UNITED STATES
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
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
(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 Act). Yes x No ¨
At April 30, 2004, there were 91,681,527 shares of Common Stock, par value $.001 per share, of the Registrant outstanding.
TRANSWITCH CORPORATION AND SUBSIDIARIES
FORM 10-Q
For the Quarterly Period Ended March 31, 2004
Table of Contents
| Page | ||||
| PART I. |
FINANCIAL INFORMATION | |||
| Item 1. |
Financial Statements (unaudited) | |||
| Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003 | 3 | |||
| Consolidated Statements of Operations for the three months ended March 31, 2004 and 2003 | 4 | |||
| Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and 2003 | 5 | |||
| Notes to Unaudited Consolidated Financial Statements | 6 | |||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 14 | ||
| Item 3. |
Quantitative and Qualitative Disclosures about Market Risk | 37 | ||
| Item 4. |
Controls and Procedures | 38 | ||
| PART II. |
OTHER INFORMATION | |||
| Item 1. |
Legal Proceedings | 39 | ||
| Item 2. |
Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities | 39 | ||
| Item 6. |
Exhibits and Reports on Form 8-K | 39 | ||
| Signatures | 40 | |||
2
TRANSWITCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
| March 31, 2004 |
December 31, 2003 |
|||||||
| (unaudited ) | ||||||||
| ASSETS |
||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 129,890 | $ | 142,950 | ||||
| Short-term investments |
5,271 | 9,101 | ||||||
| Accounts receivable, net |
3,188 | 3,684 | ||||||
| Inventories |
2,993 | 2,838 | ||||||
| Prepaid expenses and other current assets |
2,644 | 2,912 | ||||||
| Total current assets |
143,986 | 161,485 | ||||||
| Long-term marketable securities |
31,312 | 27,300 | ||||||
| Property and equipment, net |
10,461 | 10,262 | ||||||
| Patents, net of accumulated amortization |
1,200 | 1,240 | ||||||
| Investments in non-publicly traded companies |
927 | 627 | ||||||
| Deferred financing costs, net |
4,140 | 4,462 | ||||||
| Other assets |
886 | 930 | ||||||
| Total assets |
$ | 192,912 | $ | 206,306 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ | 2,247 | $ | 664 | ||||
| Accrued expenses and other current liabilities |
8,777 | 6,728 | ||||||
| Accrued compensation and benefits |
1,802 | 1,458 | ||||||
| Accrued sales returns, allowances and stock rotation |
1,204 | 1,671 | ||||||
| Accrued interest |
58 | 1,665 | ||||||
| Restructuring liabilities |
1,062 | 1,454 | ||||||
| Total current liabilities |
15,150 | 13,640 | ||||||
| Restructuring liabilities – long-term |
22,430 | 22,689 | ||||||
| 5.45% Convertible Plus Cash NotesSM due 2007, net of debt discount of $20,272 and $21,742, respectively |
77,236 | 75,866 | ||||||
| 4.50% Convertible Notes due 2005 |
24,442 | 24,442 | ||||||
| Derivative liability |
19,884 | 20,659 | ||||||
| Total liabilities |
159,142 | 157,296 | ||||||
| Commitments and contingencies |
||||||||
| Stockholders’ equity: |
||||||||
| Common stock, $.001 par value; 300,000,000 shares authorized; 91,051,968 and 90,953,205 shares issued and outstanding at March 31, 2004 and December 31, 2003, respectively |
91 | 91 | ||||||
| Additional paid-in capital |
291,268 | 291,115 | ||||||
| Accumulated other comprehensive income |
865 | 994 | ||||||
| Accumulated deficit |
(258,454 | ) | (243,190 | ) | ||||
| Total stockholders’ equity |
33,770 | 49,010 | ||||||
| Total liabilities and stockholders’ equity |
$ | 192,912 | $ | 206,306 | ||||
See accompanying notes to unaudited consolidated financial statements.
3
TRANSWITCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
| Three Months Ended March 31, |
||||||||
| 2004 |
2003 |
|||||||
| Net revenues: |
||||||||
| Product revenues |
$ | 8,203 | $ | 3,931 | ||||
| Service revenues |
2 | 167 | ||||||
| Total net revenues |
8,205 | 4,098 | ||||||
| Cost of revenues: |
||||||||
| Cost of product revenues |
2,146 | 1,238 | ||||||
| Cost of service revenues |
— | 102 | ||||||
| Total cost of revenues |
2,146 | 1,340 | ||||||
| Gross profit |
6,059 | 2,758 | ||||||
| Operating expenses: |
||||||||
| Research and development |
13,669 | 10,230 | ||||||
| Marketing and sales |
3,331 | 2,682 | ||||||
| General and administrative |
1,871 | 1,472 | ||||||
| Restructuring (benefit) charge and asset impairments, net |
(151 | ) | 3,787 | |||||
| Total operating expenses |
18,720 | 18,171 | ||||||
| Operating loss |
(12,661 | ) | (15,413 | ) | ||||
| Other (expense) income: |
||||||||
| Impairment of investments in non-publicly traded companies |
(111 | ) | (50 | ) | ||||
| Equity in net losses of affiliates |
— | (315 | ) | |||||
| Change in fair value of derivative liability |
775 | — | ||||||
| Interest income (expense): |
||||||||
| Interest income |
532 | 847 | ||||||
| Interest expense |
(3,419 | ) | (1,552 | ) | ||||
| Interest expense, net |
(2,887 | ) | (705 | ) | ||||
| Total other expense, net |
(2,223 | ) | (1,070 | ) | ||||
| Loss before income taxes, extraordinary loss and cumulative effect of adoption of and changes in accounting principles |
(14,884 | ) | (16,483 | ) | ||||
| Income tax expense |
103 | 69 | ||||||
| Loss before extraordinary loss and cumulative effect of adoption of and changes in accounting principles |
(14,987 | ) | (16,552 | ) | ||||
| Extraordinary loss upon consolidation of TeraOp (USA), Inc. |
— | (83 | ) | |||||
| Cumulative effect on prior years of adoption of and retroactive application of FIN 46R and new depreciation method |
(277 | ) | (805 | ) | ||||
| Net loss |
$ | (15,264 | ) | $ | (17,440 | ) | ||
| Basic and diluted loss per common share: |
||||||||
| Loss before extraordinary loss and cumulative effect of adoption of and changes in accounting principles |
$ | (0.17 | ) | $ | (0.18 | ) | ||
| Extraordinary loss upon consolidation of TeraOp (USA), Inc. |
— | — | ||||||
| Cumulative effect on prior years of adoption of and retroactive application of FIN 46R and new depreciation method |
— | (0.01 | ) | |||||
| Net loss |
$ | (0.17 | ) | $ | (0.19 | ) | ||
| Basic and diluted average common shares outstanding |
91,031 | 90,164 | ||||||
See accompanying notes to unaudited consolidated financial statements.
4
TRANSWITCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| Three Months Ended March 31, |
||||||||
| 2004 |
2003 |
|||||||
| Cash flows from operating activities: |
||||||||
| Net loss |
$ | (15,264 | ) | $ | (17,440 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
| Depreciation and amortization |
4,469 | 3,342 | ||||||
| Provision (benefit) for doubtful accounts |
19 | (140 | ) | |||||
| Cumulative effect on prior years of adoption of and retroactive application of FIN 46R and new depreciation method |
277 | 805 | ||||||
| Extraordinary loss upon consolidation of TeraOp (USA), Inc. |
— | 83 | ||||||
| Non-cash restructuring (benefit) charge and asset impairments, net |
(151 | ) | 248 | |||||
| Equity in net losses of affiliates |
— | 315 | ||||||
| Impairment of investments in non-publicly traded companies |
111 | 50 | ||||||
| Change in fair value of derivative liability |
(775 | ) | — | |||||
| Changes in assets and liabilities, net of effects of acquisitions: |
||||||||
| Accounts receivable |
477 | 475 | ||||||
| Inventories |
(155 | ) | 374 | |||||
| Prepaid expenses and other assets |
519 | 2,092 | ||||||
| Accounts payable |
894 | (473 | ) | |||||
| Accrued expenses and other current liabilities |
(368 | ) | (4,010 | ) | ||||
| Restructuring liabilities |
(500 | ) | 18 | |||||
| Net cash used in operating activities |
(10,447 | ) | (14,261 | ) | ||||
| Cash flows from investing activities: |
||||||||
| Capital expenditures |
(2,068 | ) | (412 | ) | ||||
| Investments in non-publicly traded companies |
(411 | ) | (295 | ) | ||||
| Cash received from liquidation of limited partnership investment |
— | 886 | ||||||
| Cash acquired upon consolidation of variable interest entities |
124 | 17 | ||||||
| Purchases of short- and long-term held-to-maturity investments |
(41,477 | ) | (10,223 | ) | ||||
| Proceeds from maturities of short- and long-term held-to-maturity investments |
41,294 | 21,871 | ||||||
| Net cash (used in) provided by investing activities |
(2,538 | ) | 11,844 | |||||
| Cash flows from financing activities: |
||||||||
| Issuance of common stock under employee stock plans |
54 | 57 | ||||||
| Net cash provided by financing activities |
54 | 57 | ||||||
| Effect of exchange rate changes on cash and cash equivalents |
(129 | ) | 177 | |||||
| Decrease in cash and cash equivalents |
(13,060 | ) | (2,183 | ) | ||||
| Cash and cash equivalents at beginning of period |
142,950 | 150,548 | ||||||