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 June 30, 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 July 30, 2004, there were 94,476,052 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 June 30, 2004
Table of Contents
| Page | ||||
| PART I. FINANCIAL INFORMATION |
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| Item 1. | Financial Statements (unaudited) | |||
| Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003 | 3 | |||
| Consolidated Statements of Operations for the three and six months ended June 30, 2004 and 2003 | 4 | |||
| Consolidated Statements of Cash Flows for the six months ended June 30, 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 | 15 | ||
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 40 | ||
| Item 4. | Controls and Procedures | 41 | ||
| PART II. OTHER INFORMATION |
||||
| Item 1. | Legal Proceedings | 42 | ||
| Item 2. | Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities | 42 | ||
| Item 4. | Submission of Vote to Shareholders | 42 | ||
| Item 6. | Exhibits and Reports on Form 8-K | 43 | ||
| Signatures | 44 | |||
2
TRANSWITCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
| June 30, 2004 |
December 31, 2003 |
|||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 107,366 | $ | 142,950 | ||||
| Short-term investments |
8,495 | 9,101 | ||||||
| Accounts receivable, net |
4,604 | 3,684 | ||||||
| Inventories |
3,915 | 2,838 | ||||||
| Prepaid expenses and other current assets |
3,946 | 2,912 | ||||||
| Total current assets |
128,326 | 161,485 | ||||||
| Long-term marketable securities |
39,071 | 27,300 | ||||||
| Property and equipment, net |
8,581 | 10,262 | ||||||
| Patents, net of accumulated amortization |
1,160 | 1,240 | ||||||
| Investments in non-publicly traded companies |
1,472 | 627 | ||||||
| Deferred financing costs, net |
3,618 | 4,462 | ||||||
| Other assets |
847 | 930 | ||||||
| Total assets |
$ | 183,075 | $ | 206,306 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ | 2,615 | $ | 664 | ||||
| Accrued expenses and other current liabilities |
8,335 | 6,728 | ||||||
| Accrued compensation and benefits |
2,063 | 1,458 | ||||||
| Accrued sales returns, allowances and stock rotation |
1,673 | 1,671 | ||||||
| Accrued interest |
1,587 | 1,665 | ||||||
| Restructuring liabilities |
968 | 1,454 | ||||||
| Total current liabilities |
17,241 | 13,640 | ||||||
| Restructuring liabilities – long-term |
22,201 | 22,689 | ||||||
| 5.45% Convertible Plus Cash NotesSM due 2007, net of debt discount of $17,758 and $21,742, respectively |
74,261 | 75,866 | ||||||
| 4.50% Convertible Notes due 2005 |
24,442 | 24,442 | ||||||
| Derivative liability |
12,934 | 20,659 | ||||||
| Total liabilities |
151,079 | 157,296 | ||||||
| Commitments and contingencies |
||||||||
| Stockholders’ equity: |
||||||||
| Common stock, $.001 par value; 300,000,000 shares authorized; 94,396,613 and 90,953,205 shares issued and outstanding at June 30, 2004 and December 31, 2003, respectively |
94 | 91 | ||||||
| Additional paid-in capital |
296,834 | 291,115 | ||||||
| Accumulated other comprehensive income |
695 | 994 | ||||||
| Accumulated deficit |
(265,627 | ) | (243,190 | ) | ||||
| Total stockholders’ equity |
31,996 | 49,010 | ||||||
| Total liabilities and stockholders’ equity |
$ | 183,075 | $ | 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 June 30, |
Six Months Ended June 30, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
| Net revenues: |
||||||||||||||||
| Product revenues |
$ | 8,501 | $ | 6,516 | $ | 16,704 | $ | 10,447 | ||||||||
| Service revenues |
186 | 91 | 188 | 258 | ||||||||||||
| Total net revenues |
8,687 | 6,607 | 16,892 | 10,705 | ||||||||||||
| Cost of revenues: |
||||||||||||||||
| Cost of product revenues |
2,246 | 1,759 | 4,392 | 2,997 | ||||||||||||
| Provision for excess inventories |
— | 1,498 | — | 1,498 | ||||||||||||
| Cost of service revenues |
158 | 13 | 158 | 115 | ||||||||||||
| Total cost of revenues |
2,404 | 3,270 | 4,550 | 4,610 | ||||||||||||
| Gross profit |
6,283 | 3,337 | 12,342 | 6,095 | ||||||||||||
| Operating expenses: |
||||||||||||||||
| Research and development |
11,972 | 10,468 | 25,641 | 20,698 | ||||||||||||
| Marketing and sales |
3,212 | 2,710 | 6,543 | 5,392 | ||||||||||||
| General and administrative |
1,792 | 1,248 | 3,663 | 2,720 | ||||||||||||
| Restructuring (benefit) charge and asset impairments, net |
(61 | ) | 138 | (212 | ) | 3,925 | ||||||||||
| Total operating expenses |
16,915 | 14,564 | 35,635 | 32,735 | ||||||||||||
| Operating loss |
(10,632 | ) | (11,227 | ) | (23,293 | ) | (26,640 | ) | ||||||||
| Other income (expense): |
||||||||||||||||
| Impairment of investments in non-publicly traded companies |
(12 | ) | — | (123 | ) | (50 | ) | |||||||||
| Equity in net losses of affiliates |
— | (471 | ) | — | (786 | ) | ||||||||||
| Change in fair value of derivative liability |
6,951 | — | 7,726 | — | ||||||||||||
| Loss on extinguishment of debt |
(1,241 | ) | — | (1,241 | ) | — | ||||||||||
| Other income |
378 | — | 378 | — | ||||||||||||
| Interest (expense) income: |
||||||||||||||||
| Interest income |
599 | 738 | 1,131 | 1,585 | ||||||||||||
| Interest expense |
(3,146 | ) | (1,486 | ) | (6,565 | ) | (3,038 | ) | ||||||||
| Interest expense, net |
(2,547 | ) | (748 | ) | (5,434 | ) | (1,453 | ) | ||||||||
| Total other income (expense), net |
3,529 | (1,219 | ) | 1,306 | (2,289 | ) | ||||||||||
| Loss before income taxes, extraordinary loss and cumulative effect of adoption of and changes in accounting principles |
(7,103 | ) | (12,446 | ) | (21,987 | ) | (28,929 | ) | ||||||||
| Income tax expense |
70 | 115 | 173 | 184 | ||||||||||||
| Loss before extraordinary loss and cumulative effect of adoption of and changes in accounting principles |
(7,173 | ) | (12,561 | ) | (22,160 | ) | (29,113 | ) | ||||||||
| 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 |
$ | (7,173 | ) | $ | (12,561 | ) | $ | (22,437 | ) | $ | (30,001 | ) | ||||
| Basic and diluted loss per common share: |
||||||||||||||||
| Loss before extraordinary loss and cumulative effect of adoption of and changes in accounting principles |
$ | (0.08 | ) | $ | (0.14 | ) | $ | (0.24 | ) | $ | (0.32 | ) | ||||
| 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 |
$ | (0.08 | ) | $ | (0.14 | ) | $ | (0.24 | ) | $ | (0.33 | ) | ||||
| Basic and diluted average common shares outstanding |
92,587 | 90,167 | 91,809 | 90,166 | ||||||||||||
See accompanying notes to unaudited consolidated financial statements.
4
TRANSWITCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)