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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 JUNE 30, 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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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 87,088,850 shares of Common Stock outstanding as of July 31, 2001.
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TERAFORCE TECHNOLOGY CORPORATION AND SUBSIDIARIES
INDEX
PAGE
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PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
Consolidated Condensed Balance Sheets of the Company
at June 30, 2001 (unaudited) and December 31, 2000 2
Consolidated Condensed Statements of Operations of the
Company (unaudited) for the three months and six months ended
June 30, 2001 and 2000 3
Consolidated Condensed Statements of Cash Flows of the Company
(unaudited) for the six months ended June 30, 2001 and 2000 4
Notes to Consolidated Condensed Financial Statements 5
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 7
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 12
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS 13
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 13
ITEM 5 OTHER INFORMATION 14
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURES 15
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
TERAFORCE TECHNOLOGY CORPORATION AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(Thousands of dollars, except share data)
June 30, December 31,
2001 2000
------------ ------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 328 $ 5,587
Investments 52 110
Accounts receivable net of allowances of $1,267 in 2001
and $1,691 in 2000 2,194 5,558
Assets held for sale 3,127 4,893
Inventories 4,638 2,175
Prepaid expenses 647 482
------------ ------------
Total current assets 10,986 18,805
Property and equipment, net 1,354 1,188
Goodwill, net 3,018 3,354
Other assets 754 657
------------ ------------
$ 16,112 $ 24,004
------------ ------------
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable $ 2,100 $ 100
Accounts payable 1,811 2,121
Accrued liabilities 1,513 2,372
------------ ------------
Total current liabilities 5,424 4,593
------------ ------------
Stockholders' equity:
Common stock, $.01 par value. Authorized 200,000,000 shares;
87,088,850 and 86,098,850 shares issued in 2001 and 2000,
respectively 871 861
Additional paid-in capital 181,898 181,381
Accumulated deficit (170,494) (161,244)
------------ ------------
12,275 20,998
Less 400,474 shares of common stock in treasury - at cost (1,587) (1,587)
------------ ------------
Total stockholders' equity 10,688 19,411
------------ ------------
$ 16,112 $ 24,004
============ ============
See accompanying notes to consolidated condensed financial statements.
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TERAFORCE TECHNOLOGY CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Operations
(Thousands of dollars, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
(unaudited)
Net revenues $ 3,112 $ 5,030 $ 7,677 $ 9,614
Cost of revenue 3,313 5,355 7,748 9,589
------------ ------------ ------------ ------------
Gross profit (loss) (201) (325) (71) 25
------------ ------------ ------------ ------------
Expenses:
Engineering and development 1,210 1,335 2,757 2,575
Selling and administrative 2,810 3,206 6,089 6,137
Amortization of goodwill 168 168 336 336
------------ ------------ ------------ ------------
4,188 4,709 9,182 9,048
------------ ------------ ------------ ------------
Operating loss (4,389) (5,034) (9,253) (9,023)
------------ ------------ ------------ ------------
Other income (expense):
Interest expense (15) (35) (19) (773)
Interest income and other 59 379 22 554
------------ ------------ ------------ ------------
44 344 3 (219)
------------ ------------ ------------ ------------
Loss before income taxes (4,345) (4,690) (9,250) (9,242)
Income tax expense -- -- -- --
------------ ------------ ------------ ------------
Net loss $ (4,345) $ (4,690) $ (9,250) $ (9,242)
============ ============ ============ ============
Dividends on preferred stock -- -- -- 966
------------ ------------ ------------ ------------
Loss allocable to common stockholders $ (4,345) $ (4,690) $ (9,250) $ (10,208)
============ ============ ============ ============
Basic and diluted loss per share:
Net loss per share $ (.05) $ (0.06) $ (.11) $ (0.13)
============ ============ ============ ============
Weighted average number of common shares
outstanding (thousands) 86,327 85,284 86,014 80,712
============ ============ ============ ============
See accompanying notes to consolidated condensed financial statements.
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TERAFORCE TECHNOLOGY CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
(Thousands of dollars)
Six Months Ended June 30,
------------------------------
2001 2000
------------ ------------
(unaudited)
Cash flows from operating activities:
Net loss $ (9,250) $ (9,242)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 620 2,136
Amortization of loan discount -- 426
Noncash operating expenses -- 628
Other 238 308
Changes in operating assets and liabilities:
Accounts receivable 3,364 333
Inventories (2,463) (1,610)
Assets held for sale 1,767 --
Other assets (165) 67
Accounts payable and accrued liabilities (1,169) (2,165)
------------ ------------
Net cash used in operating activities (7,058) (9,119)
------------ ------------
Cash flows from investing activities:
Capital expenditures (258) (1,006)
Software development costs -- (535)
Investment and other 57 (555)
------------ ------------
Net cash used in investing activities (201) (2,096)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of notes payable and other 2,000 386
Proceeds from issuance of common shares -- 42,642
Principal payments on notes payable -- (9,654)
Redemption of preferred stock -- (7,493)
Proceeds from exercise of common stock warrants -- 5,180
Proceeds from exercise of employee stock options -- 950
Dividends paid -- (966)
------------ ------------
Net cash provided by financing activities 2,000 31,045
------------ ------------
Net increase (decrease) in cash and cash equivalents (5,259) 19,830
Cash and cash equivalents, beginning of period 5,587 --
------------ ------------
Cash and cash equivalents, end of period $ 328 $ 19,830
============ ============
See accompanying notes to consolidated condensed financial statements.
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TERAFORCE TECHNOLOGY CORPORATION
Notes to Consolidated Condensed Financial Statements
(Unaudited)
June 30, 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 as of December 31, 2000.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board approved for
issuance Statement of Financial Accounting Standards No. 141 (SFAS 141),
Business Combinations. This standard eliminates the pooling method of accounting
for business combinations initiated after June 30, 2001. In addition, SFAS 141
addresses the accounting for intangible assets and goodwill acquired in a
business combination. This portion of SFAS 141 is effective for business
combinations completed after June 30, 2001. The Company does not expect SFAS 141
to have a material effect on the Company's financial position or results of
operations.
In June 2001, the Financial Accounting Standards Board approved for
issuance Statement of Financial Accounting Standards No. 142 (SFAS 142),
Goodwill and Intangible Assets, which revises the accounting for purchased
goodwill and intangible assets. Under SFAS 142, goodwill and intangible assets
with indefinite lives will no longer be amortized, but will be tested for
impairment annually, and in the event of an impairment indicator. SFAS 142 is
effective for fiscal years beginning after December 15, 2001, with early
adoption permitted for companies with fiscal years beginning after March 15,
2001 if their first quarter financial statements have not been previously
issued. The Company expects that adoption of SFAS 142 will reduce operating
expenses by approximately $168,000 per quarter. The Company will adopt SFAS 142
on January 1, 2002.
INVENTORIES
The components of inventories are as follows:
June 30, December 31,
2001 2000
------------ ------------
($ Thousands)
Raw materials $ 3,451 $ 1,859
Work in progress 1,123 289
Finished goods 64 27
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$ 4,638 $ 2,175
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SEGMENTS OF BUSINESS
Revenue by business segment:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
($ Thousands)
Optical networking equipment $ 727 $ 2,394 $ 2,282 $ 4,468
Design services 1,220 1,679 2,731 3,188
Digital signal processor (DSP) 1,111 560 2,429 1,400
Other 54 397 235 558
------------ ------------ ------------ ------------
$ 3,112 $ 5,030 $ 7,677 $ 9,614
============ ============ ============ ============
Segment-specific margins (gross profit less total engineering and
development costs, including capitalized software, for the segment):
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
($ Thousands)
Optical networking equipment $ 212 $ (1,400) $ (693) $ (2,651)
Design services (140) 43 110 125
Digital signal processor (DSP) (472) (380) (493) (319)
Other (1,011) (150) (1,752) (241)
------------ ------------ ------------ ------------
Subtotal segment specific (1,411) (1,887) (2,828) (3,086)
Capitalized software -- 227 -- 535
All other expenses (2,978) (3,374) (6,425) (6,472)
------------ ------------ ------------ ------------
Operating loss $ (4,389) $ (5,034) $ (9,253) $ (9,023)
============ ============ ============ ============
Assets are identifiable only by combined segments as follows:
At June 30, At December 31,
2001 2000
------------ ---------------
($ Thousands)
Optical networking equipment and other $ 4,714 $ 8,902
Design services and DSP 10,347 8,450
Not allocable to a segment 1,051 6,652
------------ ------------
Total $ 16,112 $ 24,004
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FINANCING MATTERS
In June 2001 the Company entered into a loan agreement with Bank One,
N.A. The agreement provides for borrowings of up to $4,500,000 on a
non-revolving basis. Amounts borrowed are to be repaid with the proceeds of
certain asset sales with all outstanding amounts due May 31, 2002. Interest is
payable monthly at LIBOR plus 1.75% (5.67% at June 30, 2001).
The bank facility is secured by letters of credit with an aggregate
face amount of $5,000,000, issued by certain individuals. Pursuant to this
arrangement the Company has entered into a Reimbursement Agreement with these
individuals. This agreement provides that the Company will reimburse the
individuals for any costs associated with the letters of credit, including any
amounts drawn under the letters of credit. The Company has issued to these
individuals warrants for the purchase of 1,200,000 shares of the Company's
common stock. These warrants have an exercise price of $0.75 per share and are
exercisable until May 31, 2004. In addition certain existing warrants for the
purchase of 800,000 shares of the Company's common stock were amended to provide
for an exercise price of $0.75 per share. These warrants had original exercise
prices ranging from $1.50 to $2.998 per share. The fair value of the new
warrants and the amendment to the existing warrants is $114,000 using the
Black-Scholes pricing model. This amount is being amortized over the term of the
loan and included in interest expense. The Company has agreed to grant to the
issuers of the letters of credit a security interest in certain accounts
receivable and inventory in the event the letters of credit are drawn to repay
the bank loan. The Company has also agreed not to pledge any of its assets and
not to incur any additional indebtedness in excess of $1,000,000 without the
prior consent of the issuers.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENT
This 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
and benefits. 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.
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COMPARISON OF SECOND QUARTER AND FIRST HALF 2001 TO 2000
The following table shows the net revenue and gross profit for the
Company's products:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
($ Thousands)
Net revenue:
Optical networking equipment $ 727 $ 2,394 $ 2,282 $ 4,468
Design services 1,220 1,679 2,731 3,188
Digital signal processors (DSP) 1,111 560 2,429 1,400
Other 54 397 235 558
------------ ------------ ------------ ------------
$ 3,112 $ 5,030 $ 7,677 $ 9,614
------------ ------------ ------------ ------------
Gross profit (loss):
Optical networking equipment $ -- $ (192) $ -- $ (215)
Design services (140) 43 110 125
Digital signal processors (DSP) 91 (34) 511 337
Other (152) (142) (692) (222)
------------ ------------ ------------ ------------
$ (201) $ (325) $ (71) $ 25
------------ ------------ ------------ ------------
NET REVENUE
Net revenue from the sale of optical networking equipment was lower
during the three and six-month periods of 2001 as compared to the same periods
in 2000, reflecting the Company's decision to de-emphasize the OmniLynx product
line and to seek a transaction to sell the assets related to this operation.
Revenue for design services decreased $459,000 (27%) and $457,000 (14%)
in the second quarter of 2001 and in the first six months of 2001 respectively,
from the comparable periods in the prior year. The telecommunications industry
in general has undergone significant turmoil and restructuring in the past
several months. As a result of this situation the Company has seen certain
on-going customers temporarily suspend or delay development projects. In
addition the pace of new projects being started within the industry has slowed
considerably from historical levels. As a consequence demand for the Company's
design services has declined recently. Given current economic and industry
conditions, no assurance can be given as to when such demand will increase.
Revenue from the sale of digital signal processor ("DSP") products in
the second quarter of 2001 increased $551,000 (98%) over the same quarter of
2000. In the first six months of 2001, revenues were $1,029,000 (74%) greater
than in the same period last year. This increase reflects increased shipments of
products based on Texas Instruments digital signal processors as compared to the
prior period and initial production orders of products based on the Power PC
line of RISC processors.
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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 half of 2001 produced no gross profit.
In the second quarter of 2001, Design Services produced a gross loss of
$140,000 attributable to the slow down in new projects in the telecommunication
industry. The strong first quarter, due primarily to increased billing rates and
improved utilization of staff, more than offset the second quarter loss,
resulting in a gross profit of $110,000 in the first half of 2001. This
represents a 12% decrease from the same period last year.
DSP product sales generated a gross profit of $91,000 in the second
quarter of 2001, compared to a gross loss of $34,000 in the second quarter of
2000. In the first half of 2001, gross profit increased $174,000 or 52% to
$511,000 as compared to the same period last year. The gross margin in the
second quarter of 2001 benefited from sales of new products in the PowerPC
product line. 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 $152,000 and $692,000 in the second
quarter and six months of 2001, respectively, 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 costs decreased $125,000 in the second
quarter of 2001 as compared to the same period in 2000. For the six months ended
June 30, 2001, engineering and development costs were $182,000 greater than in
the comparable period last year. Engineering and development costs by product
line are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
($ Thousands)
Optical networking equipment $ 296 $ 980 $ 693 $ 1,900
Digital signal processor (DSP) 563 346 1,004 656
Other 351 9 1,060 19
------------ ------------ ------------ ------------
E & D expense $ 1,210 $ 1,335 $ 2,757 $ 2,575
============ ============ ============ ============
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 second quarter and the first half 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 the first half of 2001
include $403,000 of on-going developmental activities associated with the
Centauri product line and $657,000 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. There have not been material
engineering costs associated with the operations of Intelect Network
Technologies subsequent to the first quarter of 2001.
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SELLING AND ADMINISTRATIVE EXPENSE
Selling and administrative expenses decreased $396,000, (12%) in the
second quarter of 2001 as compared to the same quarter last year. For the six
months ended June 30, 2001, selling and administrative expenses were essentially
unchanged from the comparable period last year. Selling and administrative
expenses related to the operations of Intelect Network Technologies have
continued to decline as the operations have been significantly curtailed in
recent months. This decline has been offset, in part, by increased selling and
support activities related to the Company's DSP business.
INTEREST EXPENSE
Interest expense declined by $754,000 in the first half of 2001 as
compared to the first half of 2000. This decrease is due to the Company's
repayment of all amounts due under a credit agreement in March 2000. The Company
expects to have increased interest expense during the remainder of 2001 due to
the bank loan agreement entered into in June 2001.
DIVIDENDS ON PREFERRED STOCK
Preferred stock dividends of $966,000 in the first half of 2000
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 June 30, 2001 the Company had cash and temporary investments of
$328,000, working capital of $5,562,000 and capacity under its loan agreement of
$2,500,000. For the six months ended June 30, 2001 earnings before interest,
taxes, depreciation and amortization ("EBITDA") was approximately negative
$8,600,000. Included in current assets as of June 30, 2001 are assets held for
sale in the amount of $3,127,000, which relate to the operations of Intelect
Network Technologies and the OmniLynx product line. The Company expects to
continue to dispose of these assets in an orderly manner and thereby generate
working capital.
During the first six months of 2001 accounts receivable decreased by
$3,364,000 in large part due to collections related to the operations of
Intelect Network Technologies. During this same period assets held for sale
decreased by $1,767,000, reflecting the partial liquidation of these assets. As
of June 30, 2001 inventories increased $2,463,000 from levels at December 31,
2000 reflecting an increase in components and work in progress related to the
Company's DSP products activities.
As of June 30, 2001 the Company had funded debt of $2,000,000 pursuant
to a $4,500,000 bank loan agreement entered into in June of 2001. This agreement
matures on May 31, 2002 and is repayable from the proceeds of certain assets
sales. This facility is non-revolving in that amounts cannot be repaid and then
re-borrowed. Interest is payable monthly at LIBOR plus 1.75%, which amounted to
5.67% at June 31, 2001. The bank agreement is secured by letters of credit with
an aggregate face amount of $5,000,000 issued by certain individuals. In
connection with this agreement the Company has entered into a Reimbursement
Agreement with those individuals. Pursuant to this agreement the Company has
agreed to reimburse the individuals for any costs associated with the letters of
credit including any amounts drawn against them. The Company has agreed to grant
to the issuers of the letters of credit a security interest in certain accounts
receivable and inventory in the event the letters of credit are drawn to repay
the bank loan. The Company has also agreed not to pledge any of its assets and
not to incur any additional indebtedness in excess of $1,000,000 without the
prior consent of the issuers.
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OPERATING ACTIVITIES
Net cash used in operations for the six months ended June 30, 2001
consisted of the $9,250,000 net loss, offset by $858,000 of non-cash charges and
a net decrease of $1,134,000 in other operating assets and liabilities. The
non-cash charges were primarily depreciation and amortization of intangible
assets and amortization of deferred financing costs. Approximately $3,500,000 of
the Company's operating loss in the first six months of 2001 related to the
operations of Intelect Network Technologies. As these operations have been
significantly curtailed and the Company is disposing of certain of the assets
related to the operations, management expects the cash flow utilized by these
operations to be materially less in subsequent periods.
INVESTING ACTIVITIES
Cash used in investing activities consisted primarily of $258,000 for
fixed asset additions.
LIQUIDITY OUTLOOK
The general slow-down in activity, which the telecommunications and
technology industry is currently experiencing, has recently begun to impact the
Company's design services operations. Certain long-term customers have delayed
or curtailed projects and development activities within the industry as a whole
have been curtailed. As a result of these factors the Company expects a
temporary decline in revenues from its design services business and,
accordingly, expects that revenues from this business segment for the balance of
2001 will be lower than previously estimated. The Company has recently
implemented certain business development activities, which it expects will have
a positive effect on this business. However, the timing and magnitude of such
effects is uncertain at this time.
The Company's DSP business is generally less impacted by the general
conditions within the technology industry as a whole, due in large part to its
current emphasis on the defense electronics industry. However, the Company's
products, particularly the legacy product lines, are utilized in some
telecommunications applications. Demand within this particular market segment
has decreased recently. Business development activity within this business unit
remains strong and the pace of new project opportunities and design wins has
continued in line with management's expectations. Forecast product delivery
schedules for many of these programs is often times uncertain and subject to
change within the early phases of the programs. Based on input available from
existing customers and near-term prospects, management believes that overall
demand for the Company's products remains strong and perhaps has increased from
previous estimates. However, due to the uncertainties that accompany the early
phases of these relationships, actual shipments of products during the third and
fourth quarter of 2001 may be lower than estimated earlier in the year. The
amount of any variation from these earlier estimates is uncertain at this time.
In addition, management expects 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 anticipate on-going material capital needs 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. 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. The current economic environment has made the
financing of new development projects, such as the Aegean and Centauri projects,
more difficult than in previous periods. 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 or to expend its own capital.
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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 six months of 2001.
Based on the above factors, management's goal of achieving positive
cash flow from operations is currently expected to be delayed from the end of
the third quarter of 2001. Despite this delay, management expects to fund
ongoing operations primarily from existing resources, including the collection
of accounts receivable, utilization of existing inventory balances 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 required to seek other sources of
capital. These could include additional 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 seek to curtail certain operations or to sell certain assets.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board approved for
issuance Statement of Financial Accounting Standards No. 141 (SFAS 141),
Business Combinations. This standard eliminates the pooling method of accounting
for business combinations initiated after June 30, 2001. In addition, SFAS 141
addresses the accounting for intangible assets and goodwill acquired in a
business combination. This portion of SFAS 141 is effective for business
combinations completed after June 30, 2001. The Company does not expect SFAS 141
to have a material effect on the Company's financial position or results of
operations.
In June 2001, the Financial Accounting Standards Board approved for
issuance Statement of Financial Accounting Standards No. 142 (SFAS 142),
Goodwill and Intangible Assets, which revises the accounting for purchased
goodwill and intangible assets. Under SFAS 142, goodwill and intangible assets
with indefinite lives will no longer be amortized, but will be tested for
impairment annually, and in the event of an impairment indicator. SFAS 142 is
effective for fiscal years beginning after December 15, 2001, with early
adoption permitted for companies with fiscal years beginning after March 15,
2001 if their first quarter financial statements have not been previously
issued. The Company expects that adoption of SFAS 142 will reduce operating
expenses by approximately $168,000 per quarter. The Company will adopt SFAS 142
on January 1, 2002.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's bank loan agreement bears interest at a variable rate,
LIBOR plus 1.75%. A 100 basis point increase in LIBOR would result in an
increase in interest expense of approximately $11,250 per quarter, assuming the
full amount of the $4,500,000 facility was outstanding for the entire period.
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PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Shareholder Class Action. A shareholders class action lawsuit
was filed on November 16, 1999 in the U. S. District Court for the Northern
District of Texas purported to have been filed on behalf of all persons and
entities who purchased the Company's common stock during the period between
February 24, 1998 and November 17, 1998. The named defendants include the
Company and certain former and present officers and directors of the Company.
The complaint alleges that the defendants violated Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by
making false and misleading statements concerning the Company's reported
financial results during the period, primarily relating to revenue recognition,
asset impairment and capitalization issues. The plaintiffs seek unspecified
monetary damages, interest, costs and expenses. In March 2001, the Company's
motion to dismiss the suit was denied and preliminary discovery has begun in the
case. The court has set a preliminary date for trial of April 7, 2003. The
Company believes the case is without merit and intends to defend the suit
vigorously in all aspects.
The insurance carrier, which provides the primary $2 million
of insurance coverage for this matter, United Pacific Insurance Company, an
affiliate of Reliance Insurance Company, has been placed under the supervision
of the insurance commissioner of the state of Pennsylvania. Based on information
received to date, the Company believes that the carrier will continue to respond
to all claims as provided for in the insurance policy; however, the ultimate
impact of this development on the insurance coverage of the Company is uncertain
at this time. Should this matter be decided adversely to the Company and should
the Company's insurance coverage fail to fully respond it could have a material
adverse impact on the Company.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders was held on June 15, 2001. At the
Annual Meeting, Robert H. Garrison, II was re-elected as a director of the
Company. Herman Frietsch, David Yedwab and Anton von Liechtenstein continue to
serve as directors pursuant to their prior election. In addition, stockholders
approved a proposal to increase the number of shares of Common Stock reserved
for issuance under the Company's Stock Incentive Plan from 8,000,000 to
9,500,000, approved a proposal to approve and ratify a stock option plan for the
Company's wholly-owned subsidiary, Aegean Networks, Incorporated, approved a
proposal to approve and ratify a stock option plan for the Company's
wholly-owned subsidiary, Centauri NetSystems Corporation and approved the
appointment of Grant Thornton LLP as the independent auditor of the Company.
The Director was elected by a vote of 82,958,439 shares for and 757,816
shares withheld. The proposal to increase shares reserved for the Stock
Incentive Plan was approved by a vote of 26,281,605 shares for, 3,426,586 shares
against and 216,501 shares abstained, with 53,791,563 broker non-votes. The
proposal to approve and ratify the Aegean Network, Incorporated stock option
plan was approved by a vote of 26,705,251 shares for, 2,887,865 shares against
and 331,576 shares abstained, with 53,791,563 broker non-votes. The proposal to
approve and ratify the Centauri NetSystems Corporation stock option plan was
approved by a vote of 26,668,037 shares for, 2,875,244 share against and 212,253
shares abstained, with 53,791,536 broker non-votes. The appointment of Grant
Thornton LLP as independent auditors was approved by a vote of 83,087,311 shares
for, 416,691 shares against and 212,253 shares abstained.
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ITEM 5 - OTHER INFORMATION
In June 2001 the Company entered into a loan agreement with Bank One,
N.A. See Notes to Consolidated Condensed Financial Statements - Financing
Matters included elsewhere herein.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
A. Listed below are all Exhibits filed as part of this report.
Exhibit No. Exhibit
4.1 Form of Promissory Note dated June 1, 2001 in favor of Bank
One, N.A.
4.2 Form of Warrant in favor of Oscar S. Wyatt, Jr., Morton A.
Cohn and Fayez Sarofim with an exercise price of $0.75 per
share expiring on May 31, 2004
4.3 Registration Rights Agreement, dated June 1, 2001 among the
Company, and Oscar S. Wyatt, Morton A. Cohn and Fayez
Sarofim
10.1 Business Loan Agreement, dated June 1, 2001 among the
Company and Oscar S. Wyatt, Morton A. Cohn and Fayez Sarofim
10.2 Reimbursement Agreement dated June 1, 2001 among the Company
and Oscar S. Wyatt, Jr., Fayez Sarofim and Morton Cohn
10.3 Amended and Restated Stock Incentive Plan(1)
10.4 Form of Subsidiary Stock Plan(1)
(1) Incorporated herein by reference to the Company's Definitive Proxy
Statement filed on April 30, 2001
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 dated June 26, 2001
Form 8-K dated June 19, 2001
Form 8-K dated April 9, 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: August 14, 2001 By: /s/ ROBERT P. CAPPS
---------------------- --------------------------------------------
Robert P. Capps
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: August 14, 2001 By: /s/ HERMAN M. FRIETSCH
---------------------- --------------------------------------------
Herman M. Frietsch
Chairman of the Board and Chief Executive
Officer (Principal Executive Officer)
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EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT
------- -------
4.1 Form of Promissory Note dated June 1, 2001 in favor of Bank
One, N.A.
4.2 Form of Warrant in favor of Oscar S. Wyatt, Jr., Morton A.
Cohn and Fayez Sarofim with an exercise price of $0.75 per
share expiring on May 31, 2004
4.3 Registration Rights Agreement, dated June 1, 2001 among the
Company, and Oscar S. Wyatt, Morton A. Cohn and Fayez
Sarofim
10.1 Business Loan Agreement, dated June 1, 2001 among the
Company and Oscar S. Wyatt, Morton A. Cohn and Fayez Sarofim
10.2 Reimbursement Agreement dated June 1, 2001 among the Company
and Oscar S. Wyatt, Jr., Fayez Sarofim and Morton Cohn
10.3 Amended and Restated Stock Incentive Plan(1)
10.4 Form of Subsidiary Stock Plan(1)
(1) Incorporated herein by reference to the Company's Definitive Proxy
Statement filed on April 30, 2001