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 March 31, 2004
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 000-26485
Paradyne Networks, Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 75-2658219 | |
| (State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
8545 126th Avenue North
Largo, Florida 33773
(Address of principal executive offices, zip code)
(727) 530-2000
(Registrant’s telephone number, including area code)
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 ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
The number of shares of the registrant’s common stock outstanding at April 26, 2004, the latest practicable date, was 44,897,879.
CONDENSED UNAUDITED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
| MARCH 31, 2004 |
DECEMBER 31, 2003 |
|||||||
| ASSETS | ||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 46,036 | $ | 46,775 | ||||
| Accounts receivable less allowance for doubtful accounts of $1,347 and $1,346 at March 31, 2004 and December 31, 2003, respectively |
10,944 | 7,119 | ||||||
| Inventories |
14,643 | 16,419 | ||||||
| Prepaid expenses and other current assets |
1,475 | 1,578 | ||||||
| Total current assets |
73,098 | 71,891 | ||||||
| Property, plant and equipment, net |
4,784 | 5,595 | ||||||
| Intangible assets, net |
4,563 | 4,869 | ||||||
| Other assets |
457 | 87 | ||||||
| Total assets |
$ | 82,902 | $ | 82,442 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ | 6,036 | $ | 5,486 | ||||
| Payroll and benefit related liabilities |
2,155 | 2,636 | ||||||
| Other current liabilities |
4,903 | 4,745 | ||||||
| Total current liabilities |
13,094 | 12,867 | ||||||
| Total liabilities |
$ | 13,094 | $ | 12,867 | ||||
| Stockholders’ equity: |
||||||||
| Preferred stock, par value $.001; 5,000,000 shares authorized, none issued |
— | — | ||||||
| Common stock, par value $.001; 80,000,000 shares authorized, 44,853,520 and 44,486,373 shares issued and outstanding as of March 31, 2004 and December 31, 2003, respectively |
45 | 44 | ||||||
| Additional paid-in capital |
142,917 | 141,912 | ||||||
| Accumulated deficit |
(73,347 | ) | (72,560 | ) | ||||
| Notes receivable for common stock |
(16 | ) | (16 | ) | ||||
| Other equity adjustments |
209 | 195 | ||||||
| Total stockholders’ equity |
69,808 | 69,575 | ||||||
| Total liabilities and stockholders’ equity |
$ | 82,902 | $ | 82,442 | ||||
See accompanying Notes to Condensed Unaudited Consolidated Financial Statements
1
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
| THREE MONTHS ENDED MARCH 31, |
||||||||
| 2004 |
2003 |
|||||||
| Revenues: |
||||||||
| Sales |
$ | 20,815 | $ | 17,734 | ||||
| Services |
1,482 | 1,564 | ||||||
| Total revenues |
22,297 | 19,298 | ||||||
| Total cost of sales |
13,080 | 9,565 | ||||||
| Gross margin |
9,217 | 9,733 | ||||||
| Operating expenses: |
||||||||
| Research and development |
3,758 | 5,609 | ||||||
| Selling, general & administrative |
5,806 | 7,250 | ||||||
| Amortization of intangible assets and deferred stock compensation |
343 | 423 | ||||||
| Business restructuring charges |
269 | — | ||||||
| Total operating expenses |
$ | 10,176 | $ | 13,282 | ||||
| Operating loss |
(959 | ) | (3,549 | ) | ||||
| Other (income) expenses: |
||||||||
| Interest, net |
(127 | ) | (154 | ) | ||||
| Other, net |
(45 | ) | 93 | |||||
| Loss before provision for income taxes |
(787 | ) | (3,488 | ) | ||||
| Net loss |
$ | (787 | ) | $ | (3,488 | ) | ||
| Weighted average number of common shares outstanding |
||||||||
| Basic |
44,801 | 42,862 | ||||||
| Diluted |
44,801 | 42,862 | ||||||
| Loss per common share |
||||||||
| Basic |
$ | (0.02 | ) | $ | (0.08 | ) | ||
| Diluted |
(0.02 | ) | (0.08 | ) | ||||
| Consolidated Statements of Comprehensive Income (Loss) |
||||||||
| Net loss |
(787 | ) | (3,488 | ) | ||||
| Translation adjustments |
(23 | ) | 143 | |||||
| Comprehensive loss |
$ | (810 | ) | $ | (3,345 | ) | ||
See accompanying Notes to Condensed Unaudited Consolidated Financial Statements
2
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
| THREE MONTHS ENDED MARCH 31, |
||||||||
| 2004 |
2003 |
|||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
| Net loss |
$ | (787 | ) | $ | (3,488 | ) | ||
| Adjustments to reconcile net loss to cash provided by (used in) operating activities: |
||||||||
| Income from reversal of reserves due to sale of inventory |
— | (762 | ) | |||||
| Loss on sale of assets |
3 | — | ||||||
| Increase (decrease) in allowance for bad debts |
1 | (268 | ) | |||||
| Depreciation and amortization |
1,316 | 1,959 | ||||||
| (Increase) decrease in assets, net of effects of acquisition: |
||||||||
| Receivables |
(3,826 | ) | 4,307 | |||||
| Inventories |
1,776 | 1,426 | ||||||
| Other assets |
(267 | ) | 1,063 | |||||
| Decrease in liabilities, net of effects of acquisition: |
||||||||
| Accounts payable |
550 | (1,908 | ) | |||||
| Payroll and related liabilities |
(481 | ) | (1,250 | ) | ||||
| Other current liabilities |
158 | (2,067 | ) | |||||
| Net cash (used in) provided by operating activities |
$ | (1,557 | ) | $ | (988 | ) | ||
| CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES: |
||||||||
| Capital expenditures |
(163 | ) | (181 | ) | ||||
| Net cash provided by (used in) investing activities |
$ | (163 | ) | $ | (181 | ) | ||
| CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: |
||||||||
| Net proceeds from stock transactions |
1,004 | 25 | ||||||
| Repayments under other debt obligations |
— | (165 | ) | |||||
| Net cash provided by financing activities |
1,004 | (140 | ) | |||||
| Effect of foreign exchange rate changes on cash |
(23 | ) | 143 | |||||
| Net increase (decrease) in cash and cash equivalents |
(739 | ) | (1,166 | ) | ||||
| Cash and cash equivalents at beginning of period |
46,775 | 47,706 | ||||||
| Cash and cash equivalents at end of period |
$ | 46,036 | $ | 46,540 | ||||
See accompanying Notes to Condensed Unaudited Consolidated Financial Statements
3
Notes to Condensed Unaudited Consolidated Financial Statements (in thousands, except per share data)
1. Business and Basis of Presentation:
Paradyne Networks, Inc. (the “Company”) designs, manufactures, and markets data communications and networking products for network service providers and business customers. The Company’s products enable business customers to efficiently access wide area network services and allow network service providers to provide customers with high-speed services for data, voice, video and multimedia applications.
The accompanying condensed unaudited consolidated financial statements include the results of the Company and its wholly-owned subsidiaries: Paradyne Corporation; Paradyne Canada Ltd.; Paradyne International Ltd.; Paradyne Worldwide Corp.; Ark Electronic Products, Inc.; Paradyne Finance Corporation; Paradyne International Sales Ltd.; Paradyne Networks do Brazil LTDA.; Paradyne Services, LLC and Elastic Networks Inc. Intercompany accounts and transactions have been eliminated in consolidation.
The accompanying condensed unaudited consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. However, in the opinion of management, such statements reflect all adjustments, consisting of only normal, recurring adjustments, necessary for a fair presentation of interim period results. These financial statements should be read in conjunction with the December 31, 2003 audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 15, 2004.
The results of operations for the interim periods are not necessarily indicative of results to be expected for the entire year or for other future interim periods.
Stock Options
The Company applies APB Opinion No. 25 and related interpretations for accounting for stock options. Accordingly, no compensation costs at the grant dates are recorded for options granted at fair market value. Had compensation cost for the Company’s option plans been determined based on the fair value at the grant dates as prescribed by SFAS No. 123, “Accounting for Stock Based Compensation,” the Company’s net income and net income per share on a pro forma basis would have been:
| THREE MONTHS ENDED MARCH 31, |
||||||||
| 2004 |
2003 |
|||||||
| Net income (loss), as reported |
$ | (787 | ) | $ | (3,488 | ) | ||
| Add: Stock-based employee compensaton expense included in reported net income, net of related taxes |
38 | 117 | ||||||
| Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects |
(2,604 | ) | (2,762 | ) | ||||
| Pro forma net income (loss) |
$ | (3,353 | ) | $ | (6,133 | ) | ||
| Earnings per share basic as reported |
$ | (0.02 | ) | $ | (0.08 | ) | ||
| Earnings per share diluted as reported |
$ | (0.02 | ) | $ | (0.08 | ) | ||
| Earnings per share basic and diluted pro forma |
$ | (0.07 | ) | $ | (0.14 | ) | ||
4
Product Warranty
The Company generally provides a return to factory warranty for a period of one year from the date of sale. A current charge to income is recorded at the time of sale to reflect the amount the Company estimates will be needed to cover future warranty obligations for products sold during the year. The accrued liability for warranty costs is included in the caption “other current liabilities” in the accompanying consolidated balance sheets. The estimate of such costs is based upon historical and anticipated requirements. The following table summarizes the activity for the product warranty reserve for the three months ended March 31, 2003 and 2004:
| 2004 |
2003 |
|||||||
| Beginning balance at January 1, 2004 and 2003 |
$ | 747 | $ | 1,416 | ||||
| Product warranty expenses accrued |
85 | 198 | ||||||
| Product warranty expenses incurred and charged against reserve |
(117 | ) | (198 | ) | ||||
| Adjustment for changes in estimates |
(66 | ) | — | |||||
| Ending balance at March 31, 2004 and 2003 |
$ | 649 | $ | 1,416 | ||||
Liquidity
The Company has incurred losses from operations in each of the two years presented in these consolidated financial statements due to the continuing slowdown in the telecommunications environment. At March 31, 2004, management believes that available cash and cash equivalents together with future cash flow from operations will be sufficient to meet the Company’s obligations as they become due for the next twelve months.
Loss Per Share
Basic loss per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the year. Diluted earnings per share assumes the exercise of stock options for which market price exceeds exercise price, less shares assumed purchased by the Company with related proceeds and associated tax benefits.
Options of 14,443,829 and 13,189,016 for the three months ending March 31, 2003 and 2004, respectively, are not included in the March 31, 2003 and 2004 calculation of loss per share due to their antidilutive effect.
2. Recently Issued Financial Accounting Standards:
In May 2003, the FASB issued FAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”, which requires that an issuer classify certain financial instruments as a liability or an asset. Previously, many financial instruments with characteristics of both liabilities and equity were classified as equity. Financial instruments subject to FAS 150 include financial instruments with any of the following features:
| • | An unconditional redemption obligation at a specified or determinable date, or upon an event that is certain to occur; |
| • | An obligation to repurchase shares, or indexed to such an obligation, that may require physical share or net cash settlement; |
| • | An unconditional, or for new issuances conditional, obligation that may be settled by issuing a variable number of equity shares if either (a) a fixed monetary amount is known at inception, (b) the variability is indexed to something other than the fair value of the issuer’s equity shares, or (c) the variability moves inversely to changes in the fair value of the issuer’s shares. |
The standard requires that all such instruments be classified as a