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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549
 FORM 10-Q/A Amendment No. 1
 (Mark One)x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the Quarterly Period Ended September 30, 2004 OR o
    
    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 000-31803 TRANSMETA CORPORATION (Exact name of registrant as specified in its charter)
 Delaware
    
    77-0402448(State or other jurisdiction of
    
    (I.R.S. employerincorporation or organization)
    
    identification no.)
 3990 Freedom Circle, Santa Clara, CA 95054
(Address of principal executive offices, including zip code) (408) 919-3000
(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 o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes x No o There were 176,468,261 shares of the Companys common stock, par value
$0.00001 per share, outstanding on October 22, 2004.




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TRANSMETA CORPORATION Explanatory Note We are filing this Amendment No. 1 to our Quarterly Report on Form 10-Q
for the period ended September 30, 2004 to amend portions of our Form 10-Q for
the same period initially filed with the Securities and Exchange Commission on
November 8, 2004 (the Initially Filed Form 10-Q). This Amendment No. 1 amends
Part I, Item 1  Unaudited Condensed Consolidated Financial Statements to
include one line item in our Unaudited Condensed Consolidated Balance Sheets,
which line item was inadvertently omitted in the process of preparing the document for
electronic filing on EDGAR. Specifically, this Amendment No. 1 adds the Accrued compensation and
related compensation liabilities line reflecting balances of $4,189,000 and
$4,986,000 for the periods ended September 30, 2004 and December 31, 2003,
respectively, which line had been omitted. All information in the Initially Filed Form 10-Q, as amended by this
Amendment No. 1, speaks as of the date of the original filing of the Initially
Filed Form 10-Q and does not reflect any subsequent information or events,
except as presented in this Amendment No. 1 and except for Exhibits 31.01,
31.02, 32.01 and 32.02. References to Annual Report and Form 10-K in this
Amendment No. 1 refer to our Annual Report on Form 10-K for the fiscal year
ended December 31, 2003. References to Amendment No. 1, Quarterly Report
and Form 10-Q in this Amendment No. 1, refer to our quarterly report on Form
10-Q for the three months and nine months ended September 30, 2004, as amended. All information contained in this Amendment No. 1 is subject to updating
and supplementing as provided in our reports filed with the Securities and
Exchange Commission subsequent to the date of the filing of the Initially Filed
Form 10-Q. FORM 10-Q/A
Quarterly Period Ended September 30, 2004 TABLE OF CONTENTS PagePART I. FINANCIAL INFORMATIONItem 1. Unaudited Condensed Consolidated Financial Statements
    
    
    3PART II. OTHER INFORMATIONItem 6. Exhibits
    
    
    11Signatures
    
    
    12EXHIBIT 31.01EXHIBIT 31.02EXHIBIT 32.01EXHIBIT 32.02
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION 
 Item 1.Condensed Consolidated Financial Statements TRANSMETA CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts) September 30,
    
    December 31,2004
    
    2003(1)(unaudited)(As corrected)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    18,401
    
    
    $
    83,765Short-term investments
    
    
    46,725
    
    
    
    37,000Accounts receivable, net
    
    
    2,509
    
    
    
    1,719Inventories
    
    
    7,541
    
    
    
    8,796Prepaid expenses and other current assets
    
    
    3,298
    
    
    
    3,671Total current assets
    
    
    78,474
    
    
    
    134,951Property and equipment, net
    
    
    4,551
    
    
    
    5,305Patents and patent rights, net
    
    
    24,637
    
    
    
    29,771Other assets
    
    
    2,205
    
    
    
    1,563Total assets
    
    $
    109,867
    
    
    $
    171,590LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    3,130
    
    
    $
    1,900Accrued compensation and related compensation liabilities
    
    
    4,189
    
    
    
    4,986Accrued inventory-related charges
    
    
    5,076
    
    
    
    Other accrued liabilities
    
    
    5,534
    
    
    
    5,360Current portion of accrued restructuring costs
    
    
    1,602
    
    
    
    1,916Obligation to former development partner
    
    
    15,478
    
    
    
    21,129Current portion of long-term debt and capital lease obligations
    
    
    350
    
    
    
    370Total current liabilities
    
    
    35,359
    
    
    
    35,661Long-term accrued restructuring costs, net of current portion
    
    
    4,059
    
    
    
    4,155Long-term debt and capital lease obligations, net of current portion
    
    
    91
    
    
    
    356Commitments and contingenciesStockholders Equity:Preferred stock, $0.00001 par value Authorized shares - 5,000,000. None issued
    
    
    
    
    
    
    Common stock, $0.00001 par value, at amounts paid in; Authorized shares -
1,000,000,000. Issued and outstanding shares  176,379,470 at September 30,
2004 and 167,528,493 at December 31, 2003
    
    
    694,139
    
    
    
    677,093Treasury stock
    
    
    (2,439
    )
    
    
    (2,439
    )Deferred stock compensation
    
    
    (12
    )
    
    
    (696
    )Accumulated other comprehensive income (loss)
    
    
    (83
    )
    
    
    24Accumulated deficit
    
    
    (621,247
    )
    
    
    (542,564
    )Total stockholders equity
    
    
    70,358
    
    
    
    131,418Total liabilities and stockholders equity
    
    $
    109,867
    
    
    $
    171,590
   (1)
    
    Derived from the Companys audited financial statements as of December
31, 2003, included in the Companys Form 10-K filed with the Securities
and Exchange Commission. (See accompanying notes) 3




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TRANSMETA CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited) Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,
    
    September 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Revenue:Product
    
    $
    3,297
    
    
    $
    2,365
    
    
    $
    13,977
    
    
    $
    12,909License and service
    
    
    3,698
    
    
    
    323
    
    
    
    4,220
    
    
    
    850Total revenue
    
    
    6,995
    
    
    
    2,688
    
    
    
    18,197
    
    
    
    13,759Cost of revenue:Product
    
    
    11,147
    
    
    
    3,073
    
    
    
    25,681
    
    
    
    12,523License and service
    
    
    197
    
    
    
    
    
    
    
    541
    
    
    
    Total cost of revenue
    
    
    11,344
    
    
    
    3,073
    
    
    
    26,222
    
    
    
    12,523Gross profit (loss)
    
    
    (4,349
    )
    
    
    (385
    )
    
    
    (8,025
    )
    
    
    1,236Operating expenses:Research and development(1)(2)
    
    
    13,751
    
    
    
    12,452
    
    
    
    40,187
    
    
    
    37,121Selling, general and administrative(3)(4)
    
    
    7,424
    

    
    
    5,978
    
    
    
    21,563
    
    
    
    18,959Restructuring charges
    
    
    904
    
    
    
    
    
    
    
    904
    
    
    
    Amortization of deferred charges, patents and patent rights
    
    
    2,233
    
    
    
    2,628
    
    
    
    6,984
    
    
    
    7,902Stock compensation
    
    
    56
    
    
    
    2,302
    
    
    
    1,636
    
    
    
    3,833Total operating expenses
    
    
    24,368
    
    
    
    23,360
    
    
    
    71,274
    
    
    
    67,815Operating loss
    
    
    (28,717
    )
    
    
    (23,745
    )
    
    
    (79,299
    )
    
    
    (66,579
    )Interest income and other, net
    
    
    188
    
    
    
    203
    
    
    
    677
    
    
    
    1,222Interest expense
    
    
    (26
    )
    
    
    (116
    )
    
    
    (61
    )
    
    
    (363
    )Net loss
    
    $
    (28,555
    )
    
    $
    (23,658
    )
    
    $
    (78,683
    )
    
    $
    (65,720
    )Net loss per share  basic and diluted
    
    $
    (0.16
    )
    
    $
    (0.17
    )
    
    $
    (0.45
    )
    
    $
    (0.47
    )Weighted average shares outstanding  basic and diluted
    
    
    175,487
    
    
    
    139,844
    
    
    
    173,794
    
    
    
    138,674
   (1)
    
    Excludes $79 and $190 in amortization of deferred stock compensation for
the three months ended September 30, 2004 and September 30, 2003,
respectively, and $434 and $924 for the nine months ended September 30,
2004 and September 30, 2003, respectively.(2)
    
    Excludes $(49) and $135 in variable stock compensation for the three
months ended September 30, 2004 and September 30, 2003, respectively, and
$313 and $170 for the nine months ended September 30, 2004 and September
30, 2003, respectively.(3)
    
    Excludes $26 and $115 in amortization of deferred stock compensation for
the three months ended September 30, 2004 and September 30, 2003,
respectively, and $231 and $621 for the nine months ended September 30,
2004 and September 30, 2003, respectively.(4)
    
    Excludes $0 and $1,862 in variable stock compensation for the three
months ended September 30, 2004 and September 30, 2003, respectively, and
$658 and $2,118 for the nine months ended September 30, 2004 and September
30, 2003, respectively. (See accompanying notes) 4




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TRANSMETA CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited) Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003Cash flows from operating activities:Net loss
    
    $
    (78,683
    )
    
    $
    (65,720
    )Adjustments to reconcile net loss to net cash used in operating activities:Stock compensation
    
    
    1,636
    
    
    
    3,833Depreciation
    
    
    2,778
    
    
    
    4,470Amortization of other assets
    
    
    
    
    
    
    370Amortization of deferred charges, patents and patent rights
    
    
    6,984
    
    
    
    7,902Non cash restructuring charges
    
    
    904
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (790
    )
    
    
    2,654Inventories
    
    
    1,255
    
    
    
    3,536Prepaid expenses and other current assets
    
    
    (269
    )
    
    
    357Accounts payable and accrued liabilities
    
    
    5,680
    
    
    
    (3,800
    )Accrued restructuring charges
    
    
    (1,314
    )
    
    
    (1,851
    )Net cash used in operating activities
    
    
    (61,819
    )
    
    
    (48,249
    )Cash flows from investing activities:Purchase of available-for-sale investments
    
    
    (69,994
    )
    
    
    (83,775
    )Proceeds from sale or maturity of available-for-sale investments
    
    
    60,162
    
    
    
    157,634Purchase of property and equipment
    
    
    (2,024
    )
    
    
    (834
    )Payment for previously acquired patents and patent rights
    
    
    (7,500
    )
    
    
    (9,000
    )Other assets
    
    
    
    
    
    
    (59
    )Net cash provided by / (used in) investing activities
    
    
    (19,356
    )
    
    
    63,966Cash flows from financing activities:Net proceeds from public offering of common stock
    
    
    10,289
    
    
    
    Proceeds from sales of common stock under ESPP and stock option plans
    
    
    4,948
    
    
    
    3,854Repayment of notes from stockholders
    
    
    857
    
    
    
    Repayment of debt and capital lease obligations
    
    
    (283
    )
    
    
    (584
    )Net cash provided by financing activities
    
    
    15,811
    
    
    
    3,270Change in cash and cash equivalents
    
    
    (65,364
    )
    
    
    18,987Cash and cash equivalents at beginning of period
    
    
    83,765
    
    
    
    16,613Cash and cash equivalents at end of period
    
    $
    18,401
    
    
    $
    35,600
 (See accompanying notes) 5




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TRANSMETA CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission and accounting principles generally accepted in the United
States for interim financial information. However, certain information or
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
have been condensed, or omitted, pursuant to such rules and regulations. The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements.
Actual results could differ from those estimates. Significant estimates made in
preparing the financial statements include license revenue recognition,
inventory valuations, long-lived and intangible asset valuations, restructuring
charges and loss contingencies. In the opinion of management, the statements
include all adjustments (which are of a normal and recurring nature) necessary
for the fair presentation of the results of the interim periods presented.
These financial statements should be read in conjunction with our audited
consolidated financial statements and the notes thereto included in the
Companys Form 10-K for the year ended December 31, 2003. The results of
operations for the three months and nine months ended September 30, 2004 are
not necessarily indicative of the operating results for the full fiscal year or
any future period. The financial statements of the Company have been presented based on the
assumption that the Company will continue as a going concern. The Company,
however, has a history of substantial losses, and expects to incur future
losses. The Company has historically reported negative cash flows from
operations because the gross profit, if any, generated from its product and
licensing revenues has not been sufficient to cover its operating cash
requirements. The Company believes that its existing cash and cash equivalents
and short-term investment balances and cash from operations will be
insufficient to fund its operations, planned capital and R&D expenditures for
the next 12 months on its current business model. Accordingly, the Company
intends to raise during that time period additional funds through public or
private equity or debt financing or by any other means available to the Company
at that time. Additional funds may not be available on terms favorable to the
Company or at all. In the event that the Company is unable to raise additional
funds, it is positioned to modify its current business model, for example, by
leveraging its intellectual property assets and by focusing on its strategy of
licensing its advanced power management and other technologies to other
companies and, in doing so, to substantially limit its operations and reduce
costs related to aspects of the business other than intellectual property and
technology licensing to permit it to continue to operate on a modified business
model for a period that extends at least through September 30, 2005. The Companys fiscal year ends on the last Friday in December, and each
fiscal quarter ends on the last Friday of each calendar quarter. For ease of
presentation, the accompanying financial information has been shown as of
December 31 and calendar quarter ends for all annual and quarterly financial
statement captions. The three-month periods ended September 24, 2004 and
September 26, 2003 each consisted of 13 weeks. The first nine months of fiscal
2004 and 2003 each consisted of 39 weeks. 2. Net Loss per Share Basic and diluted net loss per share is presented in conformity with the
Financial Accounting Standards Boards (FASB) Statement of Financial Accounting
Standards (SFAS) No. 128, Earnings Per Share, for all periods presented.
Basic and diluted net loss per share has been computed using the
weighted-average number of shares of common stock outstanding during each
period, less weighted-average shares subject to repurchase. 6




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The following table presents the computation of basic and diluted net loss
per share: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,
    
    September 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003(in thousands, except for per share amounts)Basic and diluted:Net loss, as reported
    
    $
    (28,555
    )
    
    $
    (23,658
    )
    
    $
    (78,683
    )
    
    $
    (65,720
    )Basic and diluted:Weighted average shares outstanding
    
    
    175,487
    
    
    
    139,844
    
    
    
    173,794
    
    
    
    138,682Less: Weighted average shares subject to repurchase
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8
    )Weighted average shares used in computing basic
and diluted net loss per share
    
    
    175,487
    
    
    
    139,844
    
    
    
    173,794
    
    
    
    138,674Net loss per share  basic and diluted
    
    $
    (0.16
    )
    
    $
    (0.17
    )
    
    $
    (0.45
    )
    
    $
    (0.47
    )
 The Company has excluded all outstanding stock options and shares subject
to repurchase from the calculation of basic and diluted net loss per share
because these securities are antidilutive for all periods presented. Options
and warrants to purchase 41,923,626 and 35,532,096 shares of common stock at
September 30, 2004 and 2003, respectively, determined using the treasury stock
method, were not included in the computation of diluted net loss per share
because the effect would be antidilutive. These securities, had they been
dilutive, would have been included in the computation of diluted net loss per
share using the treasury stock method. 3. Revenue Recognition The Company recognizes revenue from products sold when persuasive evidence
of an arrangement exists, the price is fixed or determinable, title of goods is
transferred and collectibility is reasonably assured. The Company accrues for
estimated sales returns, and other allowances at the time of shipment. Certain
of the Companys product sales are made to distributors under agreements
allowing for price protection and/or right of return on unsold products. The
Company defers recognition of revenue on these sales until the distributors
sell the products. The Company may also sell certain products with End of
Life status to its distributors under special arrangements without price
protection or return privileges for which revenue is recognized upon transfer
of title, typically upon shipment. The Company enters into license agreements, some of which may contain
multiple elements, including technology license and support services, or
non-standard terms and conditions. As a result, in accordance with Emerging
Issues Task Force (EITF) Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables and the Securities and Exchange Commissions Staff Accounting
Bulletin No. 104, Revenue Recognition, significant interpretation on these
agreements is sometimes required to determine the appropriate accounting,
including whether deliverables specified in a multiple element arrangement
should be treated as separate units of accounting for revenue recognition
purposes, and if so, how the price should be allocated among the deliverable
elements and when to recognize revenue for each element. The Company recognizes
revenue from license agreements when earned, which generally occurs when
agreed-upon deliverables are provided, or milestones are met and confirmed by
licensees and relative fair values of multiple elements can be determined.
Additionally, license revenues and maintenance and service revenues are
recognized only if payments received are non-refundable and not subject to any
future performance obligation by the Company. The Company recognizes revenue
from maintenance agreements based on the fair value of such agreements ratably
over the period in which such services are rendered. License and service revenue for the three and nine months ended September
30, 2004 were $3.7 million and $4.2 million, respectively. Through September
30, 2004, the Company has collected a total of $3.5 million for technology
transfer fees and maintenance service fees related to an agreement with its
initial LongRun2 licensing partner. The Company has recognized revenue in
respect of this agreement upon receipt of payments which are non-refundable and
not subject to any future performance obligation by the Company. 4. Stock Based Compensation The Company accounts for its stock options and equity awards in accordance
with the provisions of Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations and has elected to
follow the disclosure only alternative prescribed by SFAS 123, Accounting
for Stock-Based Compensation. Expense associated with stock-based compensation
is amortized on an accelerated basis over the vesting period of the individual
award consistent with the method 7




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described in FASB Interpretation 28, Accounting for Stock Appreciation
Rights and Other Variable Stock Option or Award Plan. Accordingly,
approximately 59% of the unearned deferred compensation is amortized in the
first year, 25% in the second year, 12% in the third year, and 4% in the fourth
year following the date of grant. Pursuant to SFAS 123, Transmeta discloses the
pro forma effect of using the fair value method of accounting for its
stock-based compensation arrangements. In December 2002, the FASB issued, and
the Company adopted, SFAS 148, Accounting for Stock-Based Compensation -
Transition and Disclosure  an Amendment of FASB Statement No. 123. SFAS 148
amends the disclosure requirements of FASBs SFAS 123, Accounting for
Stock-Based Compensation, to require more prominent disclosures in both annual
and interim financial statements regarding the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. For purposes of pro forma disclosures, the estimated fair value of options
is amortized to pro forma expense over the options vesting period using an
accelerated graded method. Pro forma information follows: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,
    
    September 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003(in thousands, except for per share amounts)Net loss, as reported
    
    $
    (28,555
    )
    
    $
    (23,658
    )
    
    $
    (78,683
    )
    
    $
    (65,720
    )Add: Stock-based employee compensation expense
included in reported net loss, net of related tax
effects
    
    
    56
    
    
    
    2,302
    
    
    
    1,636
    
    
    
    3,833Less: Total stock-based employee compensation
expense under fair value based method for all
awards, net of related tax effects
    
    
    (7,538
    )
    
    
    (13,621
    )
    
    
    (27,652
    )
    
    
    (36,690
    )Pro forma net loss
    
    $
    (36,037
    )
    
    $
    (34,977
    )
    
    $
    (104,699
    )
    
    $
    (98,577
    )Basic and diluted net loss per share  as reported
    
    $
    (0.16
    )
    
    $
    (0.17
    )
    
    $
    (0.45
    )
    
    $
    (0.47
    )Basic and diluted net loss per share  pro forma
    
    $
    (0.21
    )
    
    $
    (0.25
    )
    
    $
    (0.60
    )
    
    $
    (0.71
    )
 The fair value for the Companys stock-based awards is estimated at the
date of grant using a Black-Scholes option-pricing model. The Black-Scholes
option-pricing model was developed for use in estimating the fair value of
traded options that have no vesting restrictions and are fully transferable. In
addition, the Black-Scholes option-pricing model requires the input of highly
subjective assumptions, including expected stock price volatility. Because the
Companys stock-based awards have characteristics significantly different from
those of traded options and because changes in the subjective input assumptions
can materially affect the fair value estimate, in managements opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its stock-based awards. The fair value of options granted was
determined based on estimated stock price volatility. The weighted average
assumptions used to determine fair value were as follows: Options
    
    ESPPThree Months
    
    Nine Months
    
    Three Months
    
    Nine MonthsEnded September 30,
    
    Ended September 30,
    
    Ended September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003Expected volatility
    
    
    0.91
    
    
    
    0.92
    
    
    
    0.91
    
    
    
    0.86
    
    
    
    0.91
    
    
    
    1.03
    
    
    
    0.91
    
    
    
    1.03Expected life in years
    
    
    3.4
    
    
    
    4.0
    
    
    
    3.4
    
    
    
    4.0
    
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.5Risk-free interest rate
    
    
    2.9
    %
    
    
    2.7
    %
    
    
    2.7
    %
    
    
    2.3
    %
    
    
    1.8
    %
    
    
    1.2
    %
    
    
    1.4
    %
    
    
    1.3
    %Expected dividend yield
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
 5. Net Comprehensive Loss Net comprehensive loss includes the Companys net loss, as well as
accumulated other comprehensive income/(loss) on available-for-sale investments
and foreign currency translation adjustments. Net comprehensive loss for the
three and nine month periods ended September 30, 2004 and 2003, respectively,
is as follows (in thousands): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,
    
    September 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net loss
    
    $
    (28,555
    )
    
    $
    (23,658
    )
    
    $
    (78,683
    )
    
    $
    (65,720
    )Net change in unrealized loss on investments
    
    
    132
    
    
    
    (22
    )
    
    
    (108
    )
    
    
    (139
    )Net change in foreign currency translation adjustments
    
    
    13
    
    
    
    (14
    )
    
    
    1
    
    
    
    (6
    )Net comprehensive loss
    
    $
    (28,410
    )
    
    $
    (23,694
    )
    
    $
    (78,790
    )
    
    $
    (65,865
    )
 8




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##### Table of Contents



The components of accumulated other comprehensive income/(loss), net of
taxes as of September 30, 2004 and December 31, 2003, respectively, is as
follows (in thousands): September 30,
    
    December 31,2004
    
    2003Net unrealized loss on investments
    
    $
    (109
    )
    
    $
    (1
    )Cumulative foreign currency translation adjustments
    
    
    26
    
    
    
    25Accumulated other comprehensive income/(loss)
    
    $
    (83
    )
    
    $
    24
 6. Inventories Inventories are stated at the lower of cost (first-in, first-out) or
market. The components of inventories consist of the following (in thousands): September 30,
    
    December 31,2004
    
    2003Work in progress
    
    $
    4,930
    
    
    $
    6,136Finished goods
    
    
    2,611
    
    
    
    2,660$
    7,541
    
    
    $
    8,796
 In the third quarter of fiscal 2004, the Company recorded a $3.2 million
charge related to inventory on hand, which resulted in a reduction of the
carrying value of that inventory. The Company additionally recorded a $3.6
million charge during the period related to non-cancelable commitments for
substrates and wafers on order with our third-party suppliers, as such
contractual commitments were in excess of that inventorys net realizable
value. The charge for inventory on hand as well as the charge for inventory on
order primarily related to the cost to manufacture our 130 nanometer and 90
nanometer Efficeon products exceeding the price at which we expect to be able
to sell these products. Of the $7.5 million and $8.8 million of net inventory
on hand at September 30, 2004 and December 31, 2003, respectively, $2.3 million
and $2.6 million of net inventory, respectively, were stated at net realizable
value. Accordingly, gross margin may be impacted from future sales of these
parts to the extent that the associated revenue exceeds or fails to achieve
their currently adjusted values. Benefits to gross margin as a result of
products being sold at ASPs in excess of their previously written down values
were $0.1 million and $0.3 million for the three and nine months ended
September 30, 2004, respectively, compared to $0.2 million and $0.6 million for
the same periods last year. 7. Restructuring Charges In the second quarter of fiscal 2002, Transmeta recorded a $10.6 million
restructuring charge as a result of the Companys decision to cease development
and productization of the TM6000 microprocessor. The restructuring charge
consisted primarily of lease costs, equipment write-offs and other costs as the
Company identified a number of leased facilities as well as leased and owned
equipment that were no longer required. During the fourth quarter of fiscal 2003, Transmeta reassessed the
adequacy of the remaining accrual and adjusted the accrued restructuring costs
as a result of an update in certain underlying assumptions. During the third quarter of fiscal 2004, Transmeta reassessed the adequacy
of the remaining accrual and adjusted the accrued restructuring costs as a
result of an update in certain underlying assumptions. In view of current
market conditions, the Company has no assumptions of subleasing previously
vacated space that remains unused as of September 30, 2004. As a result of
this update in assumptions, the Company adjusted the accrued restructuring
costs and recorded a charge of $0.9 million in restructuring charges. Accrued restructuring charges consist of the following at September 30,
2004 (in thousands): ProvisionBalance atDecember 31,
    
    Drawdowns
    
    ProvisionBalance atMarch 31,
    
    Drawdowns
    
    ProvisionBalance atJune 30,
    
    Restructuring
    
    Drawdowns
    
    ProvisionBalance atSeptember 30,2003
    
    Cash
    
    Non-Cash
    
    2004
    
    Cash
    
    Non-Cash
    
    2004
    
    Charges
    
    Cash
    
    Non-Cash
    
    2004Building leasehold
costs
    
    $
    6,071
    
    
    $
    408
    
    
    
    
    
    
    $
    5,663
    
    
    $
    499
    
    
    
    
    
    
    $
    5,164
    
    
    $
    904
    
    
    $
    407
    
    
    
    
    
    
    $
    5,661
 9




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##### Table of Contents



8. Related Party Transaction Transmeta entered into a trademark and technology licensing agreement
during fiscal 2003 with Chinese 2 Linux (Holdings) Limited. In relation to
this agreement, the Company became a 16.6% beneficial owner of the party with
which the agreement was entered. In relation to this agreement, the Company
recognized license revenue of $198,000 and $720,000 for the three and nine
months ended September 30, 2004, respectively. 9. Recent Accounting Pronouncements In March 2004, the FASB issued a proposed Statement, Share-Based Payment,
an amendment of FASB Statements Nos. 123 and 95, that addresses the accounting
for share-based payment transactions in which a Company receives employee
services in exchange for either equity instruments of the Company or
liabilities that are based on the fair value of the Companys equity
instruments or that may be settled by the issuance of such equity instruments.
The proposed statement would require all companies to measure compensation cost
for all share-based payments at fair value. The effective date of the proposed
standard is for periods beginning after June 15, 2005. The Company is
currently evaluating the effect that the adoption of the proposed statement
will have on its financial position and results of operations. 10. Legal Proceedings The Company is a party in one consolidated lawsuit. Beginning in June
2001, the Company, certain of its directors and officers, and certain of the
underwriters for its initial public offering were named as defendants in three
putative shareholder class actions that were consolidated in and by the United
States District Court for the Southern District of New York in In re Transmeta
Corporation Initial Public Offering Securities Litigation, Case No. 01 CV 6492.
The complaints allege that the prospectus issued in connection with the
Companys initial public offering on November 7, 2000 failed to disclose
certain alleged actions by the underwriters for that offering, and alleges
claims against the Company and several of its officers and directors under
Sections 11 and 15 of the Securities Act of 1933, as amended, and under
Sections 10(b) and Section 20(a) of the Securities Exchange Act of 1934, as
amended. Similar actions have been filed against more than 300 other companies
that issued stock in connection with other initial public offerings during
1999-2000. Those cases have been coordinated for pretrial purposes as In re
Initial Public Offering Securities Litigation, Master File No. 21 MC 92 (SAS).
In July 2002, the Company joined in a coordinated motion to dismiss filed on
behalf of multiple issuers and other defendants. In February 2003, the Court
granted in part and denied in part the coordinated motion to dismiss, and
issued an order regarding the pleading of amended complaints. Plaintiffs
subsequently proposed a settlement offer to all issuer defendants, which
settlement would provide for payments by issuers insurance carriers if
plaintiffs fail to recover a certain amount from underwriter defendants.
Although the Company and the individual defendants believe that the complaints
are without merit and deny any liability, but because they also wish to avoid
the continuing waste of management time and expense of litigation, they
accepted plaintiffs proposal to settle all claims that might have been brought
in this action. The Company and the individual Transmeta defendants expect that
their share of the global settlement will be fully funded by their director and
officer liability insurance. Although the Company and the Transmeta defendants
have approved the settlement in principle, it remains subject to several
procedural conditions, as well as formal approval by the Court. It is possible
that the parties may not reach a final written settlement agreement or that the
Court may decline to approve the settlement in whole or part. In the event that
the parties do not reach agreement on the final settlement, the Company and the
Transmeta defendants believe that they have meritorious defenses and intend to
defend any remaining action vigorously. 11. Subsequent Events On October 19, 2004, the Company entered into an agreement with
International Business Machines, or IBM, to add a second amendment to the
Companys amended technology license agreement with IBM, which second amendment
relates solely to the terms of the Companys final $16 million cash commitment
payable to IBM in December 2004 pursuant to the amended technology license
agreement. Specifically, the second amendment reschedules and amortizes over
the next four fiscal quarters the Companys final $16 million payment to IBM.
Under the second amendment, the Company is now obligated, and currently
expects, to pay $4.0 million cash to IBM in December 2004, and to pay the
remaining $12.0 million of its cash commitment to IBM, with an imputed interest
rate of 7.5%, during the first three quarters of fiscal 2005. On October 26, 2004, the Company received from NEC Electronics, or NEC, a
cash payment of $3.0 million, which payment constitutes a portion of the
Companys deliverable-based license fee for licensing to NEC the Companys
proprietary LongRun2 technologies for power management and transistor leakage
control pursuant to the Companys March 2004 licensing agreement with
NEC. This $3.0 million payment was received during the fourth quarter of
fiscal 2004 and will be recognized as revenue in that period. 10




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##### Table of Contents



PART II. OTHER INFORMATION 
 Item 6.Exhibits (a) Exhibits. The following exhibits are filed herewith: Exhibit Number
    
    Exhibit Title31.01
    
    
    Certification by Matthew R. Perry pursuant to Rule 13a-14(a)
promulgated under the Securities Exchange Act of 1934.31.02
    
    
    Certification by Mark R. Kent pursuant to Rule 13a-14(a)
promulgated under the Securities Exchange Act of 1934.32.01*
    
    
    Certification by Matthew R. Perry pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.32.02*
    
    
    Certification by Mark R. Kent pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
 * As contemplated by SEC Release No. 33-8212, these exhibits are furnished
with this quarterly report on Form 10-Q/A and are not deemed filed with the
Securities and Exchange Commission and are not incorporated by reference in any
filing of Transmeta Corporation under the Securities Act of 1933 or the
Securities Exchange Act of 1934, including this quarterly report, whether made
before or after the date hereof and irrespective of any general incorporation
language in any filings. 11




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##### Table of Contents



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. TRANSMETA CORPORATIONBy:
    
    /s/ MARK R. KENTMark R. KentChief Financial Office(Principal Financial Officer andDuly Authorized Officer)
 Date: November 10, 2004 12




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##### Table of Contents



EXHIBIT INDEX Exhibit Number
    
    Exhibit Title31.01
    
    
    Certification by Matthew R. Perry pursuant to Rule 13a-14(a) promulgated
under the Securities Exchange Act of 1934.31.02
    
    
    Certification by Mark R. Kent pursuant to Rule 13a-14(a) promulgated under
the Securities Exchange Act of 1934.32.01*
    
    
    Certification by Matthew R. Perry pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.02*
    
    
    Certification by Mark R. Kent pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 * As contemplated by SEC Release No. 33-8212, these exhibits are furnished
with this quarterly report on Form 10-Q/A and are not deemed filed with the
Securities and Exchange Commission and are not incorporated by reference in any
filing of Transmeta Corporation under the Securities Act of 1933 or the
Securities Exchange Act of 1934, including this quarterly report, whether made
before or after the date hereof and irrespective of any general incorporation
language in any filings.