<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER 0-25996
TRANSWITCH CORPORATION
(Exact name of Registrant as Specified in its Charter)
Delaware 06-1236189
(State of Incorporation) (I.R.S. Employer Identification Number)
8 PROGRESS DRIVE
SHELTON, CONNECTICUT 06484
(Address of Principal Executive Offices)
Telephone (203) 929-8810
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
------------ ------------
COMMON STOCK, PAR VALUE $.001 PER SHARE, OUTSTANDING AT JULY 31, 1996:
11,811,119 SHARES.
<PAGE>
TRANSWITCH CORPORATION
INDEX
For the second quarter ended June 30, 1996
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1996
and December 31, 1995 3
Consolidated Statements of Operations for the Three and
Six Months Ended June 30, 1996 and 1995 4
Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1996 and 1995 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
</TABLE>
2
<PAGE>
Part I FINANCIAL INFORMATION
Item 1. Financial Statements
TranSwitch Corporation
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(in thousands, except per share data) June 30, December 31,
Assets 1996 1995
------ ---- ----
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8,111 $ 13,630
Short term investments 7,266 3,620
Accounts receivable, net 6,213 5,380
Inventories, net 3,473 2,771
Prepaid expenses and other current assets 422 499
----------- -------------
Total current assets 25,485 25,900
Property and equipment, net 2,733 2,245
Product licenses 4,565 4,525
----------- -------------
Total Assets $ 32,783 $ 32,670
============ =========== =============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 2,089 $ 2,021
Accrued liabilities 1,443 1,594
Product license fee payable, current portion 719 474
----------- -------------
Total current liabilities 4,251 4,089
Product license fee payable, less current portion 1,414 1,875
Stockholders' equity:
Common Stock, $.001 par value; authorized 25,000,000 shares;
issued and outstanding 11,503,606 shares December 31, 1995,
11,751,573 shares June 30, 1996 12 12
Additional paid in capital 44,962 44,705
Accumulated deficit (17,856) (18,011)
----------- -------------
Total stockholders' equity 27,118 26,706
----------- -------------
Total Liabilities and Stockholders' Equity $ 32,783 $ 32,670
========================================== =========== =============
</TABLE>
3
<PAGE>
TranSwitch Corporation
Consolidated Statements of Operations
Unaudited
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Product revenues, net $ 6,299 $ 3,782 $ 12,569 $ 6,523
Research and development contracts 187 238 276 591
License and royalty fees - - - 125
--------- --------- ---------- ---------
Total Revenues 6,486 4,020 12,845 7,239
Cost of Revenues:
Cost of products sold 2,737 1,650 5,578 2,912
Cost of research and development contracts 50 131 63 326
--------- --------- ---------- ---------
Total Cost of Revenues 2,787 1,781 5,641 3,238
_________ _________ _________ _________
Gross Profit 3,699 2,239 7,204 4,001
Operating Expenses:
Research and development 2,002 1,546 4,083 2,945
Marketing and sales 1,289 929 2,474 1,904
General and administrative 505 294 914 591
Total Operating Expenses 3,796 2,769 7,471 5,440
--------- --------- ---------- ---------
Operating Loss (97) (530) (267) (1,439)
Interest Income, net 189 22 422 24
--------- --------- ---------- ---------
Net Income (Loss) $ 92 $ (508) $ 155 $ (1,415)
========= ========= ========== =========
Pro-forma Net Income (Loss) per Common Share $ 0.01 $ (0.06) $ 0.01 $ (0.16)
========= ========= ========== =========
Pro-forma Weighted Average Number of Common Shares
Outstanding and Equivalents 12,284 9,204 12,236 8,805
========= ========= ========== =========
</TABLE>
4
<PAGE>
TranSwitch Corporation
Consolidated Statements of Cash Flows
Unaudited
(in thousands)
<TABLE>
<CAPTION> Six Months Ended
June 30,
--------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 155 $ (1,415)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 530 292
Stock compensation expense 78 22
Changes in assets and liabilities:
(Increase) in accounts receivable (833) (1,077)
Decrease (increase) in prepaids and other current assets 77 (292)
(Increase) in inventories (702) (419)
Increase in accounts payable 68 905
Increase (decrease) in accrued liabilities 94 (460)
-------- -----------
Total adjustments (688) (1,029)
-------- -----------
Net cash (used in) operating activities (533) (2,444)
Cash flows from investing activities:
Capital expenditures and payments on product licenses (1,519) (536)
Purchase of short term investments (11,773) -
Proceeds from sale of short term investments 8,127 -
-------- -----------
Net cash used in investing activities (5,165) (536)
Cash flows from financing activities:
Proceeds from the issuance of common stock - 20,329
Proceeds from the exercise of stock options and warrants 179 95
Repayment of notes payable to banks - (1,191)
-------- -----------
Net cash provided by (used in) financing activities 179 19,233
(Decrease) increase in cash and cash equivalents (5,519) 16,253
-------- -----------
Cash and cash equivalents at beginning of year 13,630 3,352
Cash and cash equivalents at end of period $ 8,111 $ 19,605
======== ===========
Supplemental disclosure of cash flows information:
Cash paid for interest $ 68 $ 50
</TABLE>
5
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the second quarter ended June 30, 1996
Note 1. Interim Financial Statements
- -------------------------------------
The accompanying unaudited interim financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
for reporting on Form 10-Q. Accordingly, certain information and footnotes
required by generally accepted accounting principles for complete financial
statements are not included herein. The financial statements are prepared on a
consistent basis with and should be read in conjunction with the statements and
notes thereto contained in the Company's Annual Report on From 10-K for the
fiscal year ended December 31, 1995 filed with the Securities and Exchange
Commission on March 31, 1996.
In the opinion of management, these statements include all adjustments,
consisting of normal, recurring adjustments, which are necessary for a fair
presentation for such periods. The results of operations for any interim period
are not necessarily indicative of the results which may be achieved for the
entire fiscal year ending December 31, 1996.
Note 2. Stockholders' Equity and Income (Loss) Per Share
- ---------------------------------------------------------
On June 19, 1995 and July 13, 1995 the Company completed its initial public
offering of 2,500,000 shares of Common Stock and 375,000 shares of Common Stock,
respectively, all of which were sold by the Company. Concurrent with
consummation of the offering, all outstanding shares of Mandatorily Redeemable
Convertible Preferred Stock were converted into 7,009,743 shares of Common
Stock. The pro forma net income (loss) per common share for the six month
period ended June 30, 1996 and 1995 were presented based on the weighted average
Common Stock outstanding "with Preferred Stock treated as if converted into
Common Stock at the beginning of each period presented."
Note 3. Inventories
- --------------------
Inventories are carried at the lower of cost (on a first in, first out
basis) or estimated net realizable value. Inventories are summarized as
follows:
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
------------- -----------------
<S> <C> <C>
Raw Materials $ 608,188 $ 458,282
Work in Process 1,477,680 1,315,102
Finished Goods 1,386,640 997,980
---------- ----------
Total Inventories $3,472,508 $2,771,364
================= ========== ==========
</TABLE>
6
<PAGE>
Note 4. Consolidated Statement of Stockholders' Equity
- -------------------------------------------------------
(in thousands, except share data)
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit Total
---------- ------ ---------- ------------ -------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 11,503,606 $12 $44,705 ($18,011) $26,706
Shares of common stock issued upon exercise of stock options 86,367 - 35 - 35
Exercise of warrants 13,405 - 5 - 5
Compensation related to issuance of stock options - - 39 - 39
Net income - - - 63 63
Balance at March 31, 1996 11,603,378 $12 $44,784 ($17,948) $26,848
Shares of common stock issued upon exercise of stock options 89,743 - 103 - 103
Exercise of warrants 58,452 - 36 - 36
Compensation related to issuance of stock options - - 39 - 39
Net income - - - 92 92
BALANCE AT JUNE 30, 1996 11,751,573 $12 $44,962 ($17,856) $27,118
======================== ========== === ======= =========== =======
</TABLE>
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
GENERAL
TranSwitch Corporation was organized and commenced operations in April
1988. Since its incorporation, the Company has designed, sourced and marketed
high-speed VLSI devices for public and private network applications worldwide.
The Company shipped its first product in 1990 and has increased its volume of
shipments over the last six years. The Company's product development efforts
have been focused on devices that meet the needs of public and private network
telecommunications and data communications equipment providers and are compliant
with established standards in these markets, including asynchronous, SONET/SDH
and the emerging ATM standard. The Company's products are generally
incorporated into OEM's products at the design stage, which often requires
significant expenditures by the Company well in advance of substantial orders
from the customer.
The Company believes that period to period comparisons of its financial
results are not necessarily meaningful and should not be relied upon as an
indication of future performance. In addition, the Company's results of
operations may fluctuate from period to period in the future.
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1996 AND 1995
REVENUE
The Company derives its revenues principally from product sales. The
Company also derives revenues from sponsorship of development programs, non-
recurring engineering contracts for research and development programs, and
product licenses and royalties. Total revenues for the quarter ended June 30,
1996 was $6.5 million, representing a 61% increase over the $4.0 million
recorded in the prior year period. Total revenues increased by 77% to $12.8
million for the six month period ended June 30, 1996 as compared to $7.2 million
for the corresponding period in 1995. The Company's product mix reflects an
increase in product revenues compared to research and development contracts and
license and royalty fees in the quarter and for six months periods ended June
30, 1996 compared to the corresponding periods in 1995. Product revenues
increased 67% to $6.3 million for the quarter ended June 30, 1996 compared to
$3.8 million for the corresponding quarter in 1995. In the six month period
ended June 30, 1996 product revenue increased 93% to $12.6 million compared to
$6.5 million in the corresponding period in 1995. The increase in volume was
primarily a result of increase in the demand for the Company's ATM and SONET
product lines.
GROSS PROFIT
Gross profit increased 65% to $3.7 million for the quarter ended June 30,
1996 from $2.2
8
<PAGE>
million in the corresponding period of the prior year; in the six month period
ended June 30, 1996 the gross profit increased 80% to $7.2 million compared to
$4.0 million in the same period a year ago. The increase was primarily the
result of higher volume sales of the Company's products. Gross margin increased
to 57.0% for the quarter ended June 30, 1996 as compared to 55.6% for the
quarter ended March 31, 1995; and for the six month period ended June 30, 1996
the gross margin was 56.0% compared to 55.2% in the same period a year ago. The
gross margin for the periods ended June 30, 1996 includes the amortization
expense associated with the Texas Instrument (TI) repurchase agreement that was
consummated in December, 1995.
RESEARCH AND DEVELOPMENT
Research and development expenses declined to 31.7% of total revenues for
the quarter ended June 3, 1996 from 38.5% of total revenues for the quarter
ended June 30, 1995; for the six month period ended June 30, 1996 research and
development expenses declined to 31.8% of total revenues compared to 40.7% in
the same period a year ago although total spending increased 29.5% to $2.0
million for the quarter ended June 30, 1996 compared to $1.5 million for the
quarter ended June 30, 1995. Total spending increased 39% to $4.1 million for
six months ended June 30, 1996 compared to $2.9 million in the same period a
year ago. The increase was the result of the Company's continued investment in
research and development activities.
MARKETING AND SALES
Marketing and sales expenses declined to 20.4% of total revenues for the
quarter ended June 30, 1996 compared to 23.1% for the quarter ended June 30,
1995, and declined to 19.3% of total revenues for six months ended June 30, 1995
compared to 26.3% a year ago although total spending increased 38.8% to $1.3
million for the quarter ended June 30, 1996 compared to $0.9 million for the
quarter ended June 30, 1995 and for six months ended June 30, 1996 total
spending increased 29.9% to $2.5 million compared to $1.9 million for the same
period a year ago. The increase in spending was the result of the increase in
total revenues and the Company's continued investment in its marketing and sales
infrastructure.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the quarter ended June 30, 1996
increased to $505,000 from $294,000 for the same quarter in the prior year, and
as a percentage of total revenues increased to 8.0% for the quarter ended June
30, 1996 compared to 7.3% for the quarter ended June 30, 1995. In the six
months ended June 30, 1996 expenses increased to $914,000 from $591,000, but
declined as a percentage of total revenues to 7.1% for the six months ended June
30, 1996 compared to 8.2% in the same period a year ago. The increase in
expense is primarily the result of the increase in administrative activities in
a public company environment in 1996 compared to the period in 1995 when the
Company was not yet public and to support the higher sales volumes.
9
<PAGE>
INTEREST INCOME, NET
Interest income, net of interest expense, was $189,000 in the quarter
ended June 30, 1996 compared to $22,000 in the corresponding period in 1995 and
for six months ended June 30, 1996 was $422,000 compared to $24,000 in the prior
year period. Total interest earned on investments for the quarter of $222,700
was offset by $33,700 of the interest expense and for six months the total
interest was $489,856 which was offset by $66,500 of the interest expense
incurred as a result of the TI repurchase agreement.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations and met its capital requirements
since it was incorporated in 1988 primarily through private placements of
preferred stock and borrowings from a working capital line and equipment
financing from Silicon Valley Bank and cash generated from its operations. The
Company completed an initial public offering on June 19, 1995 and July 13, 1995
and raised a total of $24.0 million, including $3.1 million from the exercise of
an over-allotment option of 375,000 shares granted to the Underwriters of the
initial public offering and exercised on July 10, 1995.
In the first six months of 1996, the Company used $533,000 of cash in its
operating activities including an increase in the accounts receivables and
inventory levels of $1.5 million. Capital expenditures in this period were
$1,519,000 including purchases of computer equipment, tooling, software
acquisitions and product licenses.
At June 30, 1996, the Company had cash and cash equivalents and short
term investments of approximately $15.4 million. The Company believes its
existing cash and the cash flow from operations will be sufficient to satisfy
the Company's cash needs for at least the next 12 months. However, there can be
no assurance that events in the future will not require the Company to seek
additional capital sooner or, if so required, that such capital will be
available on terms favorable or acceptable to the Company, if at all.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's quarterly and annual operating results are affected by a wide
variety of factors that could materially adversely affect revenues and
profitability, including: competitive pressures on selling prices; the time and
cancellation of customers orders; the timing and provision of pricing
protections and returns from certain distributors; availability of foundry
capacity and raw materials; fluctuations in yields; changes in product mix; the
Company's ability to introduce new products and technologies on a timely basis;
introduction of products and technologies by the Company's competitors; market
acceptance of the Company's and its competitors' products; the level of orders
received which can be shipped in a quarter; the amount and timing of recognition
of non-
10
<PAGE>
recurring engineering revenue; the timing of investments in research and
development, including tooling expenses associated with product development and
pre-production; and whether the Company's customers buy directly from the
Company or a distributor. Due to the absence of substantial noncancellable
backlog, the Company typically plans its production and inventory levels based
on internal forecasts of customer demand, which are highly unpredictable and can
fluctuate substantially. Because the Company is continuing to increase its
operating expenses for personnel and new product development and for inventory
in anticipation of sales levels, operating results would be adversely affected
if increased sales are not achieved. As a result of the foregoing and other
factors, the Company may experience material fluctuations in future operating
results on a quarterly or annual basis which could materially and adversely
affect its business, financial condition, operating results and stock price.
11
<PAGE>
Item 4. Submission of Matters to a Vote of Security-Holders.
On May 9, 1996 the Company held its Annual Meeting of Stockholders, at
which the stockholders of the Company voted on the following matters:
1. The election of a Board of Directors for the ensuing year. The number of
votes cast for the re-election of each of the directors listed below was as
follows:
<TABLE>
<CAPTION>
Nominees Number of Shares
======== ================
For Withhold Broker
--- -------- ------
Authority Non-Votes
--------- ---------
<S> <C> <C> <C>
Dr. Santanu Das 8,901,209 18,050 1,500
Dr. Steward S.
Flaschen 8,901,209 18,050 1,500
Dr. Charles Lee 8,911,209 8,050 1,500
John C. McDonald 8,909,048 10,211 1,500
Dr. Ljubomir Micic 8,896,517 22,742 1,500
James J. Millar 8,909,009 10,250 1,500
Dr. Albert E. Paladino 8,909,009 10,250 1,500
</TABLE>
2. An amendment to the Company's 1995 Stock Plan to increase the number of
shares of Common Stock authorized to be issued thereunder by an additional
950,000 shares, for a total of 1,569,019 shares, was approved by the
following vote:
<TABLE>
<CAPTION>
Number of Shares
================
<S> <C>
For 6,883,803
Against 606,914
Abstain 1,430,042
Broker Non-Votes 0
</TABLE>
12
<PAGE>
3. The Selection of KPMG Pear Marwick LLP as auditors for the fiscal year
ending December 31, 1996 was ratified by the following vote:
<TABLE>
<CAPTION>
Number of Shares
================
<S> <C>
For 8,894,123
Against 10,288
Abstain 16,348
Broker Non-Votes 0
</TABLE>
13
<PAGE>
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security-Holders
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 11, Statement re: computation of per share earnings.
Exhibit 27, Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the second quarter ended June
30, 1996.
14
<PAGE>
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.
TranSwitch Corporation
(Registrant)
Date: August 6, 1996 /s/ Dr. Santanu Das
--------------------------
Dr. Santanu Das
President, Chief Executive Officer
(Principal Executive Officer)
/s/ Michael F. Stauff
--------------------------
Michael F. Stauff
Senior Vice President and Chief
Financial Officer and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
15
<PAGE>
Exhibit 11:
TranSwitch Corporation
Computation of Earnings per Share (1)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Primary (2)
Weighted average number of common shares outstanding 11,726 9,143 11,648 8,683
Common stock issuable with respect to common equivalents
for stock options and warrants 558 - 588 -
Conversion of common equivalents issued during the twelve
month period prior to the initial public offering (3) - 61 - 122
--------- ------- -------- --------
Weighted average common shares and equivalents 12,284 9,204 12,236 8,805
Net income (loss) $ 92 $ (508) $ 155 $ (1,415)
--------- ------- -------- --------
Pro forma income (loss) per share $ 0.01 $ (0.06) $ 0.01 $ (0.16)
================================= ========= ======= ======== ========
</TABLE>
- --------
(1) This exhibit should be read in connection with "Stockholders' Equity and
Loss Per Share" in Note 2 of the notes to the Consolidated Financial
Statements.
(2) Fully diluted per share amounts are the same as primary.
(3) Pursuant to the requirements of the Securities and Exchange Commission,
Common Stock and common stock equivalents issued during the twelve month
period prior to the Company's initial public offering have been included in
the calculation (using the treasury stock method and the price of $10.00 per
share) as if they were outstanding for all periods presented whether they
are anti-dilutive or not.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> APR-01-1996 JAN-01-1996
<PERIOD-END> JUN-30-1996 JUN-30-1996
<CASH> 8,111 8,111
<SECURITIES> 7,266 7,266
<RECEIVABLES> 6,351 6,351
<ALLOWANCES> 138 138
<INVENTORY> 3,473 3,473
<CURRENT-ASSETS> 25,485 25,485
<PP&E> 5,947 5,947
<DEPRECIATION> 3,214 3,214
<TOTAL-ASSETS> 32,783 32,783
<CURRENT-LIABILITIES> 4,251 4,251
<BONDS> 0 0
12 12
0 0
<COMMON> 0 0
<OTHER-SE> 27,106 27,106
<TOTAL-LIABILITY-AND-EQUITY> 32,783 32,783
<SALES> 6,299 12,569
<TOTAL-REVENUES> 6,486 12,845
<CGS> 2,787 5,641
<TOTAL-COSTS> 3,796 7,471
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 34 67
<INCOME-PRETAX> 92 155
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 92 155
<EPS-PRIMARY> .01 .01
<EPS-DILUTED> .01 .01
</TABLE>
