<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 March 31, 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 April 30, 1996:
11,688,869
Page 1 of 13
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TranSwitch Corporation
INDEX
For the first quarter ended March 31, 1996
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1996
and December 31, 1995 3
Consolidated Statements of Operations for the
Three Months Ended March 31, 1996 and 1995 4
Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 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 6. Exhibits and Reports on Form 8-K 11
Signatures 13
Page 2 of 13
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Part I FINANCIAL INFORMATION
Item 1. Financial Statements
TranSwitch Corporation
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(in thousands, except per share data) March 31, December 31,
Assets 1996 1995
------ ---- ----
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 9,046 $ 13,630
Short term investments 8,282 3,620
Accounts receivable, net 4,781 5,380
Inventories, net 2,602 2,771
Prepaid expenses and other current assets 437 499
------------- -------------
Total current assets 25,148 25,900
Property and equipment, net 2,661 2,245
Product licenses 4,489 4,525
------------- -------------
Total Assets $ 32,298 $ 32,670
============ ============= =============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 1,756 $ 2,021
Accrued liabilities 1,479 1,594
Product license fee payable, current portion 570 474
------------- -------------
Total current liabilities 3,805 4,089
Product license fee payable, less current portion 1,645 1,875
Stockholders' equity:
Common Stock, $.001 par value; authorized 25,000,000 shares;
issued and outstanding 11,503,606 shares December 31, 1995,
11,603,378 shares March 31, 1996 12 12
Additional paid in capital 44,784 44,705
Accumulated deficit (17,948) (18,011)
------------- -------------
Total stockholders' equity 26,848 26,706
------------- -------------
Total Liabilities and Stockholders' Equity $ 32,298 $ 32,670
========================================== ============= =============
</TABLE>
Page 3 of 13
<PAGE>
TranSwitch Corporation
Consolidated Statements of Operations
Unaudited
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1996 1995
---- ----
<S> <C> <C>
Revenues:
Product revenues, net $ 6,270 $ 2,741
Research and development contracts 89 353
License and royalty fees - 125
----------- -----------
Total Revenues 6,359 3,219
Cost of Revenues:
Cost of products sold 2,840 1,262
Cost of research and development contracts 14 194
----------- -----------
Total Cost of Revenues 2,854 1,456
----------- -----------
Gross Profit 3,505 1,763
Operating Expenses:
Research and development 2,082 1,398
Marketing and sales 1,185 975
General and administrative 408 298
----------- -----------
Total Operating Expenses 3,675 2,671
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Operating Loss (170) (908)
Interest Income, net 233 2
----------- -----------
Net Income (Loss) $ 63 $ (906)
=========== ===========
Pro-forma Net Income (Loss) per Common Share $ 0.01 $ (0.11)
=========== ===========
Pro-forma Weighted Average Number of Common Shares
Outstanding and Equivalents 12,109 8,425
=========== ===========
</TABLE>
Page 4 of 13
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TranSwitch Corporation
Consolidated Statements of Cash Flows
Unaudited
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 63 $ (906)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 256 201
Stock compensation expense 39 9
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 599 (161)
Decrease (increase) in prepaids and other current assets 62 (25)
Decrease (increase) in inventories 169 (132)
(Decrease) increase in accounts payable (264) 393
(Decrease) in accrued liabilities (20) (502)
----------- -----------
Total adjustments 841 (218)
----------- -----------
Net cash provided by (used in) operatiing activities 904 (1,124)
Cash flows from investing activities:
Capital expenditures (636) (308)
Purchase of short term investments (5,634) -
Proceeds from sale of short term investments 972 -
----------- -----------
Net cash used in investing activities (5,298) (308)
Cash flows from financing activities:
Proceeds from the exercise of stock options and warrants 40 71
Repayment of long term liabilities (230) (14)
----------- -----------
Net cash provided by (used in) financing activities (190) 57
Increase (decrease) in cash and cash equivalents (4,584) (1,375)
----------- -----------
Cash and cash equivalents at beginning of year 13,630 3,352
Cash and cash equivalents at end of period $ 9,046 $ 1,977
=========== ===========
Supplemental disclosure of cash flows information:
Cash paid for interest $ 34 $ 23
</TABLE>
Page 5 of 13
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the first quarter ended March 31, 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 three month
periods ending March 31, 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>
March 31, 1996 December 31, 1995
-------------- -----------------
<S> <C> <C>
Raw Materials $ 471,981 $ 458,282
Work in Process 1,233,995 1,315,102
Finished Goods 895,567 997,980
---------- ----------
Total Inventories $2,601,543 $2,771,364
================= ========== ==========
</TABLE>
Page 6 of 13
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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
========================= ========== === ======= ======== =======
</TABLE>
Page 7 of 13
<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 month periods ended March 31, 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 March 31,
1996 was $6.4 million, representing a 98% increase over the $3.2 million
recorded in the prior year period. There was an increase in the mix of product
revenues vs. research and development contracts and license and royalty fees in
the quarter ended March 31, 1996 compared to the corresponding quarter in 1995.
Product revenues increased 129% to $6.3 million for the quarter ended March 31,
1996 compared to $2.7 million for the corresponding quarter in 1995. The
increase in volume was primarily a result of increase in the demand for its ATM
and SONET product lines.
Gross Profit
Gross profit increased 99% to $3.5 million for the quarter ended March 31,
1996 from $1.8 million in the corresponding period of the prior year. The
increase was primarily the result of higher volume sales of the Company's
products. Gross margin increased to 55.1% for the quarter ended March 31, 1996
as compared to 54.8% for the quarter ended March 31, 1995, but decreased when
Page 8 of 13
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compared to the 61.3% gross margin for the quarter ended December 31, 1995. The
decrease in gross margin when compared to the prior quarter was principally the
result of amortization expense associated with the Texas Instrument (TI)
repurchase agreement that was consummated in December, 1995 and to a lesser
extent to changes in product mix. Without the costs associated with the TI
agreement the gross margin for the first quarter of 1996 would have been 58.1%.
Research and Development
Research and development expenses declined to 32.7% of total revenues for
the quarter ended March 31, 1996 from 43.4% of total revenues for the quarter
ended March 31, 1995, although total spending increased 48.9% to $2.1 million
for the quarter ended March 31, 1996 compared to $1.4 million for the quarter
ended March 31, 1995. 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 18.6% of total revenues for the
quarter ended March 31, 1996 compared to 30.3% for the quarter ended March 31,
1995, although total spending increased 21.5% to $1.2 million for the quarter
ended March 31, 1996 compared to $1.0 million for the quarter ended March 31,
1995. 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 increased to $408,000 from $298,000 for
the same quarter in the prior year, but declined as a percentage of total
revenues to 6.4% for the quarter ended March 31, 1996 compared to 9.2% for the
quarter ended March 31, 1995. The increase in expense is primarily the result
of the increase in administrative activities to support the higher sales
volumes.
Interest Income, net
Interest income, net of interest expense, was $232,700 in the quarter ended
March 31, 1996 compared to $2,000 in the corresponding period in 1995. Total
interest earned on investments for the quarter of $267,100 was offset by $34,400
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 cash generated from its
operations, private placements of
Page 9 of 13
<PAGE>
preferred stock and borrowings from a working capital line and equipment
financing from Silicon Valley Bank. 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 three months of 1996, the Company generated $769,000 of cash
from operating activities including a decrease in the accounts receivables and
inventory levels. Capital expenditures in this period were $636,000 including
purchases of computer equipment, tooling and software acquisitions.
At March 31, 1996, the Company had cash and cash equivalents and short
term investments of approximately $17.3 million. The Company believes that the
cash flow from operations and its available credit lines 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-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.
Page 10 of 13
<PAGE>
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 11, Statement re: computation of per share earnings.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the first quarter ended
March 31, 1996.
Page 11 of 13
<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: May , 1995 /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)
Page 12 of 13
<PAGE>
Exhibit 11:
TranSwitch Corporation
Computation of Earnings per Share (1)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1996 1995
<S> <C> <C>
Primary (2)
Weighted average number of common shares outstanding (5) 11,571 1,215
Common Stock issuable with respect to common
equivalents for stock options and warrants 538 -
Conversion of common equivalents issued during the twelve
month period prior to the initial public offering (3) - 184
------------ ------------
Weighted average common shares and equivalents 12,109 1,399
Conversion of preferred stock to Common Stock (4) - 7,010
Conversion of preferred stock warrants to Common Stock (4) - 16
------------ ------------
Pro forma weighted average Common Stock and equivalents 12,109 8,425
Net income (loss) $ 63 $ (906)
------------ ------------
Net income (loss) per share $ 0.01 $ (0.65)
Pro forma income (loss) per share $ 0.01 $ (0.11)
================================= ============ ============
</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.
(4) Pro forma weighted average Common Stock and equivalents assumes conversion
of preferred stock warrants and Preferred Stock to Common Stock.
(5) The March 31, 1996 weighted average common shares outstanding include the
preferred stock converted to common stock as having converted into common
stock at the beginning of each period presented.
Page 13 of 13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 9,046
<SECURITIES> 8,282
<RECEIVABLES> 4,862
<ALLOWANCES> 81
<INVENTORY> 2,602
<CURRENT-ASSETS> 25,148
<PP&E> 5,601
<DEPRECIATION> 2,939
<TOTAL-ASSETS> 32,298
<CURRENT-LIABILITIES> 3,805
<BONDS> 0
0
0
<COMMON> 12
<OTHER-SE> 26,835
<TOTAL-LIABILITY-AND-EQUITY> 32,298
<SALES> 6,270
<TOTAL-REVENUES> 6,359
<CGS> 2,854
<TOTAL-COSTS> 3,675
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 34
<INCOME-PRETAX> 63
<INCOME-TAX> 0
<INCOME-CONTINUING> 63
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 63
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
