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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10 - Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
Commission File Number 0-11630
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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)
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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 No X
--- ---
There were 118,422,183 shares of Common Stock outstanding as of April 30, 2003.
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TERAFORCE TECHNOLOGY CORPORATION AND SUBSIDIARIES
INDEX
PAGE
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PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
Consolidated Balance Sheets of the Company
at March 31, 2003 (unaudited) and December 31, 2002 2
Consolidated Statements of Operations of the Company
(unaudited) for the three months ended March 31, 2003 and 2002 3
Consolidated Statements of Cash Flows of the Company
(unaudited) for the three months ended March 31, 2003 and 2002 4
Notes to Consolidated Financial Statements 5
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 11
ITEM 4 CONTROLS AND PROCEDURES 11
PART II OTHER INFORMATION 12
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS 12
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 12
SIGNATURES 14
CERTIFICATIONS 15
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
TERAFORCE TECHNOLOGY CORPORATION AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(Thousands of dollars, except share data)
March 31, December 31,
2003 2002
----------- ------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 5 $ 55
Temporary cash investments -- 457
Accounts receivable 499 573
Receivables from affiliate 699 699
Inventories 2,347 2,354
Prepaid services 74 193
Prepaid expenses and other current assets 746 587
--------- ---------
Total current assets 4,370 4,918
Property and equipment, net 517 573
Investment in affiliate 485 702
Other assets 1,276 531
--------- ---------
$ 6,648 $ 6,724
========= =========
Liabilities and Stockholders' Deficit
Current liabilities:
Notes payable $ 5,547 $ 4,047
Accounts payable 2,071 1,919
Accrued liabilities 1,612 1,392
--------- ---------
Total current liabilities 9,230 7,358
Long-term notes payable -- 900
Other long-term liabilities 975 1,100
Stockholders' deficit:
Common Stock, $.01 par value; authorized 200,000,000 shares;
118,422,183 and 114,255,518 shares issued in 2003 and 2002,
respectively 1,184 1,143
Additional paid-in capital 186,180 184,953
Accumulated deficit (189,334) (187,143)
--------- ---------
(1,970) (1,047)
Less 400,474 shares of common stock in treasury at cost (1,587) (1,587)
--------- ---------
Total stockholders' deficit (3,557) (2,634)
--------- ---------
$ 6,648 $ 6,724
========= =========
See accompanying notes to consolidated condensed financial statements.
2
TERAFORCE TECHNOLOGY CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Operations
(Thousands except per share data)
Three Months Ended March 31,
2003 2002*
--------- ---------
(unaudited)
Net revenue $ 953 $ 1,630
Cost of revenue 680 759
--------- ---------
Gross profit 273 871
--------- ---------
Expenses:
Engineering and development 785 1,037
Selling and administrative 1,204 1,185
--------- ---------
1,989 2,222
--------- ---------
Operating loss (1,716) (1,351)
--------- ---------
Other income (expense):
Litigation settlement -- 6,300
Litigation costs (77) (52)
Share of income (loss) of unconsolidated affiliate (217) 30
Interest expense (116) (143)
Interest income and other (65) --
--------- ---------
(475) 6,135
--------- ---------
Net income (loss) $ (2,191) $ 4,784
========= =========
Basic and diluted income (loss) per share $ (0.02) $ 0.06
========= =========
Weighted average number of common shares outstanding -
Basic and diluted 115,054 86,688
========= =========
*Certain amounts have been reclassified to conform to current classifications.
See accompanying notes to consolidated condensed financial statements.
3
TERAFORCE TECHNOLOGY CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
(Thousands of dollars)
Three Months Ended March 31,
----------------------------
2003 2002
------- -------
(unaudited)
Cash flows from operating activities:
Net income (loss) $(2,191) $ 4,784
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Litigation settlement -- (6,300)
Utilization of prepaid services 119 300
Depreciation and amortization 65 54
Share of loss (income) from unconsolidated affiliate 217 (30)
Other (181) 83
Change in operating assets and liabilities:
Accounts receivable 74 9
Inventories 6 235
Accounts payable and accrued liabilities 371 (1,716)
------- -------
Net cash used in operating activities (1,520) (2,581)
------- -------
Cash flows from investing activities:
Proceeds from litigation settlement -- 6,300
Capital expenditures (4) (55)
Net proceeds from disposal of discontinued operations -- 1,372
Software development costs (83) --
Temporary cash investments 457 --
------- -------
Net cash provided by investing activities 370 7,617
------- -------
Cash flows from financing activities:
Proceeds from issuance of notes payable 600 500
Proceeds from issuance of common stock 500 --
Principal payments on notes payable -- (1,354)
------- -------
Net cash provided by (used in) financing activities 1,100 (854)
------- -------
Net increase (decrease) in cash and cash equivalents (50) 4,182
Cash and cash equivalents, beginning of period 55 1
------- -------
Cash and cash equivalents, end of period $ 5 $ 4,183
======= =======
See accompanying notes to consolidated condensed financial statements.
4
TERAFORCE TECHNOLOGY CORPORATION
Notes to Consolidated Condensed Financial Statements
(Unaudited)
March 31, 2003
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 for the year ended December 31, 2002.
The Company incurred an operating loss in the first quarter of 2003 and
has incurred significant operating losses in 2002, 2001 and 2000. These losses
were funded by proceeds from the issuance of equity securities and notes
payable, and as of March 31, 2003 notes payable due within one year amounted to
$5,547,000. The Company's continued existence is dependent on the Company's
ability to continue to fund any operating losses and on the restructuring or
refinancing of its debt obligations. In the first quarter of 2003 the Company
has generated additional capital amounting to $1,500,000 from the sale of equity
securities and from the proceeds of new credit facilities. In addition, the
Company is engaged in continuing discussions regarding additional sources of
capital, as well as the restructuring of its outstanding debt obligations.
The Company's operating losses have declined over the three year period
ended December 31, 2002 primarily as a result of the disposal of certain
operations, specifically those related to the telecommunications industry, the
reduction of other operating expenses and increases in net revenues from the
Company's defense electronics business. Net revenues from the sale of defense
electronics products have increased in each of the last three years and
management expects net revenues to increase further in 2003. Therefore,
management believes that the Company's needs for capital to fund operating
losses will continue to decline.
The Company believes that it will be able to fund any further operating
losses and to refinance or otherwise restructure its outstanding debt
obligations through either the issuance of new equity securities, the incurrence
of new debt or the modification of the terms of its existing debt obligations.
There can be no assurance that the Company can accomplish these matters, or can
do so under acceptable terms. These financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
5
TERAFORCE TECHNOLOGY CORPORATION
Notes to Consolidated Condensed Financial Statements
(Unaudited)
March 31, 2003
INVENTORIES
The components of inventories are as follows:
March 31, December 31,
2003 2002
--------- ------------
($ Thousands)
Raw materials $ 1,628 $ 1,658
Work in process 423 408
Finished goods 296 288
--------- ---------
Total $ 2,347 $ 2,354
========= =========
SEGMENTS OF BUSINESS
In the three-month periods ended March 31, 2003 and 2002, all of the
Company's net revenues were generated from its defense electronics business.
Segment-specific margins (gross profit less total engineering and
development costs, including capitalized software for the segment):
Three Months Ended March 31,
----------------------------
2003 2002
-------- --------
($ Thousands)
Defense electronics $ (512) $ 97
Optical networking equipment -- (101)
Other -- (162)
-------- --------
Subtotal segment specific (512) (166)
All other expenses (1,204) (1,185)
-------- --------
Operating loss $ (1,716) $ (1,351)
======== ========
Assets identifiable only by combined segments:
At March 31, At December 31,
2003 2002
------------ ---------------
($ Thousands)
Defense electronics $ 3,834 $ 3,760
Optical networking equipment and other 1,233 1,501
Not allocable to a segment 1,581 1,463
-------- --------
Total $ 6,648 $ 6,724
======== ========
INCOME TAXES
For the three months ended March 31, 2003 and 2002, the Company's
effective income tax rate differed from the federal statutory rate due to
current period tax expense offset by an offsetting change in the valuation
allowance for the same amount.
6
TERAFORCE TECHNOLOGY CORPORATION
Notes to Consolidated Condensed Financial Statements
(Unaudited)
March 31, 2003
STOCK OPTION PLAN
The Company accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. As such,
compensation expense is recorded on the date of grant only if the current market
price of the underlying stock exceeded the exercise price. SFAS No. 123,
"Accounting for Stock-Based Compensation," requires pro forma net income and pro
forma earnings per share disclosures for employee stock option grants as if the
fair-value-based method defined in SFAS No. 123 had been applied.
Three Months Ended March 31,
----------------------------
2003 2002
---------- ---------
Net income (loss) allocable to
common shareholders:
As reported $ (2,191) $ 4,784
Pro forma $ (2,360) $ 4,645
Income (loss) per share:
As reported $ (0.02) $ 0.06
Pro forma $ (0.02) $ 0.05
EARNINGS PER SHARE
Basic and diluted earnings per share are the same for the three months
ended March 31, 2003 and 2002 because all potential common shares were
anti-dilutive for those periods.
STOCKHOLDERS' EQUITY
In January and March 2003, the Company completed private placement
transactions in which it issued a total of 4,166,667 shares of common stock and
warrants for the purchase of an additional 4,333,333 shares of common stock for
aggregate proceeds of $500,000. The warrants have an exercise price of $0.15 per
share and are exercisable at any time through March 31, 2007.
In March 2003, the Company and its wholly-owned subsidiary, DNA
Computing Solutions, Inc. ("DNA-CS"), entered into a revolving line of credit
with a bank in order to provide working capital to DNA-CS. Under the facility,
DNA-CS may borrow up to $1,000,000. Outstanding amounts are due March 26, 2004;
however, DNA-CS may extend such date six months, provided certain conditions are
maintained. Interest is payable monthly at the greater of prime plus 1% and
5.25%. At March 31, 2003, $600,000 was outstanding under this facility.
This working capital facility is secured by the accounts receivable and
inventory of DNA-CS, the guarantee of the Company and by limited guarantees
provided by certain private investors. As consideration for providing the
guarantees that secure the Notes the Company has entered into a Reimbursement
Agreement with the guarantors. The Reimbursement Agreement provides that the
Company will reimburse the investors for any amounts that they may be required
to reimburse the bank pursuant to the guarantees. Pursuant to the Reimbursement
Agreement and related agreements,
7
TERAFORCE TECHNOLOGY CORPORATION
Notes to Consolidated Condensed Financial Statements
(Unaudited)
March 31, 2003
as of March 26, 2003 the investors have the right to purchase up to 8,333,333
shares of the Company's common stock for $1,000,000 in cash, the proceeds of
which will be used to repay amounts outstanding under the Note and provide for
the release of the guarantees. In addition, as of March 26, 2003 the investors
received warrants to purchase an aggregate of 9,583,333 shares of the Company's
common stock at a price of $0.15 per share. The warrants may be exercised at any
time through March 31, 2007. The Company has valued the warrants at
approximately $360,000, using the Black-Scholes pricing model. This amount and
beneficial conversion feature in the amount of approximately $408,000 related to
the purchase rights have been recorded as deferred financing costs.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE PERIOD ENDED MARCH 31, 2003
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, 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
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.
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COMPARISON OF FIRST QUARTER 2003 TO FIRST QUARTER 2002
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NET REVENUE
For the first quarter of 2003 and 2002 all of our net revenues were
generated by our defense electronics business. Net revenue from defense
electronics decreased 42% in the first quarter of 2003 as compared to the first
quarter of 2002. However, in the first quarter of 2003 the Company's bookings of
new orders amounted to approximately $4,000,000 and the Company's backlog of
orders amounted to approximately $3,200,000 at March 31, 2003, compared to a
backlog of approximately $500,000 at March 31, 2002. The decline in net revenues
in the first quarter of 2003 is due, in part, to the timing of shipments based
on customer requirements. In addition, due to our increased working capital
needs related to the increase in orders and unexpected delays in completing
financing arrangements in the first quarter of 2003, we experienced delays in
payments to some of our vendors. These delays temporarily affected our ability
to complete orders. Management believes that the financing arrangements that
have been concluded and that are being negotiated will alleviate the liquidity
difficulties and that revenues during the balance of 2003 will increase as
compared to 2002.
8
GROSS PROFIT
Gross profit from defense electronics decreased in the first quarter of
2003 as compared to the first quarter of 2002 due to the decline in net revenues
between these periods.
ENGINEERING AND DEVELOPMENT EXPENSE
Engineering and development expense decreased 33% to $785,000 in the
first quarter of 2003 from $1,037,000 in the same period in 2002. Costs by
product line are as follows:
Three Months Ended March 31,
----------------------------
2003 2002
---------- -----------
($ Thousands)
Defense electronics $ 785 $ 774
Optical networking products -- 101
Other -- 162
-------- ---------
$ 785 $ 1,037
======== =========
Engineering and development expenses related to defense electronics in
the first quarter of 2003 reflect on-going enhancements of the VQG4 product line
and our new Eagle product that was introduced at the end of the first quarter of
2003. All development activities, other than those related to our defense
electronic products, were terminated in 2002. Included in engineering and
development expenses during the first quarter of 2003 and 2002 is approximately
$119,000 and $300,000, respectively, related to design services provided by
Flextronics International, Ltd. These services are provided under the
engineering design services agreements we entered into when we sold our
engineering design services business in January 2002.
SELLING AND ADMINISTRATIVE EXPENSE
Selling and administrative expenses increased less than 2% in the first
quarter of 2003 as compared to the first quarter of 2002.
LITIGATION SETTLEMENT
In March 2002 we settled our outstanding litigation against Cadence
Design Systems, Inc. We received $6,300,000, net of attorney fees, from this
settlement.
LITIGATION COSTS
Litigation costs represent legal fees and expenses related to the
shareholder action.
INTEREST EXPENSE
Interest expense decreased by $27,000 in the first quarter of 2003 as
compared to the first three months of 2002 because of decreased borrowings and
lower interest rates.
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LIQUIDITY AND CAPITAL RESOURCES
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As of March 31, 2003 our working capital deficit was $4,860,000, which
included $5,547,000 of notes payable due within one year. Of these amounts,
approximately $1,600,000 is due on demand or by June 30, 2003. At March 31, 2003
we had $400,000 available for borrowing under a revolving bank credit agreement.
9
OPERATING ACTIVITIES
Net cash used in operations for the three months ended March 31, 2003
amounted to $1,520,000. This amount arose primarily from the net loss of
$2,191,000, offset by non-cash charges of $119,000 from the utilization of
prepaid services and $217,000 related to our share of the loss from our
unconsolidated affiliate.
INVESTING ACTIVITIES
For the three months ended March 31, 2003, investing activities
provided cash in the amount of $370,000, primarily from the liquidation of
temporary cash investments.
FINANCING ACTIVITIES
In January and March 2003, we completed private placement transactions
in which we issued a total of 4,166,667 shares of common stock and warrants for
the purchase of an additional 4,333,333 shares of common stock for aggregate
proceeds of $500,000. The warrants have an exercise price of $0.15 per share and
are exercisable at any time through March 31, 2007.
In March 2003, the Company and DNA-CS entered into a revolving line of
credit with a bank in order to provide working capital to DNA-CS. Under the
facility, DNA-CS may borrow up to $1,000,000. Outstanding amounts are due March
26, 2004; however, DNA-CS may extend the maturity date six months, provided
certain conditions are maintained. Interest is payable monthly at the greater of
prime plus 1% and 5.25%. At March 31, 2003 $600,000 was outstanding under this
facility. This working capital facility is secured by the accounts receivable
and inventory of DNA-CS, the guarantee of the Company and by limited guarantees
provided by certain private investors. As consideration for providing the
guarantees that secure the facility the Company has entered into a Reimbursement
Agreement with the guarantors. The Reimbursement Agreement provides that the
Company will reimburse the investors for any amounts that may be required to
reimburse the bank pursuant to the guarantees. Pursuant to the Reimbursement
Agreement and related agreements, the investors have the right to purchase up to
8,333,333 shares of the Company's common stock for $1,000,000 in cash, and the
proceeds will be used to repay amounts outstanding under the facility and
provide for the release of the guarantees. In addition, the investors have
received warrants to purchase an aggregate of 9,582,334 shares of the Company's
common stock at a price of $0.15 per share. The warrants may be exercised at any
time through March 31, 2007.
LIQUIDITY OUTLOOK
We also have had a series of discussions with potential financial and
strategic investors regarding additional financing activities. These activities
might include the repayment of all or a portion of our currently outstanding
debt, as well as providing us with additional working capital. These financing
activities might include the issuance of convertible preferred stock or
convertible debt securities. The discussions have not resulted in definitive
agreements or arrangements to date and there is no assurance that any additional
financing can be arranged on terms acceptable to all parties involved.
In connection with the financing activities described above, we have
been negotiating amendments to our credit agreements with Bank One NA ("Bank
One") and a private investor who has provided security to Bank One related to
these agreements. Currently, the Company has $1,500,000 outstanding under a Loan
Agreement with Bank One that is secured by the guarantee of the private
investor. This agreement has been amended to extend the maturity to July 31,
2003. In addition, the Company has outstanding $2,700,000 under a Credit
Agreement with Bank One that is secured by a letter of credit provided by this
same private investor. Amounts outstanding under this
10
facility are due March 31, 2004, with periodic reductions beginning May 30,
2003. The Company, Bank One and the private investor are currently engaged in
discussion to amend these agreements in order to extend the maturities of these
obligations. These discussions have not yet been concluded and there is no
assurance that the Company will be able to reach agreements acceptable to all
parties involved. If we are unable to reach agreements related to our debt
obligations and if we are unable to obtain required additional working capital,
it may have a material adverse effect on our operations.
Our estimate of capital needs is 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 requirements is our
ability to begin to generate positive cash flow from operations. As discussed
above, this in turn is dependent upon our ability to increase revenues from our
defense electronics business, to generate adequate gross profit from those sales
and to control other costs and expenses. Our capital needs could increase
materially if any of our contingent liabilities are resolved adversely to the
Company. In addition, we could require additional working capital if the defense
electronics business increases more rapidly than we currently anticipate.
Potential sources of additional capital include the sale of additional
debt or equity securities, other debt, such as bank debt, and the sale of
assets. A sale of additional securities could result in dilution to existing
common shareholders. There is no assurance that additional capital will be
available under terms that are acceptable to us.
CONTINGENT LIABILITIES
As discussed in "ITEM 3 - Legal Proceedings" in the Company's Annual
Report on Form 10-K, 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 at March 31, 2003 amounting to $6,300,000 that
bears interest at a variable interest rate. This interest is based on a widely
used reference interest rate known as LIBOR. An increase of 50 basis points in
LIBOR would result in an increase in our annual interest expense of $31,500.
ITEM 4 - CONTROLS AND PROCEDURES
a) Evaluation of Disclosure Controls and Procedures. The term
"disclosure controls and procedures" is defined in Rule 13a-14(c) of the
Securities Exchange Act of 1934, or the Exchange Act. This term refers to the
controls and procedures of a company that are designed to ensure that
information required to be disclosed by a company in the reports that it files
under the Exchange Act is recorded, processed, summarized and reported within
required time periods. Our Chief Executive Officer and our Chief Financial
Officer have evaluated the effectiveness of our disclosure controls and
procedures as of a date within 90 days before the filing of this quarterly
report, and they have concluded that as of that date, our disclosure controls
and procedures were effective at ensuring that required information will be
disclosed on a timely basis in our reports filed under the Exchange Act.
b) Changes in Internal Controls. We maintain a system of internal
controls that are designed to provide reasonable assurance that our books and
records accurately reflect in all material respects our transactions and that
our established policies and procedures are followed. There were no significant
changes to our internal controls or in other factors that could significantly
affect our internal controls subsequent to the date of their evaluation by our
Chief Executive Officer and our Chief Financial Officer, involving any
corrective actions with regard to significant deficiencies and material
weaknesses.
11
PART II - OTHER INFORMATION
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
In the first quarter of 2003 we issued a total of 5,166,667 shares of
our common stock and warrants for the purchase of an additional 4,333,333 shares
of common stock in a series of private placements. Proceeds to us from these
transactions totaled $620,000 and were used for working capital. The warrants
have an exercise price of $0.15 per share and may be exercised at any time
through March 31, 2007. The Company's sales of common stock were exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933, as amended
(the Securities Act), and pursuant to Rule 506 of Regulation D of the Securities
Act. A Rule 506 exemption was available for these sales because the Company sold
only to accredited investors; the Company did not solicit or advertise the
sales; a restrictive legend was placed on each certificate issued describing the
restrictions against resale; and a Form D was filed with the Securities and
Exchange Commission and in each state where the individual investors reside.
In March 2003, the Company and DNA-CS entered into a revolving line of
credit with a bank in order to provide working capital to DNA-CS. Under the
facility, DNA-CS may borrow up to $1,000,000. Outstanding amounts are due March
26, 2004; however, DNA-CS may extend the maturity date six months, provided
certain conditions are maintained. Interest is payable monthly at the greater of
prime plus 1% and 5.25%. At March 31, 2003 $600,000 was outstanding under this
facility. This working capital facility is secured by the accounts receivable
and inventory of DNA-CS, the guarantee of the Company and by limited guarantees
provided by certain private investors. As consideration for providing the
guarantees that secure the Note the Company has entered into a Reimbursement
Agreement with the guarantors. The Reimbursement Agreement provides that the
Company will reimburse the investors for any amounts that may be required to
reimburse the bank pursuant to the guarantees. Pursuant to the Reimbursement
Agreement and related agreements, the investors have the right to purchase up to
8,333,333 shares of the Company's common stock for $1,000,000 in cash, and the
proceeds will be used to repay amounts outstanding under the Note and provide
for the release of the guarantees. In addition, the investors have received
warrants to purchase an aggregate of 9,582,334 shares of the Company's common
stock at a price of $0.15 per share. The warrants may be exercised at any time
through March 31, 2007.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
A. Listed below are all Exhibits filed as part of this report.
Exhibit Description of Exhibit
99.1 906 Certificate
99.2 906 Certificate
B. The Company has not filed any report on Form 8-K during the period
covered by this Report, except as follows:
On January 15, 2003, we filed a Current Report on Form 8-K/A amending
the Current Report on Form 8-K dated October 3, 2002, disclosing information
under Item 5 and filing exhibits under Item 9.
12
On March 25, 2003, we filed a Current Report on Form 8-K/A amending the
Current Report on Form 8-K dated October 3, 2002, disclosing information under
Item 5 and filing exhibits under Item 9.
On March 26, 2003 we filed a Current Report on Form 8-K dated March 26,
2003, disclosing information under Item 5 and filing exhibits under Item 9.
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: May 15, 2003 /s/ ROBERT P. CAPPS
----------------- ---------------------------------------------
Robert P. Capps
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: May 15, 2003 /s/ HERMAN M. FRIETSCH
----------------- ---------------------------------------------
Herman M. Frietsch
Chief Executive Officer and Director
(Principal Executive Officer)
14
CERTIFICATIONS
I, Herman M. Frietsch certify that:
1. I have reviewed this quarterly report on Form 10-Q of TeraForce Technology
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ HERMAN M. FRIETSCH
-----------------------
Herman M. Frietsch
Chief Executive Officer
15
I, Robert P. Capps certify that:
1. I have reviewed this quarterly report on Form 10-Q of TeraForce Technology
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ ROBERT P. CAPPS
-----------------------
Robert P. Capps
Chief Financial Officer
16
EXHIBIT INDEX
Exhibit Description
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99.1 906 Certificate
99.2 906 Certificate