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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10 - Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
for the quarterly period ended June 30, 2002
or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
for the transition period from ____________ to ____________
Commission File Number 0-25996
TRANSWITCH CORPORATION
(Exact name of Registrant as Specified in its Charter)
Delaware 06-1236189
(State of Incorporation) (I.R.S. Employer Identification Number)
3 Enterprise Drive
Shelton, Connecticut 06484
(Address of Principal Executive Offices)
Telephone (203) 929-8810
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 ___
---
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 $.001 per share, outstanding at July 31, 2002;
90,088,207 Series A Junior Participating Preferred Stock Purchase
Rights 4 1/2% Convertible Notes due 2005 outstanding at July 31, 2002;
$114,113,000
TranSwitch Corporation
FORM 10-Q
For the Quarter Ended June 30, 2002
Table of Contents
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001 3
Consolidated Statements of Operations for the Three Months and Six Months
ended June 30, 2002 and 2001 4
Consolidated Statements of Cash Flows for the Six Months ended June 30, 2002
and 2001 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures about Market Risk 46
PART II. OTHER INFORMATION
Item 4. Submission of Vote to Shareholders 47
Item 6. Exhibits and Reports on Form 8-K 48
SIGNATURES 49
2
TRANSWITCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
June 30, December 31,
2002 2001
(unaudited)
-------------------------------
ASSETS
Current assets:
Cash and cash equivalents ................................................ $ 184,985 $ 370,248
Short-term investments ................................................... 37,324 39,344
Accounts receivable, net ................................................. 2,798 3,525
Inventories .............................................................. 8,229 8,227
Deferred income taxes .................................................... 3,433 3,023
Prepaid expenses and other current assets ................................ 5,858 2,936
----------------------------
Total current assets ................................................ 242,627 427,303
Long-term investments (marketable securities) ................................. 18,776 26,582
Property and equipment, net ................................................... 20,101 18,946
Deferred income tax assets .................................................... 58,027 65,536
Goodwill ...................................................................... 60,029 54,547
Patents, net of accumulated amortization ...................................... 1,765 1,560
Investments in non-publicly traded companies, at cost ......................... 9,082 12,138
Deferred financing costs, net ................................................. 2,600 8,092
Other assets .................................................................. 4,581 4,007
----------------------------
Total assets ........................................................ $ 417,588 $ 618,711
----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ......................................................... $ 1,209 $ 3,960
Accrued expenses and other current liabilities ........................... 8,880 9,149
Accrued compensation and benefits ........................................ 2,357 2,717
Accrued sales returns, allowances and stock rotation ..................... 2,125 2,300
Accrued interest ......................................................... 1,546 4,120
Deferred revenue ......................................................... 585 51
Restructuring liabilities ................................................ 1,708 2,999
----------------------------
Total current liabilities ........................................... 18,410 25,296
Restructuring liabilities - long term ......................................... 24,294 26,925
4 1/2% Convertible Notes due 2005 ............................................. 114,113 314,050
----------------------------
Total liabilities ................................................... 156,817 366,271
----------------------------
Stockholders' equity:
Common stock $.001 par value; authorized 300,000,000 shares; issued and
outstanding, 90,027,373 shares at June 30, 2002 and 90,932,469 shares
at December 31, 2001 ................................................... 90 91
Additional paid-in capital ............................................... 290,107 293,902
Accumulated other comprehensive loss ..................................... (66) (303)
Accumulated deficit ...................................................... (29,360) (37,039)
Less 1,010,000 shares of common stock in treasury, at cost ............... - (4,211)
----------------------------
Total stockholders' equity .......................................... 260,771 252,440
----------------------------
Total liabilities and stockholders' equity .......................... $ 417,588 $ 618,711
----------------------------
See accompanying notes to unaudited consolidated financial statements
3
TRANSWITCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
Net revenues:
Product revenues .................................................. $ 4,266 $ 11,012 $ 8,795 $ 49,287
Service revenues .................................................. 223 20 556 395
---------------------------------------------------------
Total net revenues ........................................... 4,489 11,032 9,351 49,682
Cost of revenues:
Cost of product revenues .......................................... 961 6,300 2,545 17,680
Provision for excess inventories .................................. - 24,694 - 24,694
Cost of service revenues .......................................... 612 6 846 222
---------------------------------------------------------
Total cost of revenues ................................................. 1,573 31,000 3,391 42,596
---------------------------------------------------------
Gross profit (loss) .................................................... 2,916 (19,968) 5,960 7,086
Operating expenses:
Research and development .......................................... 13,189 11,986 26,515 22,980
Marketing and sales ............................................... 2,941 6,130 6,677 13,510
General and administrative ........................................ 1,874 2,343 4,196 4,521
Amortization of goodwill .......................................... - 630 - 1,176
Restructuring benefit ............................................. (1,480) - (1,480) -
Purchased in-process research and development ..................... - - 2,000 -
---------------------------------------------------------
Total operating expenses ..................................... 16,524 21,089 37,908 42,187
Operating loss ......................................................... (13,608) (41,057) (31,948) (35,101)
Other income (expense):
Impairment of investment in non-publicly traded company ........... (3,089) - (3,089) -
Interest (expense) income:
Interest income ................................................ 1,569 6,184 3,911 15,284
Interest expense ............................................... (1,593) (5,509) (5,406) (11,599)
---------------------------------------------------------
Interest (expense) income, net ............................... (24) 675 (1,495) 3,685
---------------------------------------------------------
Total other income (expense) ................................. (3,113) 675 (4,584) 3,685
---------------------------------------------------------
Loss before income taxes and extraordinary gain ........................ (16,721) (40,382) (36,532) (31,416)
Income tax benefit .................................................... (5,182) (14,402) (11,726) (10,995)
---------------------------------------------------------
Loss before extraordinary gain ......................................... (11,539) (25,980) (24,806) (20,421)
Extraordinary gain from repurchase of 4 1/2% Convertible Notes due 2005,
net of income taxes of $0 and $6,538 for the second quarter and $19,491
and $6,538 for the six months, respectively ............................ - 12,142 32,485 12,142
---------------------------------------------------------
Net (loss) income ...................................................... $ (11,539) $ (13,838) $ 7,679 $ (8,279)
---------------------------------------------------------
Basic (loss) earnings per common share:
Loss before extraordinary gain ......................................... $ (0.13) $ (0.30) $ (0.27) $ (0.24)
Extraordinary gain ..................................................... $ - $ 0.14 $ 0.36 $ 0.14
---------------------------------------------------------
Net (loss) income ...................................................... $ (0.13) $ (0.16) $ 0.09 $ (0.10)
---------------------------------------------------------
Diluted (loss) earnings per common share:
Loss before extraordinary gain ......................................... $ (0.13) $ (0.30) $ (0.27) $ (0.24)
Extraordinary gain ..................................................... $ - $ 0.14 $ 0.36 $ 0.14
---------------------------------------------------------
Net (loss) income ...................................................... $ (0.13) $ (0.16) $ 0.09 $ (0.10)
---------------------------------------------------------
Basic average shares outstanding ....................................... 90,038 85,126 89,992 84,872
Diluted average shares outstanding ..................................... 90,038 85,126 89,992 84,872
See accompanying notes to unaudited consolidated financial statements.
4
TRANSWITCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
June 30,
2002 2001
------------------------------
Cash flows from operating activities:
Net income (loss) ............................................................. $ 7,679 $ (8,279)
Adjustments required to reconcile net income (loss) to cash
flows used in operating activities, net of effects of
acquisitions:
Depreciation and amortization ............................................ 6,893 5,531
Deferred income taxes .................................................... (11,904) (20,406)
Tax benefit from exercise of employee stock options ...................... 27 8,052
Other non-cash items ..................................................... (156) -
Provision for doubtful accounts .......................................... (980) 1,469
Provision for excess inventories ......................................... - 24,694
Restructuring benefit .................................................... (1,480) -
Impairment of investment in non-publicly traded company .................. 3,089 -
Purchased in-process research and development ............................ 2,000 -
Extraordinary gain on extinguishment of 4 1/2% Convertible Notes due
2005, net of income taxes ................................................ (32,485) (12,142)
Decrease (increase) in operating assets:
Accounts receivable ................................................. 1,707 22,338
Inventories ......................................................... (2) (22,123)
Prepaid expenses and other assets ................................... (3,311) (2,357)
(Decrease) increase in operating liabilities:
Accounts payable .................................................... (2,950) (5,620)
Accrued expenses and other current liabilities ...................... (4,302) 2,108
Restructuring liabilities ........................................... (2,442) -
------------------------------
Net cash used in operating activities .......................... (38,617) (6,735)
------------------------------
Cash flows from investing activities:
Purchase of product licenses .................................................. (2,000) -
Capital expenditures .......................................................... (5,826) (5,844)
Investments in non-publicly traded companies .................................. (512) (4,680)
Acquisition of businesses, net of cash acquired ............................... (5,789) 63
Purchases of short and long term held-to-maturity investments ................. (26,315) (206,975)
Proceeds from short and long term held-to-maturity of investments ............. 36,141 202,776
------------------------------
Net cash used in investing activities .......................... (4,301) (14,660)
------------------------------
Cash flows from financing activities:
Repurchase of 4 1/2% Convertible Notes due 2005 ............................... (143,156) (61,013)
Proceeds from the exercise of stock options ................................... 574 7,749
------------------------------
Net cash used in financing activities .......................... (142,582) (53,264)
------------------------------
------------------------------
Effect of exchange rate changes on cash and cash equivalents ....................... 237 (111)
------------------------------
Decrease in cash and cash equivalents .............................................. (185,263) (74,770)
Cash and cash equivalents at beginning of period ................................... 370,248 507,552
------------------------------
Cash and cash equivalents at end of period ......................................... $ 184,985 $ 432,782
------------------------------
See accompanying notes to unaudited consolidated
financial statements.
5
TRANSWITCH CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Tabular dollars in thousands, except per share amounts)
Note 1. Summary of Significant Accounting Policies
Description of Business
TranSwitch Corporation ("TranSwitch" or the "Company") was incorporated
in Delaware on April 26, 1988, and is headquartered in Shelton, Connecticut. The
Company and its subsidiaries (collectively, "TranSwitch" or the "Company")
design, develop, market and support highly integrated digital and mixed-signal
semiconductor devices for the telecommunications and data communications
industries.
Basis of Presentation - Interim Financial Statements
The consolidated financial statements include the accounts of
TranSwitch Corporation and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated. The accompanying unaudited
interim consolidated financial statements of TranSwitch Corporation and
Subsidiaries have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission for reporting on Form 10-Q. Accordingly,
certain information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements are
not included herein. The interim consolidated financial statements are prepared
on a consistent basis with and should be read in conjunction with the audited
consolidated financial statements and the related notes thereto for the year
ended December 31, 2001, contained in the Company's Annual Report on Form 10-K
filed with the Securities and Exchange Commission on March 22, 2002.
In the opinion of management, the accompanying unaudited interim
consolidated financial statements include all adjustments, consisting of normal
recurring adjustments, which are necessary for a fair presentation for such
periods. The results of operations for any interim period are not necessarily
indicative of the results that may be achieved for the entire year ending
December 31, 2002.
Reclassifications
Certain prior period amounts have been reclassified to conform to the
current period's presentation.
Goodwill and Purchased Intangible Assets
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS 141"). SFAS 141 requires that the purchase method of accounting be used
for all business combinations initiated after June 30, 2001. SFAS 141 also
specifies certain criteria that must be met in order for intangible assets
acquired in a purchase method business combination to be recognized and reported
apart from goodwill, noting that any purchase price allocable to an assembled
workforce may not be
6
TRANSWITCH CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - Continued
(Tabular dollars in thousands, except per share amounts)
accounted for separately. The Company adopted the provisions of SFAS 141 as of
July 1, 2001 and, accordingly, has not amortized goodwill for business
combinations that occurred after July 1, 2001.
In June 2001, the FASB issued Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which
became effective and was adopted by the Company on January 1, 2002. SFAS 142
requires, among other things, the discontinuance of goodwill amortization. In
addition, the standard includes provisions, upon adoption, for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the testing for impairment of existing goodwill and other intangibles.
Accordingly, the Company ceased amortizing goodwill totaling $54.5 million as of
January 1, 2002, which includes workforce intangibles of approximately $0.7
million previously classified as purchased intangible assets.
In lieu of amortization going forward, the Company completed an
initial impairment review of its goodwill balance during the second quarter of
2002. This impairment analysis determined that as of January 1, 2002, there was
no impairment to the carrying value of goodwill. Going forward, the Company will
perform annual assessments of its goodwill balance in the fourth quarter of the
fiscal year. TranSwitch has one reporting unit as defined by SFAS 142 and
considers, along with valuation techniques such as discounted cash flows, the
quoted value of its outstanding common stock when evaluating goodwill for
impairment. As such, there can be no assurance that an impairment charge will
not be recorded in future periods. The following table presents the impact of
SFAS 142 on net (loss) income and net (loss) income per share had the standard
been in effect for the three and six months ended June 30, 2001 as well as the
full year impact for the last three fiscal years (2001, 2000 and 1999):
Three Six Year Year Year
Months Ended Months Ended Ended Ended Ended
June 30, June 30, December 31, December 31, December 31,
2001 2001 2001 2000 1999
Net (loss) income - as reported ..................... $ (13,838) $ (8,279) $ (77,464) $ 38,355 $ 25,334
Add Adjustment:
Amortization of goodwill and acquired
workforce intangible ....................... 630 1,176 2,476 384 -
----------------------------------------------------------------------
Net (loss) income - as adjusted ..................... $ (13,208) $ (7,103) $ (74,988) $ 38,739 $ 25,334
======================================================================
Basic (loss) earnings per share - as reported ....... $ (0.16) $ (0.10) $ (0.89) $ 0.47 $ 0.33
Basic (loss) earnings per share - as adjusted ....... $ (0.16) $ (0.08) $ (0.86) $ 0.46 $ 0.33
Diluted (loss) earnings per share - as reported ..... $ (0.16) $ (0.10) $ (0.89) $ 0.44 $ 0.31
Diluted (loss) earnings per share - as adjusted ..... $ (0.16) $ (0.08) $ (0.86) $ 0.43 $ 0.31
7
TRANSWITCH CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - Continued
(Tabular dollars in thousands, except per share amounts)
Recent Accounting Pronouncements
In June 2002, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities". This statement provides guidance on the recognition and
measurement of liabilities associated with exit and disposal activities and is
effective for the Company on January 1, 2003. The Company is currently reviewing
the provisions of SFAS No. 146 to determine the standard's impact upon adoption.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 62, Amendment of FASB Statement No. 13, and Technical
Corrections". SFAS No. 145 requires that certain gains and losses on
extinguishments of debt be classified as income or loss from continuing
operations rather than as extraordinary items as previously required under SFAS
No. 4, "Reporting Gains and Losses from Extinguishment of Debt". This statement
also amends SFAS No. 13, Accounting for Leases, to require certain modifications
to capital leases be treated as a sale-leaseback and modifies the accounting for
sub-leases when the original lessee remains a secondary obligor (or guarantor).
In addition, SFAS No. 145 rescinded SFAS No. 44, "Accounting for Intangible
Assets of Motor Carriers", which addressed the accounting for intangible assets
of motor carriers and made numerous technical corrections to various FASB
pronouncements. The Company will be required to adopt SFAS No. 145 on January 1,
2003, and after adoption will reclassify extraordinary items (see Note 5 --
Extraordinary Gain From the Repurchase of Convertible Notes) to continuing
operations.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS 144 supercedes SFAS 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of". SFAS 144 applies to all long-lived assets (including
discontinued operations) and consequently amends Accounting Principles Board
Opinion No. 30 (APB 30), Reporting Results of Operations - Reporting the Effects
of Disposal of a Division of a Business. SFAS 144 develops one accounting model
for long-lived assets that are to be disposed of by sale and requires that
long-lived assets that are to be disposed of by sale be measured at the lower of
book value or fair value less selling costs. Additionally, SFAS 144 expands the
scope of discontinued operations to include all components of an entity with
operations that (1) can be distinguished from the rest of the entity and (2)
will be eliminated from the ongoing operations of the entity in a disposal
transaction. SFAS 144 is effective for and was adopted by TranSwitch as of
January 1, 2002. The adoption of this standard did not have a material impact on
the Company's consolidated financial statements.
8
TRANSWITCH CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - Continued
(Tabular dollars in thousands, except per share amounts)
Note 2. Inventories
Inventories are carried at the lower of cost (on a weighted average
cost basis) or estimated net realizable value. Inventories are summarized as
follows:
June 30, December 31,
2002 2001
------------------- -----------------
Raw materials ...................... $ 501 $3,961
Work in process .................... 3,515 1,031
Finished goods ..................... 4,213 3,235
------------------- -----------------
Total inventories ... $8,229 $8,227
------------------- -----------------
As a result of current and anticipated business conditions, as well as
lower than anticipated demand, the Company recorded provisions for excess
inventories totaling approximately $39.2 million during fiscal 2001 which were
calculated in accordance with the Company's accounting policy. The effect of
these inventory provisions was to write inventory down to a new cost basis of
zero. During fiscal 2002, the Company shipped products that had previously been
written down to a cost basis of zero. The following tables present the impact to
gross profit of the excess inventory charges and benefits for the three and six
months ended June 30, 2002 and 2001:
Three Months Ended Three Months Ended
June 30, 2002 June 30, 2001
Gross Gross Gross Gross
Profit $ Profit % Profit $ Profit %
-------------------------------------------------------------
Gross Profit - As Reported $ 2,916 65% $ (19,968) (181%)
Excess Inventory Charge/1/ - - 24,694 224%
Excess Inventory Benefit/2/ (743) (17%) - -
-------------------------------------------------------------
Gross Profit - As Adjusted $ 2,173 48% $ 4,726 43%
-------------------------------------------------------------
Six Months Ended Six Months Ended
June 30, 2002 June 30, 2001
Gross Gross Gross Gross
Profit $ Profit % Profit Profit %
-------------------------------------------------------------
Gross Profit - As Reported $ 5,960 64% $ 7,086 14%
Excess Inventory Charge/1/ - - 24,694 50%
Excess Inventory Benefit/2/ (1,553) (17%) - -
-------------------------------------------------------------
Gross Profit - As Adjusted $ 4,407 47% $ 31,780 64%
-------------------------------------------------------------
1 - During 2001 as a result of then current and anticipated business
conditions, as well as lower than anticipated demand, the Company
recorded a provision for excess inventories during the quarter ended
June 30, 2001 of approximately $24.7 million against costs of sales.
This amount is excluded for the purposes of this comparison.
2 - During 2002, due to changes in demand for certain products, the
Company realized an excess inventory benefit from the sales of products
which had previously been written down to a cost basis of zero. For the
purposes of comparing the change in gross profit on net revenues, the
Company is excluding this benefit and calculating gross product on
these product sales as if they had been sold at their historical
average costs.
9
TRANSWITCH CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - Continued
(Tabular dollars in thousands, except per share amounts)
Note 3. Comprehensive (Loss) Income
The components of comprehensive (loss) income, net of tax, are as
follows:
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
--------------------------------------------------
Net (loss) income ............................ $ (11,539) $ (13,838) $ 7,679 $ (8,279)
Foreign currency translation adjustment ...... 312 (51) 237 (111)
--------------------------------------------------
Total comprehensive (loss) income ............ $ (11,227) $ (13,889) $ 7,916 $ (8,390)
--------------------------------------------------
Note 4. (Loss) Earnings Per Share
Basic (loss) earnings per share for the three and six months ended June
30, 2002 and 2001 are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---------------------------------------------------
Net (loss) income .............................. $ (11,539) $ (13,838) $ 7,679 $ (8,279)
---------------------------------------------------
Weighted average common shares outstanding
for the period (in thousands) ................ 90,038 85,126 89,992 84,872
---------------------------------------------------
Basic (loss) earnings per share ................ $ (0.13) $ (0.16) $ 0.09 $ (0.10)
---------------------------------------------------
Diluted earnings (loss) per share for the three and six months ended June
30, 2002 and 2001 are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---------------------------------------------------
Net (loss) income .............................. $ (11,539) $ (13,838) $ 7,679 $ (8,279)
---------------------------------------------------
Weighted average common shares outstanding 90,038 85,126 89,992 84,872
for the period (in thousands) ................ ----------------------------------------------------
Diluted (loss) earnings per share(1) (2) ....... $ (0.13) $ (0.16) $ 0.09 $ (0.10)
---------------------------------------------------
(1) The assumed exercise of "in-the-money" stock options has been
excluded because their effect is anti-dilutive. For the purposes of
calculating the dilutive (loss) earnings per share for the three and
six months ended June 30, 2002, 142,000 and 543,000 shares have been
excluded, respectively. For the purposes of calculating the dilutive
(loss) earnings per share for the three and six months ended June 30,
2001, 2,595,000 and 3,939,000 shares have been excluded, respectively.
(2) For purposes of calculating the dilutive (loss) earnings per share
for the three and six months ended June 30, 2002 and 2001, the assumed
conversion of 4 1/2% Convertible Notes due 2005 is not taken into
10
TRANSWITCH CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - Continued
(Tabular dollars in thousands, except per share amounts)
consideration as its effect is anti-dilutive. Had these notes been
converted, the Company would have used the following calculations for
interest expense and outstanding shares:
a) For the purposes of calculating diluted (loss) earnings per
share had the 4 1/2% Convertible Notes due 2005 been
converted, approximately $0.8 and $2.8 million of interest
expense (after tax) would have been added to net income during
the three and six months ended June 30, 2002, respectively.
For the purposes of calculating diluted earnings per share had
the 4 1/2% Convertible Notes due 2005 been converted,
approximately $3.0 and $6.2 million of interest expense (after
tax) would have been added to net income during the three and
six months ended June 30, 2001, respectively.
b) For the purposes of calculating diluted (loss) earnings per
share had the 4 1/2% Convertible Notes due 2005 been
converted, approximately 1,843,000 and 2,919,000 additional
shares of common stock would have been assumed outstanding for
the three and six months ended June 30, 2002, respectively.
For the purposes of calculating diluted earnings per share had
the 4 1/2% Convertible Notes due 2005 been converted,
approximately 6,363,000 and 6,896,000 additional shares of
common stock would have been assumed outstanding for the three
and six months ended June 30, 2001, respectively.
Note 5. Extraordinary Gain From the Repurchase of Convertible Notes
On February 11, 2002, the Company's Board of Directors approved a
tender offer to purchase up to $200 million aggregate principal of the Company's
outstanding 4 1/2% Convertible Notes due 2005 at a price not greater than $700
nor less than $650 per $1,000 principal amount, plus accrued and unpaid interest
thereon to, but not including, the date of the purchase. This tender offer
expired at midnight on March 11, 2002, and the Company repurchased $199.9
million face value of the outstanding notes at the price of $700 per $1,000
principal amount for a cash payment of $139.9 million. Net of taxes, deferred
financing costs and transaction fees, the Company recorded a gain of $32.5
million, which is further detailed as follows:
Six Months Ended
June 30, 2002
-------------------------
Par value of 4 1/2% Convertible Notes due 2005 repurchased ................ $ 199,937
Tender offer transaction and professional fees ............................ (3,201)
Write-off of deferred financing costs ..................................... (4,805)
Cash paid to repurchase notes ............................................. (139,955)
-------------------------
Pre-tax gain on repurchase of notes ....................................... 51,976
Income taxes on gain on repurchase of notes ............................... (19,491)
-------------------------
Extraordinary gain ........................................................ $ 32,485
-------------------------
The Company has funded the repurchases of the 4 1/2% Convertible Notes
due 2005 from available cash, cash equivalents and short-term investments. There
were no repurchases during the quarter ended June 30, 2002. As of June 30, 2002,
the remaining outstanding principal balance of the 4 1/2% Convertible Notes due
2005 is $114.1 million. The Company will be required to adopt SFAS No. 145 on
January 1, 2003, and after adoption will reclassify extraordinary gains on debt
repurchases to continuing operations (refer to Note 1 - Summary of Significant
Accounting Policies).
11
TRANSWITCH CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - Continued
(Tabular dollars in thousands, except per share amounts)
Note 6. Restructuring Liabilities
The Company announced two restructuring plans during fiscal 2001 due to
then current and anticipated business conditions. These plans resulted in the
elimination of seventy-seven positions in North America and the closing of four
leased facilities in Canada, Massachusetts and Connecticut. A summary of the
restructuring liabilities and the activity from December 31, 2001 through June
30, 2002 is as follows:
Cash Payments Adjustments
January 1, 2002 and Changes
December 31, 2001 - June 30, 2002 to Estimates (1) June 30, 2002
----------------------------------------------------------------------
Restructuring Liabilities:
Employee termination benefits ........... $ 1,302 $ (1,080) $ (222) $ --
Costs to exit facilities ................ 28,620 (1,360) (1,258) 26,002
----------------------------------------------------------------------
Total restructuring liabilities ... $ 29,922 $ (2,440) $ (1,480) $ 26,002
======================================================================
(1) All cash payments for employee termination benefits related to the
fiscal 2001 restructuring plans were paid as of June 30, 2002. During
the second quarter of fiscal 2002, the Company sub-let a portion of
its unused excess facilities. As a result, the Company recognized
income (restructuring benefit) of approximately $1.5 million with a
corresponding reduction to the restructuring liability. This was
partially offset by commissions paid to rent these facilities.
At June 30, 2002, the Company has classified approximately $24.2
million of this restructuring liability as a long-term liability that represents
net lease commitments that are not due in the succeeding twelve-month period.
Subsequent to June 30, 2002, the Company announced a restructuring plan
referred to as the July 2002 Restructuring Plan. Refer to Note 9 - Subsequent
Events for additional details.
Note 7. Investments in Non-Publicly Traded Companies, Asset Impairments and
Deferred Revenue
Investments in Non-Publicly Traded Companies
The Company has purchased shares of convertible preferred stock of
certain privately held companies. The Company's direct and indirect (which
include certain board members and employees) voting interest is less than 20% of
the total ownership of each of these companies as of December 31, 2001, and June
30, 2002, and the Company does not exercise significant influence over the
management of these companies as defined by APB Opinion No. 18 "The Equity
Method of Accounting for Investments in Common Stock," and other relevant
literature. During 2001, the Company has also purchased an interest of
approximately 48% in GTV Capital, L.P., a venture capital limited partnership.
This investment has been accounted for under the equity method. The Company has
recorded 48% of the limited partnership's losses from its date of investment
through
12
TRANSWITCH CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - Continued
(Tabular dollars in thousands, except per share amounts)
December 31, 2001, which have been insignificant. Excluding GTV Capital, L.P,
all investments in non-publicly traded companies are carried at cost net of
asset impairments.
The following table summarizes the Company's investments in non
publicly-traded companies at December 31, 2001 and June 30, 2002:
Fiscal 2002 Activity
---------------------------------------------------
December 31, Additional Equity Asset
Investee company: 2001 Investments Acquisitions Losses Impairments June 30, 2002
-----------------------------------------------------------------------------------
TeraOp (USA) Inc. ................ $ 4,000 $ 400 $ - $ - $ - $ 4,400
OptiX Networks, Inc. ............. 3,658 - - - (3,089) 569
Accordion Networks, Inc. ......... 1,500 - - - - 1,500
Intellectual Capital for
Integrated Circuits, Inc. ........ 1,385 112 - - - 1,497
GTV Capital, L.P ................. 1,186 - - (70) - 1,116
Systems On Silicon, Inc. ......... 409 - (409) - - -
-----------------------------------------------------------------------------------
Total minority investments ... $ 12,138 $ 512 $ (409) $ (70) $ (3,089) $ 9,082
===================================================================================
From time to time, the Company will conduct arms length business
transactions with the companies listed above. During the three and six months
ended June 30, 2002, the Company performed design services for OptiX. During the
three months ended March 31, 2002, the Company acquired Systems On Silicon, Inc.
(refer to Note 8 - Business Combinations).
Asset Impairments
During the second quarter of 2002 the Company performed an impairment
analysis on its investment in OptiX Networks, Inc. (OptiX) because of the
declining financial resources of OptiX and the uncertainty of capital resources
generally available to early stage start-up companies. Additionally, OptiX
currently does not have the ability to repay TranSwitch for services performed
(described further below). Based on the results of this analysis, the Company
reduced the carrying value of its investment in OptiX to its estimated fair
value of $0.6 million, resulting in an impairment charge of approximately $3.1
million which is classified as "Impairment of investment in non-publicly traded
company" in the Consolidated Statement of Operations.
Deferred Revenue
As of June 30, 2002, the Company had recorded approximately $0.6
million of deferred revenue on its consolidated balance sheet related to design
services performed by TranSwitch for OptiX during the three-month period ended
June 30, 2002. Due to the declining financial condition of OptiX and given that
the collectibility of this revenue was not reasonably assured, TranSwitch has
deferred this amount, in accordance with its revenue recognition policy. Should
this amount be collected in future periods, the Company will recognize this as
service revenue in the consolidated statement of operations. All costs related
to this service revenue have been recognized in the period
13
TRANSWITCH CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - Continued
(Tabular dollars in thousands, except per share amounts)
ended June 30, 2002. Should the Company not be able to collect this deferred
revenue, it will be off-set against the receivable for the same amount due from
OptiX.
The deferred revenue balance of $0.05 million as of December 31, 2001
was related to a separate customer (not OptiX) and was recognized as service
revenue during the first quarter of fiscal 2002.
Note 8. Business Combinations
On March 27, 2002 the Company acquired Systems on Silicon, Inc. (SOSi)
located in Monmouth Junction, New Jersey, which develops highly integrated VLSI
solutions that address the requirements of converged networks with an initial
focus on the intelligent integrated access device ("IAD"). This acquisition was
a strategic investment aimed at enhancing and expanding the Company's product
offering with higher speed solutions for the metro and access markets. As a
result of this acquisition, the Company paid $0.9 million in cash for the
outstanding shares of stock in SOSi. The Company incurred transaction fees of
approximately $0.3 million in conjunction with this purchase, the majority of
which is unpaid at June 30, 2002. Including the Company's previous investment of
approximately $0.4 million, TranSwitch's total investment in SOSi is
approximately $1.3 million.
The results of operations of SOSi have been included in the Company's
consolidated financial results beginning on March 27, 2002, the date of
acquisition, and all significant intercompany balances have been eliminated. The
acquisition was accounted for under the purchase method of accounting for
business combinations. SOSi is a wholly owned subsidiary of TranSwitch.
The purchase price of and investment in SOSi has been allocated, on a
preliminary basis, in the Company's unaudited interim consolidated financial
statements as shown in the following table:
Purchased in-process research and development ..... $ 2,000
Goodwill .......................................... 302
Deferred income tax assets ........................ 438
Cash and investments .............................. 110
Property and equipment ............................ 111
Prepaid and other assets .......................... 39
Patent ............................................ 300
Accrued liabilities ............................... (1,991)
----------
Investment in SOSi ....................... $ 1,309
----------
Purchased in-process research and development
At the time of acquisition, SOSi was in the process of developing an
Intelligent Integrated Access Device ("IAD") chip. The project was
started concurrently with SOSi's inception in 1999 and is scheduled for
its first release in the first quarter of 2003. The IAD chip is the
enabling solution to service the last mile in voice and data access.
The IAD chip provides a
14
TRANSWITCH CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - Continued
(Tabular dollars in thousands, except per share amounts)
System On a Chip ("SoC") solution. The IAD chip will serve the needs of
existing Incumbent Local Exchange Carrier ("ILEC") legacy networks. The
product will also enable the converged data and voice network
architecture. Its telephone features will include voice activity
detection, silence suppression and comfort noise generation.
The $2.0 million allocated to in-process research and development
("IPR&D") was determined through an independent valuation using
established valuation techniques in the telecommunications and data
communications industries. The value allocated to IPR&D was based upon
the forecasted operating after-tax cash flows from the technology
acquired, giving effect to the stage of completion at the acquisition
date. Future cash flows were adjusted for the value contributed by any
core technology and development efforts expected to be completed post
acquisition. These forecasted cash flows were then discounted at rates
commensurate with the risks involved in completing the acquired
technologies taking into consideration the characteristics and
applications of each product, the inherent uncertainties in achieving
technological feasibility, anticipated levels of market acceptance and
penetration, market growth rates and risks related to the impact of
potential changes in future target markets. A project's risk is the
highest at its inception. As the project progresses, the risk of a
project generally decreases. As of the acquisition date, the IAD chip
was still in its initial stages of development. After considering these
factors, the risk-adjusted discount rates for the IAD chip product was
determined to be 65%. The acquired technology that had not yet reached
technological feasibility and no alternative future uses existed was
expensed upon acquisition in accordance with SFAS No. 2, "Accounting
for Research and Development Costs".
Goodwill
The excess purchase price, including the Company's original investment
in SOSi, over the fair value of the net identifiable assets and
liabilities acquired of $0.3 million has been recorded as goodwill. In
accordance with SFAS No. 141 and SFAS No. 142, the Company is not
amortizing this goodwill as the transaction was completed after June
30, 2001, but will perform a periodic evaluation for impairment.
Patents
At the time of acquisition, SOSi had two patent applications pending.
The Company, through an independent valuation using established
valuation techniques in the telecommunications and data communications
industries, determined these applications to be worth approximately
$0.3 million with an estimated useful life of 5 years. The Company is
amortizing this asset on a straight-line basis over the 5-year period.
Pro forma financial information
Pro forma results of operations for SOSi have not been presented
because the effects of this acquisition were not material to the
unaudited interim consolidated financial statements.
15
TRANSWITCH CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - Continued
(Tabular dollars in thousands, except per share amounts)
Note 9. Subsequent Events
July 2002 Restructuring Plan
Due to current and anticipated business conditions, on July 15, 2002,
the Company announced a restructuring plan. As a result of this plan, the
Company eliminated sixty-six positions and announced the closing of its design
centers in Milpitas, CA and Raleigh, NC. In conjunction with this restructuring,
the Company is abandoning the Astrix and Sertopia product lines and
strategically refocusing its research and development efforts. The Company
currently estimates that the total restructuring charge related to the workforce
reduction and facility closings to be between $4 - $5 million. As a result of
this restructuring effort, the Company is also evaluating its remaining fixed
asset base for utilization and impairment that could result in additional,
non-cash, charges in the third quarter of fiscal 2002.
Nasdaq Listing Requirements
On July 19, 2002, the Company received notification from Nasdaq
regarding the Company's noncompliance with the listing requirements for The
Nasdaq National Market, on which the Company's common stock is presently traded.
This is due to the Company's stock price closing below $1.00 for a period of
thirty consecutive trading days. Therefore, in accordance with Nasdaq
marketplace rules, the Company will be provided 90 calendar days, or until
October 17, 2002, to regain compliance. If, at any time before October 17, 2002,
the bid price of the Company's common stock closes at $1.00 per share or more
for a minimum of 10 consecutive trading days, then Nasdaq will provide written
notification that the Company complies with continued listing requirements. If
compliance can not be demonstrated by October 17, 2002 then Nasdaq will provide
written notification that the Company's securities will be delisted. At that
time, the Company would have the right to request a hearing to appeal the Nasdaq
determination.
The Company also has the option to apply to transfer listing of its
securities to The Nasdaq SmallCap Market ("SmallCap Market"). To transfer, the
Company must satisfy the continued inclusion requirements for the SmallCap
Market, which makes available an extended grace period to satisfy the minimum
$1.00 bid price requirement. If the Company submits a transfer application and
pays the applicable listing fees by October 17, 2002, initiation of the
delisting proceedings will be stayed pending the Staff's review of the transfer
application. If the transfer application is approved, the Company will be
afforded the 180 calendar day SmallCap Market grace period which would expire
January 15, 2003. The Company may also be eligible for an additional 180
calendar day grace period provided that it meets the initial listing criteria
for the SmallCap Market. Furthermore, the Company may be eligible to transfer
back to The Nasdaq National Market if, by July 14, 2003, its bid price maintains
the $1.00 per share requirement for 30 consecutive trading days and it has
maintained compliance with all other continued listing requirements on that
market.
16
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the
Consolidated Financial Statements and the notes thereto and with Management's
Discussion and Analysis of Financial Condition and Results of Operations that
are included in the Annual Report on Form 10-K for the year ended December 31,
2001 for TranSwitch Corporation. This Quarterly Report on Form 10-Q and, in
particular, this Management's Discussion and Analysis of Financial Condition and
Results of Operation, contain forward-looking statements regarding future events
or the future financial performance of the Company that involve certain risks
and uncertainties including, but not limited to, those set forth in "Risk
Factors" and other sections discussed below. Actual events or the actual future
results of the Company may differ materially from any forward-looking statements
due to such risks and uncertainties. Readers are cautioned not to place undue
reliance on these forward-looking statements, which reflect management's
analysis only as of the date hereof. The Company assumes no obligation to update
these forward-looking statements to reflect actual results or changes in factors
or assumptions affecting such forward-looking assumptions.
OVERVIEW
We are a Delaware corporation, incorporated on April 26, 1988, that
designs, develops, markets and supports highly integrated digital and
mixed-signal (analog and digital) semiconductor system-on-a-chip solutions for
use in building emerging networks for telecommunications and data communications
applications. Our very large-scale integrated (VLSI) semiconductor devices
provide core functionality for communications network equipment. Our
programmable VLSI solutions can be tailored by network equipment manufacturers
to provide high levels of functionality for broadband communication networks and
to implement value-added features, thus differentiating our products from
competitive offerings. Our programmable VLSI solutions also accommodate new
customer application requirements and protocol changes throughout the networking
equipment life cycle. Our VLSI devices are compliant with
Asynchronous/Plesiochronous Digital Hierarchy (Asynchronous/PDH), Synchronous
Optical Network/Synchronous Digital Hierarchy (SONET/SDH) and Asynchronous
Transfer Mode/Internet Protocol (ATM/IP) standards. We also offer products that
combine multi-protocol capabilities on a single chip that can be programmed for
multi-service applications. Our mixed-signal and digital design capability, in
conjunction with our communications systems expertise, enables us to determine
and implement optimal combinations of design elements for enhanced
functionality. We believe that this approach permits our customers to achieve
faster time-to-market and to introduce systems that offer greater functionality,
improved performance, lower power dissipation, reduced system size and cost and
greater reliability relative to discrete solutions.
Our principal customers are Original Equipment Manufacturers (OEMs) that
serve three market segments:
. the worldwide public network infrastructure that supports voice and data
communications;
. the Internet infrastructure that supports the World Wide Web and other
data services; and
. corporate Wide Area Networks (WANs) that support voice and data
information exchange within medium-sized and large enterprises.
We have sold our VLSI devices to more than 400 customers worldwide. We sell
our products through a worldwide direct sales force and a worldwide network of
independent distributors and sales representatives.
17
SIGNIFICANT ACCOUNTING POLICIES AND USE OF ESTIMATES
Our consolidated financial statements and related disclosures, which
are prepared to conform with accounting principles generally accepted in the
United States of America, require us to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses during
the period reported. We are also required to disclose amounts of contingent
assets and liabilities at the date of the consolidated financial statements. Our
actual results in future periods could differ from those estimates. Estimates
and assumptions are reviewed periodically, and the effects of revisions are
reflected in the consolidated financial statements in the period they are
determined to be necessary.
We consider the most significant estimates in our consolidated
financial statements to be those surrounding:
(1) revenues, cost of revenues and gross profit;
(2) estimated excess inventories;
(3) valuation of deferred tax assets;
(4) valuation and impairment of goodwill, other intangibles and
long-lived assets; and
(5) estimated restructuring reserves.
These accounting policies, the basis for these estimates and their potential
impact to our consolidated financial statements, should any of these estimates
change, are further described as follows:
Revenues, Cost of Revenues and Gross Profit. Net revenues are primarily
comprised of product shipments, principally to domestic and
international telecommunications and data communications OEMs and to
distributors. Net revenues from product sales are recognized at the
time of product shipment when the following criteria are met: (1)
persuasive evidence of an arrangement exists; (2) title and risk of
loss transfers to the customer; (3) the selling price is fixed or
determinable; and (4) collectibility is reasonably assured. Agreements
with certain distributors provide price protection and return and
allowance rights. With respect to recognizing revenues from our
distributors: (1) the prices are fixed at the date of shipment from our
facilities; (2) payment is not contractually or otherwise excused until
the product is resold; (3) we do not have any obligations for future
performance relating to the resale of the product; and (4) the amount
of future returns, allowances, refunds and costs to be incurred can be
reasonably estimated and are accrued at the time of shipment. Service
revenues are recognized when the following criteria are met: (1)
persuasive evidence of an arrangement exists; (2) we have performed a
service in accordance with our contractual obligations; and (3)
collectibility is reasonably assured.
At the time of shipment, we record a liability against our
gross product revenues for future price protection and sales
allowances. This liability is established based on historical
experience, contractually agreed to provisions and future shipment
forecasts. We had established liabilities totaling $1.46 and $1.90
million as of June 30, 2002 and December 31, 2001, respectively, for
price protection and sales allowances related to shipments that were
recorded as revenue during the past 12 months.
18
We also record, at the time of shipment, a liability against
our gross revenues and an inventory asset against cost of revenue in
order to establish a provision for the gross margin related to future
returns under our distributor stock rotation program. As of June 30,
2002, we had established a liability of $0.67 million and an inventory
asset of $0.36 million for a net stock rotation reserve for future
returns totaling $0.31 million. This compares to a liability of $0.40
million and an inventory asset of $0.20 million for a net stock
rotation reserve for future returns totaling $0.20 million as of
December 31, 2001. Should our actual experience differ from our
estimated liabilities, there could be adjustments (either favorable or
unfavorable) to our net revenues, cost of revenues and gross profits.
We warranty our products for up to one year from the date of
shipment. A liability is recorded for estimated claims to be incurred
under product warranties and is based primarily on historical
experience. Estimated warranty expense is recorded as cost of product
revenues when products are shipped. As of June 30, 2002 and December
31, 2001, we had a warranty liability established in the amount of $0.2
million, which is included in accrued expenses on the consolidated
balance sheets. We had no material warranty claims during the first six
months of fiscal 2002. Should future warranty claims differ from our
estimated current liability, there could be adjustments (either
favorable or unfavorable) to our cost of revenues. Any adjustments to
cost of revenues could also impact future gross profits.
Estimated Excess Inventories. We periodically review our inventory
levels to determine if inventory is stated at the lower of cost or net
realizable value. Due to the severe downturn in the telecommunications
and data communications industries during 2001, we evaluated our
inventory position based on known backlog of orders, projected sales
and marketing forecasts, shipment activity and inventory held at our
significant distributors. As a result of current and anticipated
business conditions, as well as lower than anticipated demand, we
recorded a charge for excess inventories during fiscal 2001 of
approximately $39.2 million. The majorities of these products have not
been disposed and remain in inventory at an adjusted cost basis of
zero.
During the first and second quarters of fiscal 2002, we
recorded net product revenues of approximately $3.2 million on
shipments of excess inventory that had previously been written down to
their estimated net realizable value of zero. This resulted in 100%
gross margin on these product sales. Had these products been sold at
our historical average cost basis, a 53% gross margin would have been
recorded. We currently do not anticipate that a significant amount of
the excess inventories subject to the write-down described above will
be used in the future based upon our current demand forecast. Should
our future demand exceed the estimates that we used in writing down our
excess inventories, we will recognize a favorable impact to cost of
revenues and gross profits. Should demand fall below our current
expectations, then we may record additional inventory write downs which
will result in a negative impact to cost of revenues and gross profits.
Valuation of Deferred Tax Assets. Income taxes are accounted for under
the asset and liability method. Deferred income tax assets and
liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and
operating loss and tax credit carry forwards. Deferred income tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
19
differences are expected to be recovered or settled. The effect on
deferred income tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. To
the extent that it is more likely than not that we will not be able to
utilize deferred income tax assets in the future, then a valuation
allowance is established. At June 30, 2002, we had deferred income tax
assets, net of valuation allowances of $61.5 million compared to $68.6
million as of December 31, 2001. Deferred income tax assets decreased
during the first six months of fiscal 2002 due to income tax expense on
the gain of approximately $19.5 million realized from the purchase of
our convertible notes. The income tax expense on this gain was
partially offset by the income tax benefit of our operating loss.
We continue to periodically review the realizability of deferred
income tax assets considering all positive and negative evidence
available to us, which includes, among other factors, our specific
historical operating results, changes in our future expectations of
revenues and their impact on future profitability. To the extent that
we believe that it is more likely than not that some or all of our
deferred income tax assets will not be realized, we will establish a
valuation allowance. Such a valuation allowance would impact our income
tax rate. As of June 30, 2002 we did not establish or make adjustments
to any existing valuation allowances, however, if market conditions
persist, we may consider it necessary to establish additional
allowances in future periods.
Valuation and Impairment of Goodwill, Other Intangibles and Long-Lived
Assets. We review long-lived assets, goodwill and certain identifiable
intangible assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.
When factors indicate that a long-lived asset should be evaluated
for possible impairment, an estimate of the related asset's
undiscounted future cash flows over the remaining life of the asset
will be made to measure whether the carrying value is recoverable. Any
impairment is measured based upon the excess of the carrying value of
the asset over its estimated fair value which is generally based on an
estimate of future discounted cash flows. A significant amount of
management judgment is used in estimating future discounted cash flows.
In accordance with SFAS 142 we perform an annual test for
impairment of goodwill and intangible assets that will generally be
performed in the fourth quarter of the fiscal year. When measuring the
potential impairment of goodwill and intangible assets, we determine
the fair value of our reporting units (TranSwitch currently has one
reporting unit) and compare this fair value against the carrying value
of the goodwill and intangible assets. If the fair value of the
reporting unit exceeds that of the goodwill and intangible assets, then
no impairment exists. If the fair value of the reporting unit is less
than that of the carrying value of our goodwill and intangible assets,
then these assets will be written down by the difference. We use an
average of our historical quoted common stock price when assessing a
reporting unit's fair value. As a result, impairment of our goodwill
and intangible assets could occur if our common stock trades below the
carrying value of these assets for an extended period of time.
20
Our total goodwill, other intangibles and long-lived assets on
our consolidated balance sheets were as follows as of June 30, 2002 and
December 31, 2001:
June 30, December 31,
2002 2001
----------------------------
Goodwill, Other Intangibles and Long-Lived Assets
Property and equipment, net ........................... $ 20,101 $ 18,946
Goodwill and purchased intangible assets, net ......... 61,794 56,107
Other assets .......................................... 4,581 4,007
----------------------------
Total goodwill, other intangible and long-lived assets .. $ 86,476 $ 79,060
----------------------------
Estimated Restructuring Reserves. We recorded restructuring charges
totaling $32.5 million during fiscal 2001 related to employee
termination benefits and costs to exit certain facilities. At June 30,
2002, the restructuring liabilities that remain total $26.0 million on
our consolidated balance sheets, compared to $29.9 million as of
December 31, 2001. The decrease of $3.9 million during the six months
ended June 30, 2002 was related to cash payments for severance and
lease costs on excess facilities and a non-cash reduction to the
outstanding liability as we entered into a new sub-lease arrangement
with a third party to rent a portion of our excess space. Certain
assumptions of this estimate include future maintenance costs, price
escalation and sublease income derived from these facilities. Should we
negotiate additional sublease rental income agreements or reach a
settlement with our landlords to be released from our existing
obligations, then we could realize a favorable benefit to our results
of future operations. Should future lease, maintenance or other costs
related to these facilities exceed our estimates, then we could incur
additional expense in future periods.
21
RESULTS OF OPERATIONS
The following table sets forth certain unaudited interim consolidated
statements of operations data as a percentage of net revenues for the periods
indicated:
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---------------------------------------------
Net revenues:
Product revenues 95% 100% 94% 99%
Service revenues 5% - 6% 1%
---------------------------------------------
Total net revenues 100% 100% 100% 100%
Cost of revenues:
Product cost of revenues 21% 57% 27% 36%
Provision for excess inventories - 224% - 50%
Service cost of revenues 14% - 9% -
---------------------------------------------
Total cost of revenues 35% 281% 36% 86%
---------------------------------------------
Gross profit (loss) 65% (181%) 64% 14%
---------------------------------------------
Operating expenses:
Research and development 294% 109% 284% 46%
Marketing and sales 66% 56% 71% 27%
General and administrative 42% 21% 45% 9%
Amortization of goodwill and other
intangibles - 6% - 2%
In-process research and development - - 21% -
Restructuring (benefit) (33%) - (16%) -
---------------------------------------------
Total operating expenses 369% 192% 405% 84%
---------------------------------------------
Operating loss (304%) (373%) (341%) (70%)
=============================================
Net Revenues
The following tables summarizes our revenue mix by product line for the
three and six months ended June 30, 2002 and 2001 ($s in thousands):
Three Months Ended Three Months Ended Percentage
June 30, 2002 June 30, 2001 Increase /
Percent of Percent of (Decrease) in
Product Product Product Product Product
Revenue Revenue Revenue Revenue Revenue
----------------------------------------------------------------
SONET/SDH $ 1,673 39% $ 4,714 43% (65%)
Asynchronous/PDH 960 23% 107 1% 797%
ATM/IP 1,553 36% 6,191 56% (75%)
Multi Service/Switching 80 2% - - 100%
----------------------------------------------------------------
Total $ 4,266 100% $11,012 100% (61%)
22
Six Months Ended Six Months Ended Percentage
June 30, 2002 June 30, 2001 Increase /
Percent of Percent of (Decrease) in
Product Product Product Product Product
Revenue Revenue Revenue Revenue Revenue
--------------------------------------------------------------------
SONET/SDH $ 3,569 41% $ 26,709 54% (87%)
Asynchronous/PDH 2,141 24% 7,221 15% (70%)
ATM/IP 3,005 34% 15,357 31% (80%)
Multi Service/Switching 80 1% - - 100%
--------------------------------------------------------------------
Total $ 8,795 100% $ 49,287 100% (82%)
Total net revenues for the three and six months ended June 30, 2002
decreased by $6.5 million and $40.3 million, respectively. This represents a 59%
and 81% decline from the comparable three and six months of the prior year.
During the quarter ended June 30, 2002, we began shipping products under our new
Omni product line that we are classifying as Multi Service/Switching products.
We expect this product line to grow in the future as we complete development and
gain customer acceptance for this family of products. We continue to experience
very difficult market conditions and decreased revenues in the SONET/SDH and
ATM/IP product lines, while there was a slight dollar basis increase in the
Asynchronous/PDH product line during the three months ended June 30, 2002. For
the six months ended June 30, 2002, the decrease in net revenues was distributed
across all three of these product lines with SONET/SDH decreasing by the largest
percentage. These decreases were primarily related to a decline in volumes
shipped over the prior comparable period that we attribute to an overall
economic downturn and significant excess capacity in the telecommunications and
data communications industries. Although our volumes are down significantly, we
continue to retain the majority of our customer base. During the past three
fiscal years, our SONET/SDH product line accounted for an average of 57% of our
net revenues; thus, the current product mix percentage is not consistent with
this historical trend. Given the lack of visibility in the current market, we
cannot predict when, and to the extent that, historical product mix percentages
will return, if at all.
Included in total net revenues were service revenues consisting of
design services performed for third parties on a short-term contract basis.
Service revenues for the three months ended June 30, 2002 increased by $0.2
million from essentially zero from the comparable three months of the prior
year. Service revenues for the six months ended June 30, 2002 increased by $0.2
million or 41% from the comparable six months of the prior year. Service
revenues are not our primary strategic focus and, as such, will fluctuate up or
down from period to period, depending on business priorities. Approximately 53%
of service revenues during the six months ended June 30, 2002 were from OptiX
Networks, Inc. (OptiX), a related party, in which we have a less then 20%
ownership interest. As was detailed in Note 7 to our unaudited interim
consolidated financial statements, we also deferred approximately $0.6 million
in service revenue from OptiX given that the collectibility of this amount was
not reasonably assured.
International net revenues represented approximately 59% of net
revenues for the three months ended June 30, 2002 compared with approximately
79% of net revenues for the three months ended June 30, 2001. International net
revenues represented approximately 50% of net revenues for the six months ended
June 30, 2002 compared with approximately 62% of net revenues for the six months
ended June 30, 2001. The decrease in international revenues as a
23
percent of total revenues in fiscal 2002 is due to the fact that we had shipped
several relatively larger orders from U.S. customers than those from
international customers during the period. We do not consider this decrease in
international revenues a trend given our low shipment levels and the modest
ordering patterns that currently exist throughout the industry.
Gross Profit
The following tables are provided to detail the changes in gross profit
for the three and six months ended June 30, 2002 compared to the same periods in
the prior year.
Three Months Ended Three Months Ended
June 30, 2002 June 30, 2001
Gross Gross Gross Gross
Profit $ Profit % Profit $ Profit %
------------------------------------------------------------
Gross Profit - As Reported $ 2,916 65% $ (19,968) (181%)
Excess Inventory Charge/1/ - - 24,694 224%
Excess Inventory Benefit/2/ (743) (17%) - -
------------------------------------------------------------
Gross Profit - As Adjusted $ 2,173 48% $ 4,726 43%
------------------------------------------------------------
Six Months Ended Six Months Ended
June 30, 2002 June 30, 2001
Gross Gross Gross Gross
Profit $ Profit % Profit $ Profit %
------------------------------------------------------------
Gross Profit - As Reported $ 5,960 64% $ 7,086 14%
Excess Inventory Charge/1/ - - 24,694 50%
Excess Inventory Benefit/2/ (1,553) (17%) - -
------------------------------------------------------------
Gross Profit - As Adjusted $ 4,407 47% $ 31,780 64%
------------------------------------------------------------
1 - During 2001 as a result of current and anticipated business
conditions, as well as lower than anticipated demand, we recorded a
provision for excess inventories during the quarter ended June 30, 2001
of approximately $24.7 million against costs of revenues. For the
purposes of comparing the change in gross profit on our net revenues,
we are excluding this amount.
2 - During 2002, due to changes in demand for certain products, we
realized an excess inventory benefit from the sales of products which
had previously been written down to a cost basis of zero. For the
purposes of comparing the change in gross profit on our net revenues,
we are excluding this benefit and calculating gross product on these
product sales as if they had been sold at their historical average
costs.
Total gross profit for the three months ended June 30, 2002 increased
by $22.9 million, or 115%, from the comparable three months of the prior year.
This increase is due in large part to a charge that we took against cost of
revenues in the second quarter of fiscal 2001 for excess inventories. Excluding
this charge for excess inventories as well as the benefit of sales thereof in
fiscal 2002, gross profit for the period decreased by $2.6 million, or 54%. The
decrease in gross profit dollars for the three months ended June 30, 2002 is the
result of lower total net revenues and volumes of product shipments. Gross
profit percentage (excluding excess inventory charges and benefits) for the
three months ended June 30, 2002 was 48% compared to 43% for the three months
ended June 30, 2001. The nominal increase in gross profit percentage during the
second quarter is the result in a change in product mix over the prior period.
24
Total gross profit for the six months ended June 30, 2002 decreased by
$1.1 million, or 16%, from the comparable six months of the prior year.
Excluding this charge for excess inventories as well as the benefit of sales
thereof in fiscal 2002, gross profit for the period decreased by $27.4 million,
or 86%. The decrease in gross profit dollars for the six months ended June 30,
2002 is the result of lower total net revenues and volumes of product shipments.
Gross profit percentage (excluding excess inventory charges and benefits) for
the six months ended June 30, 2002 was 47% compared to 64% for the six months
ended June 30, 2001. The decrease in gross profit is primarily due to shipments
of lower margin products with lower gross profit in fiscal 2002 and the excess
capacity absorption due to lower product volumes causing our average inventory
cost to increase compared to the prior year.
Research and Development
Research and development expenses for the three months and six months
ended June 30, 2002 increased by $1.2 and $3.5 million, or 10% and 15%,
respectively, from the comparable three and six month periods of the prior year.
This increase in absolute dollars is the result of acquisitions during the first
quarter of 2002 and the second half of 2001 and continued investment in
personnel, electronic design and automation software tools and intellectual
property cores, as well as fabrication costs and depreciation expense in
connection with developing next generation telecommunication and data
communication products. As a percentage of total net revenues, our research and
development costs increased as we continued investing in the design and
development of future products notwithstanding the fact that current product
shipments have declined due to adverse industry conditions. We have monitored
our known and forecasted sales demand and operating expense run rates closely
and, as a result, took two restructuring actions in 2001. Subsequent to the
quarter ended June 30, 2002, we announced a restructuring action whereby we
reduced our workforce by approximately 16% and closed two facilities. We will
continue to closely monitor both our costs and our revenue expectations in
future periods and will take actions as market conditions dictate. There can be
no assurances that future acquisitions, market conditions or unforeseen events
will not cause our expenses to rise or fall in future periods.
Marketing and Sales
Marketing and sales expenses for the three months and six months ended
June 30, 2002 decreased by $3.2 and $6.8 million, or 52% and 51%, respectively,
from the comparable three and six-month periods of the prior year. These
decreases in expenses are primarily due to a decrease in commissions due to the
decrease in revenues over the same periods last year. Also contributing to this
decrease is a reduction in our provision for doubtful customer accounts by
approximately $0.7 million and $1.0 million for the three and six months ended
June 30, 2002, respectively. During fiscal 2002, we experienced improved
collections on certain customer accounts receivables that we had previously
reserved. We have monitored our known and forecasted sales demand and operating
expense run rates closely and, as a result, took two restructuring actions in
2001. Subsequent to the quarter ended June 30, 2002, we announced a
restructuring action whereby we reduced our workforce by approximately 16% and
closed two facilities. We will continue to closely monitor our costs and our
revenue expectations in future periods and will take actions as market
conditions dictate. There can be no assurances that future acquisitions, market
conditions or unforeseen events will not cause our expenses to rise or fall in
future periods.
25
General and Administrative
General and administrative expenses for the three months and six months
ended June 30, 2002 decreased by $0.5 million and $0.3 million, or 20% and 7%,
respectively, from the comparable three months and six months of the prior year.
This decrease is primarily due to lower professional fees and savings realized
from restructuring actions. As a percentage of total net revenues, our general
and administrative costs increased since the fixed components of these costs do
not fluctuate with total net revenues, which decreased during the quarter. We
have monitored our known and forecasted sales demand and operating expense run
rates closely and, as a result, took two restructuring actions in 2001.
Subsequent to the quarter ended June 30, 2002, we announced a restructuring
action whereby we reduced our workforce by approximately 16% and closed two
facilities. We will continue to closely monitor our costs and our revenue
expectations in future periods and will take actions as market conditions
dictate. There can be no assurances that future acquisitions, market conditions
or unforeseen events will not cause our expenses to rise or fall in future
periods.
Amortization of Goodwill and Purchased Intangibles
Amortization of goodwill and purchased intangible assets for the three
months and six months ended June 30, 2002 decreased $0.6 million and $1.2
million, or 100%, from the comparable three months and six months of the prior
year. This decrease in expense is related to our adoption of SFAS 141 on July 1,
2001 and SFAS 142 on January 1, 2002, at which time all future amortization of
goodwill ceased. We are required to review goodwill and purchased intangibles
for impairment, at a minimum, annually.
Restructuring Benefit
During the second quarter of fiscal 2002, we sub-let a portion of our
unused excess facilities. As a result, we recognized income (restructuring
benefit) of approximately $1.5 million and, accordingly, reduced the
restructuring liability. At June 30, 2002, we have approximately $26.0 million
of restructuring liabilities on the consolidated balance sheet. Subsequent to
June 30, 2002, we announced a restructuring plan referred to as the July 2002
Restructuring Plan. We currently estimate that we will incur a restructuring
charge of between $4-$5 million in the quarter ended September 30, 2002 related
to a workforce reduction and facility closings. Refer to Note 9 - Subsequent
Events in the unaudited consolidated financial statements for additional
details. Comparative periods did not have any restructuring benefits.
In-Process Research and Development
During the six months ended June 30, 2002, we recorded a charge for
in-process research and development of $2.0 million related to our purchase of
Systems on Silicon, Inc. (SOSi) on March 27, 2002. This transaction was recorded
in the first quarter of fiscal 2002. There were no in-process research and
development charges in the second quarter of fiscal 2002 or the three and six
month periods ended June 30, 2001.
At the time of acquisition, SOSi was in the process of developing the
Intelligent Integrated Access Device (IAD) chip. The project was started
concurrently with SOSi's inception in 1999 and is scheduled for its first
release in the first quarter of 2003. The IAD chip is the enabling solution to
service the last mile in voice and data access. The IAD chip provides a System
On a Chip (SoC) solution. The IAD chip will serve the need for existing
Incumbent Local Exchange Carrier (ILEC)
26
legacy networks. Its telephone features will include voice activity detection,
silence suppression and comfort noise generation.
The $2.0 million allocated to IPR&D was determined through an
independent valuation using established valuation techniques in the
telecommunications and data communications industries. The value allocated to
IPR&D was based upon the forecasted operating after-tax cash flows from the
technology acquired, giving effect to the stage of completion at the acquisition
date. Future cash flows were adjusted for the value contributed by any core
technology and development efforts expected to be completed post acquisition.
These forecasted cash flows were then discounted at rates commensurate with the
risks involved in completing the acquired technologies taking into consideration
the characteristics and applications of each product, the inherent uncertainties
in achieving technological feasibility, anticipated levels of market acceptance
and penetration, market growth rates and risks related to the impact of
potential changes in future target markets. A project's risk is the highest at
its inception. As the project progresses, the risk of a project generally
decreases. As of the acquisition date, the IAD chip was still in the initial
stages of development. After considering these factors, the risk adjusted
discount rates for the IAD chip product was determined to be 65%. The acquired
technology that had not yet reached technological feasibility and, with no
alternative future uses, it was expensed upon acquisition in accordance with
SFAS No. 2, "Accounting for Research and Development Costs".
Impairment of investment in non-publicly traded company
During the second quarter of 2002 we performed an impairment analysis
of our investment in OptiX Networks, Inc. (OptiX) because of the declining
financial resources of OptiX and the uncertainty of capital resources generally
available to early stage start-up companies. Additionally, Optix currently does
not have the ability to repay us for services performed during the three months
ended June 30, 2002. Based on the results of this analysis, we reduced the
carrying value of our investment in OptiX to its estimated fair value of $0.6
million, resulting in an impairment charge of approximately $3.1 million which
is classified as "Impairment of investment in non-publicly traded company" on
the Consolidated Statement of Operations. Comparative periods did not have any
impairments of investments in non-public companies.
Interest Income (Expense)
Interest income (expense), net for the three and six months ended June
30, 2002 decreased by $0.7 million and $5.2 million, or 104% and 141%,
respectively from the comparable three and six month periods of the prior year.
The decrease in interest income (expense), net is due to a lower average cash
balance and interest rates during the second quarter of fiscal 2002 compared to
the second quarter of fiscal 2001. The decrease in interest income as a result
of lower cash balances has been partially offset by lower interest expense
because we have repurchased approximately $200 million face value of our 4 1/2%
Convertible Notes due 2005. At June 30, 2002 and June 30, 2001, the effective
interest rate on our interest-bearing securities was approximately 2.50% and
4.35%, respectively.
Income Tax Expense (Benefit)
Our effective income tax rate, before extraordinary items, for the
three and six months ended June 30, 2002 is a benefit of 31% and 32%
respectively, compared to an effective income tax
27
expense rate of approximately 36% and 35% for the three and six month periods of
the prior year. The total income tax rate for the three and six months ended
June 30, 2002 differed from statutory rates primarily due to the non-deductible
write-off of purchased in-process research and development and the impairment
charge recorded on our investment in OptiX. In addition to the tax benefit
recorded during the quarter ended March 31, 2002, we also recorded income tax
expense of $19.5 million on the extraordinary gain from the tender offer to
repurchase up to $200 million face value of our outstanding 4 1/2% Convertible
Notes due 2005.
We continue to periodically review the realizability of deferred income
tax assets considering all positive and negative evidence available to us, which
includes, among other factors, our specific historical operating results,
changes in our future expectations of revenues and their impact on future
profitability. To the extent that we believe that it is more likely than not
that some or all of our deferred income tax assets will not be realized, we will
establish a valuation allowance. Such a valuation allowance would impact our
income tax rate. As of June 30, 2002, we did not establish or make adjustments
to any existing valuation allowances, however, if market conditions persist, we
may consider it necessary to establish additional allowances in future periods.
Extraordinary Gain on the Repurchase of Convertible Notes
In February 2002, we announced a tender offer to repurchase up to $200
million face value of our outstanding 4 1/2% Convertible Notes due 2005. In the
quarter ended March 31, 2002, we repurchased $199.9 million face value of our
outstanding notes for a cash payment of $139.9 million. After taxes, transaction
costs and a write-off of previously deferred financing costs, this transaction
resulted in an after-tax gain of $32.5 million for the three months ended March
31, 2002.
The timing and amount of any additional repurchases of our convertible
notes will depend on many factors, including, but not limited to, the prevailing
market price of the notes and overall market conditions. We intend to fund
additional repurchases of the notes, if any, from available cash, cash
equivalents and investments. We did not purchase any of our notes during the
second quarter of 2002.
28
Liquidity and Capital Resources
As of June 30, 2002, we had total cash, cash equivalents and
investments of approximately $241.1 million. This is our primary source of
liquidity as we are not currently generating positive cash flow from our
operations. Details of our cash inflows and outflows for the six months ended
June 30, 2002 as well as a summary of our cash, cash equivalents and investments
and future commitments are detailed as follows:
Cash Inflows and Outflows
During the six months ended June 30, 2002, the net decrease in cash and
cash equivalents was $185.3 million compared to a net decrease of $74.8 million
during the six months ended June 30, 2001. Details of our cash inflows and
outflows are as follows:
Operating Activities: In the six months ended June 30, 2002, we used $38.6
million in cash, which consists of the following:
. Net income for the period totaling $7.7 million.
. Non cash reductions to net income totaling $35.9 million
consisted of a gain of $32.5 million from the repurchase of our
notes, deferred income taxes totaling $12.8 million, a
restructuring benefit totaling $1.5 million, a reduction to the
provision for bad debts totaling $1.0 million and other non-cash
items of $0.2 million offset by depreciation and amortization
totaling $7.0 million, a write-off of purchased in-process
research and development totaling $2.0 million and an impairment
of an investment in a non-public company totaling $3.1 million.
. A $10.4 million decrease in net working capital comprised of
decreases in accounts payable, accrued expenses and restructuring
liabilities totaling $8.8 million in addition to a net increase
in accounts receivable, inventories, prepaid and other assets
totaling $1.6 million.
Investing Activities: During the six months ended June 30, 2002, we invested
approximately $7.8 million in capital equipment and product licenses. We also
paid $5 million to satisfy a purchase price contingency related to ADV
Engineering SA which we acquired in January 2001, and $0.9 million to purchase
all of the outstanding securities of SOSi, not already owned by us, which we
acquired in March 2002. We also invested approximately $0.5 million in
non-public companies during the six months ended June 30, 2002. These
investments, offset by net proceeds of held-to-maturity short and long-term
investments totaling $9.7 million resulted in a total cash use of $4.3 million
related to investing activities.
Financing Activities: During the six months ended June 30, 2002, we used $142.6
million in financing activities, which consisted primarily of $143.2 million
used to repurchase our 4 1/2% Convertible Notes due 2005 offset by proceeds from
the exercise of stock options and purchases of shares in our employee stock
purchase plan of $0.6 million.
Effect of Exchange Rates and Inflation: Exchange rates and inflation have not
had a significant impact on our operations or cash flows.
29
Cash, Cash Equivalents and Investments
We have financed our operations and have met our capital requirements
since incorporation in 1988 primarily through private and public issuances of
equity securities, convertible notes, bank borrowings and cash generated from
operations. Our principal sources of liquidity as of June 30, 2002 consisted of
$185.0 million in cash and cash equivalents, $37.3 million in short-term
investments and $18.8 million in long-term investments for a total cash and
investment balance of $241.1 million. Cash equivalents are instruments with
maturities of less than 90 days, short-term investments have maturities of
greater then 90 days but less than one year and long-term investments have
maturities of greater than one year. Our cash equivalents and investments
consist of U.S. Treasury Bills, corporate debt, taxable municipal securities,
money market instruments, overnight repurchase investments and commercial paper.
We believe that our existing cash, cash equivalents and investments will
be sufficient to fund operating losses, capital expenditures and provide
adequate working capital for at least the next twelve months. However, there can
be no assurance that events in the future will not require us to seek additional
capital and, if so required, that capital will be available on terms favorable
or acceptable to us, if at all.
Commitments
We have existing commitments to make future interest payments on our
existing 4 1/2% Convertible Notes due 2005 and also to redeem them in September
of 2005. Over the remaining life of the outstanding notes, we expect to accrue
and pay approximately $16.5 million in interest to the holders.
We have outstanding operating lease commitments of approximately $32.8
million payable over the next fifteen years. Some of these commitments are for
space that was not being utilized and, as a result, we recorded a restructuring
charge of $28.6 during fiscal 2001 for excess facilities. During fiscal 2002, we
sublet a portion of our excess space and as a result, we reduced our
restructuring liability and recorded a restructuring benefit of $1.5 million. We
are in the process of trying to sublease additional excess space but it is
unlikely that any sublease income generated will offset the entire future
commitment. We currently believe that we can fund these lease commitments in the
future, however, there can be no assurances that we will not be required to seek
additional capital or provide additional guarantees or collateral on these
obligations.
A summary of our significant future commitments and their payments by
fiscal year is summarized as follows (in thousands):
Scheduled
payments for
the six
months ended
December 31, Scheduled payments for the years ending December 31,
------------- ----------------------------------------------------
Total
Commitment 2002 2003 2004 2005 2006-2017 Commitments
- ----------------------------------------------------------------------------------------------------------------------------
Interest on Convertible Notes $ 2,568 $ 5,135 $ 5,135 $ 3,638 $ -- $ 16,476
Redemption of Convertible Notes -- -- -- 114,113 -- 114,113
Operating Lease Commitments, net 1,689 3,118 2,774 2,001 23,206 32,788
-----------------------------------------------------------------------------------
Total $ 4,257 $ 8,253 $ 7,909 $ 119,752 $ 23,206 $ 163,377
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