--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
Commission File Number 0-11630
---------------------
TERAFORCE TECHNOLOGY CORPORATION
(exact name of registrant as specified in its charter)
DELAWARE 76-0471342
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) Identification No.)
1240 EAST CAMPBELL ROAD, RICHARDSON, TEXAS 75081
(Address of principal executive offices) (Zip code)
469-330-4960
(Registrant's telephone number, including area code)
---------------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
There were 89,088,850 shares of Common Stock outstanding as of July 22, 2002.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
TERAFORCE TECHNOLOGY CORPORATION AND SUBSIDIARIES
INDEX
PAGE
----
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
Consolidated Condensed Balance Sheets of the Company
at June 30, 2002 (unaudited) and December 31, 2001 2
Consolidated Condensed Statements of Operations of the
Company (unaudited) for the three months and six months ended
June 30, 2002 and 2001
3
Consolidated Condensed Statements of Cash Flows of the Company
(unaudited) for the six months ended June 30, 2002 and 2001 4
Notes to Consolidated Condensed Financial Statements 5
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 13
PART II OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 13
SIGNATURES 14
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
TERAFORCE TECHNOLOGY CORPORATION AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(Thousands of dollars, except share data)
June 30, December 31,
2002 2001
------------- -------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 1,159 $ 1
Temporary cash investments 867 53
Accounts receivable net of allowances of $1,598 in 2002
and $1,691 in 2001 1,426 869
Receivables from affiliate 799 816
Inventories 2,690 3,262
Prepaid services 440 --
Net current assets of discontinued operations -- 2,880
Prepaid expenses and other current assets 503 224
------------- -------------
Total current assets 7,884 8,105
Property and equipment, net 647 638
Investment in affiliate 1,178 1,284
Other assets 197 169
------------- -------------
$ 9,906 $ 10,196
------------- -------------
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Notes payable $ 6,700 $ 7,554
Accounts payable 876 1,864
Accrued liabilities 1,216 2,389
------------- -------------
Total current liabilities 8,792 11,807
------------- -------------
Commitments and contingencies
Stockholders' (deficit) equity:
Common stock, $.01 par value. Authorized 200,000,000 shares;
89,088,850 and 87,088,850 shares issued in 2002 and 2001,
respectively 891 871
Additional paid-in capital 181,887 181,898
Accumulated deficit (180,077) (182,793)
------------- -------------
2,701 (24)
Less 400,474 shares of common stock in treasury - at cost (1,587) (1,587)
------------- -------------
Total stockholders' equity (deficit) 1,114 (1,611)
------------- -------------
$ 9,906 $ 10,196
============= =============
See accompanying notes to consolidated condensed financial statements.
2
TERAFORCE TECHNOLOGY CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Operations
(Thousands of dollars, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
(unaudited)
Net revenues $ 1,659 $ 1,892 $ 3,289 $ 4,946
Cost of revenue 960 1,953 1,719 5,127
----------- ----------- ----------- -----------
Gross profit (loss) 699 (61) 1,570 (181)
----------- ----------- ----------- -----------
Expenses:
Engineering and development 903 1,210 1,940 2,757
Selling and administrative 1,634 2,422 2,871 5,271
----------- ----------- ----------- -----------
2,537 3,632 4,811 8,028
----------- ----------- ----------- -----------
Operating loss (1,838) (3,693) (3,241) (8,209)
----------- ----------- ----------- -----------
Other income (expense):
Litigation settlement -- -- 6,300 --
Share of loss of unconsolidated affiliate (136) -- (106) --
Interest expense (86) (15) (190) (19)
Interest income and other (7) (8) (46) 22
----------- ----------- ----------- -----------
(229) (23) 5,958 3
----------- ----------- ----------- -----------
Income (loss) from continuing operations (2,067) (3,716) 2,717 (8,206)
Loss from discontinued operations -- (629) -- (1,044)
----------- ----------- ----------- -----------
Net income (loss) $ (2,067) $ (4,345) $ 2,717 $ (9,250)
=========== =========== =========== ===========
Basic and diluted income (loss) per share:
Continuing operations $ (.02) $ (.04) $ .03 $ (.10)
Discontinued operations -- (.01) -- (.01)
----------- ----------- ----------- -----------
Net income (loss) per share $ (.02) $ (.05) $ .03 $ (.11)
=========== =========== =========== ===========
Weighted average number of common shares
outstanding (thousands) basic and diluted 88,469 86,327 87,583 86,014
=========== =========== =========== ===========
See accompanying notes to consolidated condensed financial statements.
3
TERAFORCE TECHNOLOGY CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
(Thousands of dollars)
Six Months Ended June 30,
--------------------------------
2002 2001
------------- -------------
(unaudited)
Cash flows from operating activities:
Net income (loss) $ 2,717 $ (9,250)
Adjustments to reconcile net loss to
net cash used in operating activities:
Litigation settlement (6,300) --
Utilization of prepaid services 560 --
Depreciation and amortization 113 620
Share of loss of unconsolidated affiliate 106 --
Other 77 73
Changes in operating assets and liabilities:
Accounts receivable (700) 3,364
Inventories 571 (2,463)
Assets held for sale -- 1,767
Accounts payable and accrued liabilities (1,698) (1,169)
------------- -------------
Net cash used in operating activities (4,554) (7,058)
------------- -------------
Cash flows from investing activities:
Proceeds from litigation settlement 6,300 --
Capital expenditures (118) (258)
Investment in temporary cash investments (867) --
Net proceeds from disposal of discontinued operation 1,198 --
Other 53 57
------------- -------------
Net cash provided by (used in) investing
activities 6,566 (201)
------------- -------------
Cash flows from financing activities:
Proceeds from issuance of notes payable 500 2,000
Principal payments on notes payable (1,354) --
------------- -------------
Net cash provided by (used in) financing
activities (854) 2,000
------------- -------------
Net increase (decrease) in cash and cash equivalents 1,158 (5,259)
Cash and cash equivalents, beginning of period 1 5,587
------------- -------------
Cash and cash equivalents, end of period $ 1,159 $ 328
============= =============
See accompanying notes to consolidated condensed financial statements.
4
TERAFORCE TECHNOLOGY CORPORATION
Notes to Consolidated Condensed Financial Statements
(Unaudited)
June 30, 2002
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared
by the Company without audit in accordance with accounting principles generally
accepted in the United States of America for interim financial statements and
with instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion
of management, all adjustments (consisting only of normal recurring accruals)
considered necessary for a fair presentation have been included.
The accompanying consolidated financial statements do not include
certain footnotes and financial presentations normally required under accounting
principles generally accepted in the United States of America and, therefore,
should be read in conjunction with the audited financial statements included in
the Company's Annual Report on Form 10-K as of December 31, 2001.
The Company incurred an operating loss in the first six months of 2002
and has incurred significant operating losses in 2001, 2000 and 1999. These
losses were funded by proceeds from the issuance of equity securities and notes
payable. As of June 30, 2002, notes payable due within one year amounted to
$6,700,000. In 2001 and through January 2002, the Company disposed of certain
operations and assets and has reduced operating expenses. In addition, second
quarter of 2002 revenues from the Company's defense electronics business
exceeded those recorded in the first quarter of 2002, have increased in each of
the last three years, and are expected to continue to increase in 2002.
Accordingly, management expects the Company to generate positive cash flow from
operations by the end of 2002. However, there is no assurance that revenues will
increase such that the Company will generate positive cash flow from operations.
Until that point, the Company expects to generate losses and negative cash flow
from operations. Furthermore, should the Company not generate positive cash flow
from operations within the expected time frame, additional capital may be
required to fund operating losses.
In January 2002, the Company received cash proceeds of $1,660,000 from
the sale of its engineering design services business and in March 2002, received
cash proceeds of $6,300,000 from the settlement of litigation. Management
believes that these amounts will be sufficient to fund its negative cash flow
from operations during 2002; however, management does not believe these amounts
will be sufficient to repay all outstanding debt as it is currently scheduled to
come due. Therefore, the continued existence of the Company is dependent on the
refinancing or restructuring of these obligations.
The Company believes that it will be able to refinance or restructure
the outstanding notes payable due in 2002 and obtain additional capital that may
be required through either the issuance of equity securities, the incurrence of
new debt or the modification of the terms of the existing notes payable.
However, there can be no assurance the Company can accomplish this or that it
can do so under acceptable terms. These financial statements have been prepared
assuming the Company will continue as a going concern and do not include any
adjustments that might result from the outcome of this uncertainty.
5
INVENTORIES
The components of inventories are as follows:
June 30, December 31,
2002 2001
--------------- ---------------
($ Thousands)
Raw materials $ 2,105 $ 2,615
Work in progress 411 493
Finished goods 174 154
--------------- ---------------
$ 2,690 $ 3,262
=============== ===============
SEGMENTS OF BUSINESS
Net revenues by business segment:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ----------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
($ Thousands)
Defense electronics $ 1,659 $ 1,111 $ 3,289 $ 2,429
Optical networking equipment -- 727 -- 2,282
Other -- 54 -- 235
----------- ----------- ----------- -----------
$ 1,659 $ 1,892 $ 3,289 $ 4,946
=========== =========== =========== ===========
Segment-specific margins (gross profit less total engineering and
development costs for the segment):
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ----------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
($ Thousands)
Defense electronics $ (97) $ (472) $ - $ (493)
Optical networking equipment (94) 212 (195) (693)
Other (13) (1,011) (175) (1,752)
----------- ----------- ----------- -----------
Subtotal segment specific (204) (1,271) (370) (2,938)
Selling and administrative expenses (1,634) (2,422) (2,871) (5,271)
----------- ----------- ----------- -----------
Operating loss $ (1,838) $ (3,693) $ (3,241) $ (8,209)
=========== =========== =========== ===========
Assets are identifiable only by combined segments as follows:
At June 30, At December 31,
2002 2001
-------------- --------------
($ Thousands)
Defense electronics $ 4,146 $ 4,052
Optical networking equipment and other 2,312 2,625
Not allocable to a segment 3,448 3,519
-------------- --------------
Total $ 9,906 $ 10,196
============== ==============
6
INCOME TAXES
For the six months ended June 30, 2002, the Company's effective income
tax rate differed from the federal statutory rate due to current period tax
expense offset by a decrease in the valuation allowance for the same amount. For
the six months ended June 30, 2001 the Company's effective income tax rate
differed from the federal statutory rate due to taxable losses incurred for
which no benefit was provided.
EARNINGS PER SHARE
Basic and diluted earnings per share are the same for the six months
ended June 30, 2002 and 2001 because all potential common shares were
anti-dilutive for those periods.
NOTES PAYABLE
As of June 30, 2002 notes payable includes $6,000,000 related to
guaranteed bank credit facilities. These facilities have an original maturity of
May 31, 2002; however, the facilities and the underlying guarantee obligations
have been amended to extend the maturity to August 27, 2002. The Company is
currently negotiating to further extend or refinance these obligations.
COMMITMENTS AND CONTINGENCIES
The Company has entered into an agreement for the design and
manufacture of a "ruggedized" version of its PowerPC products. Ruggedized
products are designed to be utilized in harsh environments such as extreme
temperature, shock and vibration. Under this agreement, a third party will
provide certain design services, testing equipment and will produce initial
production quantities of the product. The Company expects that payments under
this agreement will approximate $1,000,000 over the next six to nine months. The
majority of this amount relates to production quantities of the product that the
Company expects to sell to its customers as the product is available from the
manufacturer. The Company has provided a $390,000 standby letter of credit to
collateralize its obligations under this agreement.
STOCKHOLDERS' EQUITY
In April 2002, the Company issued 2,000,000 shares of common stock in
exchange for the return and cancellation of warrants to purchase a total of
26,017,308 shares of common stock. The warrants had an exercise price of $0.75
per share. Since the common stock was issued in exchange for other equity
securities, the transaction was recorded by crediting common stock for the par
value of the shares issued with offsetting debit to additional paid-in capital.
If the Company's common stock trades at a price of $0.75 or more for ten
consecutive trading days prior to October 14, 2002, the Company will be required
to issue an additional 3,000,000 shares of common stock.
7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENT
This Quarterly Report on Form 10-Q contains certain forward looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In
this report, as well as in oral statements made by the Company or Management,
statements that are prefaced with the words "may," "will," "expect,"
"anticipate," "believe," "continue," "estimate," "project," "intend," "designed"
and similar expressions are intended to identify forward-looking statements
regarding events, conditions and financial trends that may affect the Company's
future plans, business strategy, results of operations, financing activities and
financial position. These statements are based on the Company's current
expectations and estimates as to prospective events and circumstances about
which the Company can give no firm assurance. Further, any forward-looking
statement speaks only as of the date the statement was made, and the Company
undertakes no obligation to update any forward-looking statement to reflect
events or circumstances after the date the statement was made. Because it is not
possible to predict every new factor that may emerge, forward-looking statements
should not be relied upon as a prediction of actual future financial condition
or results. Examples of types of forward-looking statements include statements
on future levels of net revenue, costs and cash flow, new product development,
strategic plans and financing. These forward -looking statements involve risks
and uncertainties that could cause actual results to differ materially from
those projected or anticipated. Factors that might cause such a difference
include, but are not limited to: general economic conditions in the markets the
Company operates in; the ability of the Company to execute its plan in strategic
direction; success in the development and market acceptance of new and existing
products; dependence on suppliers, third party manufacturers and channels of
distribution; customer and product concentration; fluctuations in customer
demand; the ability to obtain and maintain access to external sources of
capital; the ability to control costs; overall management of the Company's
expansion; and other risk factors detailed from time to time in the Company's
filings with the Securities and Exchange Commission. The terms "we," "our" and
"us" and similar terms refer to the Company and its consolidated subsidiaries,
not to any individual or group of individuals.
RESULTS OF OPERATIONS
Our engineering design services business was sold in January 2002. As
of December 31, 2001 this business is accounted for as a discontinued operation
in our financial statements. Accordingly, net revenues, cost of revenues and
expenses in the accompanying financial statements do not include any amounts
related to these operations. The net operating results of this business are
reflected as a loss from discontinued operations in the accompanying statements
of operations.
8
COMPARISON OF SECOND QUARTER AND FIRST HALF 2002 TO 2001
The following table shows the net revenue and gross profit for the
Company's products:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
($ Thousands)
Net revenues:
Defense electronics $ 1,659 $ 1,111 $ 3,289 $ 2,429
Optical networking equipment -- 727 -- 2,282
Other -- 54 -- 235
------------ ------------ ------------ ------------
$ 1,659 $ 1,892 $ 3,289 $ 4,946
------------ ------------ ------------ ------------
Gross profit (loss):
Defense electronics $ 699 $ 91 $ 1,570 $ 511
Optical networking equipment -- -- -- --
Other -- (152) -- (692)
------------ ------------ ------------ ------------
$ 699 $ (61) $ 1,570 $ (181)
------------ ------------ ------------ ------------
NET REVENUES
Net revenues from defense electronics increased 49% in the second
quarter of 2002 and 35% for the first six months of 2002, as compared to the
same periods last year. These increases reflect an increasing demand for our
products, including our PowerPC based products that we began shipping to
customers in the fourth quarter of 2000. The first six months of 2002 also
reflects continued sales of our products that are based on Texas Instruments'
digital signal processors that we have been shipping to customers since 1997.
Although our net revenues have increased, we believe that there has been a
temporary decrease in new order activity in the defense electronics industry. We
believe this slowdown reflects reevaluations of programs within the Department
of Defense and changes in priorities. These factors have, we believe, caused
delays in funding for many defense and intelligence gathering programs. We
expect our net revenues to continue to increase as our products are selected for
additional programs and as production demands increase related to programs for
which our products have previously been selected. However, due to the
uncertainty as to the award of new programs and the timing of specific orders,
we cannot be sure that net revenues will increase sequentially in each quarter.
Net revenues could decrease from quarter to quarter.
Net revenues from optical networking products during 2001 represent
sales related to our OmniLynx product line. In August 2001, we sold the OmniLynx
product line to Intelect Technologies, Inc.
GROSS PROFIT
Gross profit from defense electronics increased 668% in the second
quarter of 2002 as compared to the second quarter of 2001. For the first six
months of 2002, gross profit from defense electronics was 207% greater than the
comparable period in 2001. The increase in gross profit is a result of higher
utilization of fixed production costs and the sale of products with lower
material costs than in prior periods. The gross profit for the first six months
of 2002 is equal to approximately 48% of net revenue from the sale of these
products.
9
As of December 31, 2000, all assets related to the OmniLynx product
line were adjusted to the lower of cost and net realizable value. Accordingly,
sales of OmniLynx products during 2001 produced no gross profit.
ENGINEERING AND DEVELOPMENT (E&D) EXPENSE
Engineering and development expense decreased 25% to $903,000 in the
second quarter of 2002 from $1,210,000 in the same period in 2001. For the first
six months of 2002, these expenses decreased 30% from the comparable period in
2001. Costs by product line are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
($ Thousands)
Defense electronics $ 796 $ 563 $ 1,570 $ 1,004
Optical networking equipment 94 296 195 693
Other 13 351 175 1,060
---------- ---------- ---------- ----------
E & D expense $ 903 $ 1,210 $ 1,940 $ 2,757
========== ========== ========== ==========
Engineering and development expenses related to defense electronics in
the second quarter of 2002 and first six months of 2002 reflect on-going
enhancements of our PowerPC based products, including "ruggedized" versions of
these products, our WingSpan(TM) software environment and other product
initiatives. The reduced expenses related to optical networking products reflect
significantly reduced activity on our Aegean project. As of July 31, 2002 we
have suspended essentially all activity related to this project. Other
engineering and development expenses were primarily incurred in the first
quarter of 2002 related to our Centauri project. We suspended essentially all
activity related to the Centauri project in March 2002. Included in engineering
and development expenses during the second quarter and first six months of 2002
are approximately $260,000 and $560,000, respectively, related to design
services provided by Flextronics International, Ltd. ("Flextronics"). These
services are provided under the engineering design services agreements we
entered into when we sold our engineering design services business in January
2002. Other engineering and development expenses in the first six months of 2001
include approximately $657,000 related to the engineering organization involved
with the OmniLynx product line. We expect engineering and development expense to
decline in the last half of 2002 due to the suspension of activities related to
Aegean and Centauri and due to reduced services from Flextronics.
SELLING AND ADMINISTRATIVE EXPENSE
Selling and administrative expenses decreased $788,000, or 33%, in the
second quarter of 2002 as compared to the second quarter of 2001. For the six
months ended June 30, 2002, selling and administrative expenses decreased
$2,400,000, or 46%, from the same period last year. Approximately $2,130,000 of
this decrease for the first six months of 2002 relates to costs associated with
the OmniLynx product line. The remainder of the decrease results primarily from
reduced headcount and lower professional fees.
LITIGATION SETTLEMENT
In March 2002, we settled our litigation against Cadence Design
Systems, Inc. We received $6,300,000, net of attorney fees, from this
settlement.
10
SHARE OF LOSS OF UNCONSOLIDATED AFFILIATE
These amounts represent our proportionate share of the losses of
Intelect Technologies, Inc. ("ITI") for the second quarter and first six months
of 2002. ITI was formed in August 2001, and acquired our OmniLynx product line
and related assets at that time. We own 33% of the common stock of ITI.
INTEREST EXPENSE
Due to increased borrowings in 2002, interest expense increased by
$71,000 and $171,000 in the second quarter and first six months of 2002,
respectively, as compared to the comparable periods last year.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2002 the Company had cash and temporary investments of
$2,026,000 and a working capital deficit of $908,000. Included in current
liabilities are $6,700,000 of notes payable. Of the $6,700,000, $100,000 is due
on demand and $600,000 is due in October 2002. The balance of $6,000,000 is
payable under bank credit agreements that are guaranteed by certain individuals.
These facilities had been scheduled to mature on May 31, 2002; however, the
maturity has been extended to August 27, 2002. We are currently negotiating with
the bank and the individuals that have guaranteed the debt to restructure these
obligations. See "Liquidity Outlook" below.
OPERATING ACTIVITIES
Net cash used in operating activities amounted to $4,554,000 for the
six months ended June 30, 2002. Significant items contributing to the $4,554,000
include the operating loss of $3,241,000 and a net increase in working capital
of $1,827,000, offset by utilization of prepaid services from Flextronics
amounting to $560,000. The net increase in working capital arose from an
increase in accounts receivable of $700,000 and a decrease in accounts payable
and accrued liabilities of $1,698,000. These amounts were offset by the
utilization of $571,000 in inventory.
INVESTING ACTIVITIES
For the six months ended June 30, 2002, investing activities provided
$6,566,000 in cash flow. This amount consists primarily of $6,300,000 from the
settlement of litigation and $1,198,000 from the disposal of discontinued
operations, which amount is net of $462,000 of costs related to the operations.
The above amounts were offset by $118,000 of capital expenditures, primarily for
test equipment, and $867,000 used to acquire temporary cash investments. The
temporary cash investments are used to collateralize letters of credit
supporting insurance programs and vendor obligations.
FINANCING ACTIVITIES
In the first quarter of 2002, we borrowed $500,000 for general working
capital under a demand note. We repaid a total of $1,354,000 in demand notes
from the proceeds of the litigation settlement and the disposal of discontinued
operations.
11
LIQUIDITY OUTLOOK
As discussed above, we have outstanding debt obligations that we are
undertaking to restructure. In addition, we may require additional working
capital for the operation of our business. We have had a series of discussions
and negotiations with our bank lender, the individuals guaranteeing that debt
and other parties that could be a source of capital for us. Based on these
discussions and negotiations, we expect to restructure our debt obligations and
to raise additional working capital in a series of transactions. We expect to
sell common stock to certain of the parties with whom we have had discussions. A
portion of the proceeds from the sale of this common stock may be used to repay
amounts due under our bank credit facilities and to relieve a portion of the
guarantees that collateralize those facilities. We expect to retain the balance
of these proceeds for use as working capital in our business. We cannot be sure
as to the amount of the proceeds from the sale of the common stock, the price
per share at which we will sell the stock, the amount by which we will reduce
our bank facilities or the amount of additional working capital that will be
available, if any. The issuance of the common stock could result in significant
dilution to existing common shareholders.
We believe that upon a reduction of our bank credit facilities with the
proceeds from the sale of common stock, the credit facilities would be amended
and extended and that these amended facilities would be collateralized by
guarantees provided by others. We cannot be sure of the terms of such amended
facilities. We do, however, expect to meet the repayment terms of amended
facilities with the proceeds of subsequent sales of equity or from cash flow
provided by operations.
While we expect to complete the transactions described above, there is
no assurance that we will be able to do so. We do not have binding commitments
from any party to enter into these transactions or as to the terms of the
transactions. The failure to reach a binding agreement with any one of the
parties could impair our ability to reach agreement with other parties involved.
If we do not restructure our debt obligations, or if we subsequently
default on the terms of the restructured obligations, the parties that have
guaranteed these facilities will be obligated to repay those borrowings. In that
case, we will have demand obligations to those parties equal to the debt that
they repay. In that event, these parties will have collateral rights in most of
our accounts receivable and inventory. In addition, they will be our largest
creditor and could demand payment at any time. They could therefore be in a
position to obtain a judgment against the Company and exert influence over our
actions.
Our consolidated financial statements have been prepared on the basis
of a going concern and do not include any adjustments that might be necessary if
we were not a going concern. These adjustments include changes in the possible
future recoverability and classification of assets or the amount and
classification of liabilities.
Our estimates of capital and liquidity needs are subject to a number of
risks and uncertainties that could result in additional capital needs that have
not been anticipated. An important aspect of our estimated capital and liquidity
requirements is our ability to generate positive cash flow from operations. We
believe the primary factor in generating positive cash flow from operations is
increased net revenue from our defense electronics business. We have increased
revenues from these operations each of the last three quarters; however, there
is no assurance that we will be able to continue to do so. Other factors
contributing to our ability to generate positive operating cash flow include
generating adequate gross profit on net revenues and controlling other costs and
expenses. Our capital needs could increase materially if any of our contingent
liabilities are resolved adversely to
12
us. In addition, we could require more working capital if our defense
electronics business increases more rapidly than we currently anticipate.
CONTINGENT LIABILITIES
As discussed in "ITEM 3 - Legal Proceedings" in the Company's Annual
Report on Form 10-K for 2001, the Company is exposed to certain contingent
liabilities which, if resolved adversely to the Company, would adversely affect
its liquidity, its results of operations, and/or its financial position.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have outstanding debt that bears interest at a variable interest
rate amounting to $6,000,000 as of June 30, 2002. This interest is based on a
widely used reference interest rate known as LIBOR. For example, an increase of
50 basis points in LIBOR would result in an increase in our annual interest
expense of $30,000.
As of June 30, 2002, we have cash and temporary investments of
$2,026,000. The majority of this amount is invested in money market funds that
pay interest at rates that fluctuate with market conditions. For example, a
decrease of 50 basis points in the interest rate which these investments pay
would result in a decrease in our annual interest income of approximately
$10,000.
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
A. Listed below are all Exhibits filed as part of this report.
None
B. The Company has not filed any report on Form 8-K during the period
covered by this Report.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TERAFORCE TECHNOLOGY CORPORATION
(Registrant)
Date: August 12, 2002 By: /s/ ROBERT P. CAPPS
--------------------------------------------
Robert P. Capps
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: August 12, 2002 By: /s/ HERMAN M. FRIETSCH
--------------------------------------------
Herman M. Frietsch
Chairman of the Board and Chief Executive
Officer (Principal Executive Officer)
14