<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 SEPTEMBER 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 OCTOBER 31, 1996:
11,869,512 SHARES.
Page 1 of 14
<PAGE>
TRANSWITCH CORPORATION
INDEX
For the third quarter ended September 30, 1996
<TABLE>
<CAPTION>
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C>
Consolidated Balance Sheets as of September 30, 1996
and December 31, 1995 3
Consolidated Statements of Operations for the Three and
Nine Months Ended September 30, 1996 and 1995 4
Consolidated Statements of Cash Flows for the nine
Months Ended September 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
</TABLE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 14
Page 2 of 14
<PAGE>
Part I FINANCIAL INFORMATION
Item 1. Financial Statements
TranSwitch Corporation
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(in thousands, except per share data) September 30, December 31,
Assets 1996 1995
------ ---- ----
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,646 $ 13,630
Short term investments 7,584 3,620
Accounts receivable, net 2,947 5,380
Inventories, net 4,136 2,771
Prepaid expenses and other current assets 366 499
-------- --------
Total current assets 21,679 25,900
Property and equipment, net 3,079 2,245
Product licenses, net 4,393 4,525
-------- --------
Total Assets $ 29,151 $ 32,670
============== ======== ========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 2,128 $ 2,021
Accrued liabilities 1,208 1,594
Product license fee payable, current portion 905 474
-------- --------
Total current liabilities 4,241 4,089
Product license fee payable, less current portion 1,184 1,875
Stockholders' equity:
Common Stock, $.001 par value; authorized 25,000,000 shares;
issued and outstanding 11,503,606 shares December 31, 1995,
11,827,574 shares September 30, 1996 12 12
Additional paid in capital 45,050 44,705
Accumulated deficit (21,336) (18,011)
-------- --------
Total stockholders' equity 23,726 26,706
-------- --------
Total Liabilities and Stockholders' Equity $ 29,151 $ 32,670
========================================== ======== ========
</TABLE>
Page 3 of 14
<PAGE>
TranSwitch Corporation
Consolidated Statements of Operations
Unaudited
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Product revenues, net $ 2,477 $ 4,352 $ 15,046 $ 10,875
Research and development contracts 138 192 414 783
License and royalty fees -- -- -- 125
-------- -------- -------- --------
Total Revenues 2,615 4,544 15,460 11,783
Cost of Revenues:
Cost of products sold 2,071 1,853 7,649 4,765
Cost of research and development contracts -- 105 63 431
-------- -------- -------- --------
Total Cost of Revenues 2,071 1,958 7,712 5,196
-------- -------- -------- --------
Gross Profit 544 2,586 7,748 6,587
Operating Expenses:
Research and development 2,251 1,900 6,334 4,844
Marketing and sales 1,433 1,051 3,907 2,955
General and administrative 506 409 1,420 1,001
-------- -------- -------- --------
Total Operating Expenses 4,190 3,360 11,661 8,800
-------- -------- -------- --------
Operating Loss (3,646) (774) (3,913) (2,213)
Interest Income, net 166 305 588 329
-------- -------- -------- --------
Net Income (Loss) $ (3,480) $ (469) $ (3,325) $ (1,884)
======== ======== ======== ========
Pro-forma Net Income (Loss) per Common Share $ (0.29) $ (0.04) $ (0.28) $ (0.20)
======== ======== ======== ========
Pro-forma Weighted Average Number of Common Shares
Outstanding and Equivalents 11,820 11,245 11,705 9,625
======== ======== ======== ========
</TABLE>
Page 4 of 14
<PAGE>
TranSwitch Corporation
Consolidated Statements of Cash Flows
Unaudited
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (3,325) $ (1,884)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 837 598
Stock compensation expense 117 61
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 2,433 (1,858)
Decrease (increase) in prepaids and other current assets 133 (268)
(Increase) in inventories (1,365) (750)
Increase in accounts payable 107 966
Increase (decrease) in accrued liabilities 45 (352)
------- ------
Total adjustments 2,307 (1,603)
------- -------
Net cash (used in) operating activities (1,018) (3,487)
Cash flows from investing activities:
Capital expenditures and cost of product licenses (2,230) (924)
Purchase of short term investments (17,233) (5,846)
Proceeds from sale of short term investments 13,269 --
------- ------
Net cash used in investing activities (6,194) (6,770)
Cash flows from financing activities:
Proceeds from the issuance of common stock -- 20,329
Proceeds from the exercise of stock options and warrants 228 2,978
Repayment of notes payable to banks -- (1,191)
------- ------
Net cash provided by (used in) financing activities 228 22,116
(Decrease) increase in cash and cash equivalents (6,984) 11,859
-------- -------
Cash and cash equivalents at beginning of year 13,630 3,352
Cash and cash equivalents at end of period $ 6,646 $ 15,211
======== ========
Supplemental disclosure of cash flows information:
Cash paid for interest $ 107 $ 46
</TABLE>
Page 5 of 14
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the third quarter ended September 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 nine month
period ended September 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>
September 30, 1996 December 31, 1995
------------------ -----------------
<S> <C> <C>
Raw Materials $ 295,485 $ 458,282
Work in Process 1,936,036 1,315,102
Finished Goods 1,904,124 997,980
---------- ----------
Total Inventories $4,135,645 $2,771,364
================= ========== ==========
</TABLE>
Page 6 of 14
<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
Shares of common stock issued upon exercise of stock options 54,506 - 37 - 37
Exercise of warrants 21,495 - 12 - 12
Compensation related to issuance of stock options - - 39 - 39
Net income - - - (3,480) (3,480)
BALANCE AT SEPTEMBER 30, 1996 11,827,574 $12 $45,050 ($21,336) $23,726
============================= ========== ===== ======= ========= =======
</TABLE>
Page 7 of 14
<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 NINE MONTH PERIODS ENDED SEPTEMBER 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 September
30, 1996 were $2.6 million, representing a decline from the $4.5 million
recorded in the prior year comparable period. The decline in revenue in the
quarter is primarily attributable to the reduction of inventory levels by its
telecom and datacom customers. Total revenues increased by 31% to $15.5 million
for the nine month period ended September 30, 1996 as compared to $11.8 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 this quarter and for comparable nine months ended
September 30, 1996 compared to the corresponding periods in 1995. The Company
expects this trend to continue, although there can be no assurance that it will.
Product revenues declined to $2.5 million for the quarter ended September 30,
1996 compared to $4.4 million for the corresponding quarter in September, 1995
due primarily to the inventory corrections described above. In the nine month
period ended September 30, 1996 product revenue increased 38% to $15.0 million
compared to $10.9 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 over a portion of the period.
Page 8 of 14
<PAGE>
GROSS PROFIT
Gross profit declined to $0.5 million for the quarter ended September 30,
1996 from $2.6 million in the corresponding period of the prior year; in the
nine month period ended September 30, 1996 the gross profit increased 18% to
$7.7 million compared to $6.6 million in the same period a year ago. The
decrease in gross profit for the third quarter of 1996 was primarily the result
of reduced demand for products by certain of the Company's telecom and datacom
customers who are undergoing inventory corrections. The increase for the nine
months ending September 30 1996 was primarily the result of higher volume sales
of the Company's products over a portion of that period. Gross margin decreased
to 20.8% for the quarter ended September 30, 1996 as compared to 57.0% for the
quarter ended September 30, 1995; and for the nine month period ended September
30, 1996 the gross margin was 50.0% compared to 55.9% in the same period a year
ago. The decline in the gross margin for the three and nine month periods ended
September 30, 1996 includes a charge of $660,000 to cost of products sold to
adjust the inventory for those items for which there was a significant drop in
demand in the quarter and to recognize poor yields for certain products.
RESEARCH AND DEVELOPMENT
Research and development expenses were 86.0% of total revenues for the
quarter ended September 30, 1996 as compared to 41.8% of total revenues for the
quarter ended September 30, 1995; for the nine month periods ended September 30,
1996 and 1995 research and development expenses were relatively stable at 41% of
total revenues, although total spending increased 18.5% to $2.3 million for the
quarter ended September 30, 1996 compared to $1.9 million for the quarter ended
September 30, 1995. Total spending increased 31.3% to $6.3 million for nine
months ended September 30, 1996 compared to $4.8 million in the same period a
year ago. The increases were the result of the Company's continued investment
in research and development activities.
MARKETING AND SALES
Marketing and sales expenses were 54.8% of total revenues for the quarter
ended September 30, 1996 compared to 23.1% for the quarter ended September 30,
1995, and 25.3% of total revenues for the nine months ended September 30, 1996
compared to 25.0% for the comparable period of a year ago, the marketing and
sales expenses increased 36.3% to $1.4 million for the quarter ended September
30, 1996 compared to $1.1 million for the quarter ended September 30, 1995 and
for nine months ended September 30, 1996 total spending increased 32.2% to $3.9
million compared to $3.0 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. The increase as
a percentage of total revenue in the quarter is attributed to the decline in the
revenue level in the quarter.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the quarter ended September 30,
1996 increased to
Page 9 of 14
<PAGE>
$506,000 from $409,000 for the same quarter in the prior year, and as a
percentage of total revenues increased to 19.3% for the quarter ended September
30, 1996 compared to 9.0% for the quarter ended September 30, 1995. In the nine
months ended September 30, 1996 general and administrative expenses increased to
$1.4 million from $1.0 million in the prior year comparable period, and as a
percentage of total revenues were 9.2% for the nine months ended September 30,
1996 compared to 8.5% in the same period a year ago. The increase in expense in
actual dollars is 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 public for only a portion of this period and also to support the
higher sales volumes. The increase as a percentage of total revenue in the
quarter is attributed to the decline in the revenue level in the quarter.
INTEREST INCOME, NET
Interest income, net of interest expense, was $166,000 in the quarter
ended September 30, 1996 compared to $306,000 in the corresponding period in
1995, and for the nine months ended September 30, 1996 was $588,000 compared to
$329,000 in the prior year period. Total interest earned on investments for
the third quarter, 1996 of $204,429 was offset by $38,576 of interest expense
incurred as a result of the TI repurchase agreement and for the nine months the
total interest was $694,285 which was offset by $106,744 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 and through 1995 primarily through private
placements of preferred stock, 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 nine months of 1996, the Company used $1.0 million of cash in
its operating activities, the result of a net loss of $3.3 million. Capital
expenditures in this period were $2.2 million including purchases of computer
equipment, tooling, software acquisitions and product licenses. During the
first nine months of 1996, accounts receivable and inventory, net have decreased
$1.1 million.
At September 30, 1996, the Company had cash and cash equivalents and short
term investments of approximately $14.2 million. The Company believes its
existing cash and the cash flow from operations if any, 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
Page 10 of 14
<PAGE>
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 future 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 11 of 14
<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.
Exhibit 27, Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the third quarter ended September
30, 1996.
Page 12 of 14
<PAGE>
Exhibit 11:
TranSwitch Corporation
Computation of Earnings per Share (1)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Primary (2)
Weighted average number of common shares outstanding 11,820 11,245 11,705 9,537
Common stock issuable with respect to common equivalents
for stock options and warrants -- -- -- --
Conversion of common equivalents issued during the twelve
month period prior to the initial public offering (3) -- -- -- 88
-------- ------- ------- -------
Weighted average common shares and equivalents 11,820 11,245 11,705 9,625
Net income (loss) $ (3,480) $ (469) $(3,325) $(1,884)
-------- ------- ------- -------
Pro forma net income (loss) per share $ (0.29) $ (0.04) $ (0.28) $ (0.20)
======== ======= ======= =======
</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.
Page 13 of 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: November 11, 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)
Page 14 of 14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JUL-01-1996 JAN-01-1996
<PERIOD-END> SEP-30-1996 SEP-30-1996
<CASH> 6,646 6,646
<SECURITIES> 7,584 7,584
<RECEIVABLES> 3,035 3,035
<ALLOWANCES> 88 88
<INVENTORY> 4,136 4,136
<CURRENT-ASSETS> 21,679 21,679
<PP&E> 6,598 6,598
<DEPRECIATION> 3,519 3,519
<TOTAL-ASSETS> 29,151 29,151
<CURRENT-LIABILITIES> 4,241 4,241
<BONDS> 0 0
0 0
0 0
<COMMON> 12 12
<OTHER-SE> 23,714 23,714
<TOTAL-LIABILITY-AND-EQUITY> 29,151 29,151
<SALES> 2,477 15,046
<TOTAL-REVENUES> 2,615 15,460
<CGS> 2,071 7,712
<TOTAL-COSTS> 4,190 11,661
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 39 106
<INCOME-PRETAX> (3,480) (3,325)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,480) (3,325)
<EPS-PRIMARY> (.29) (.28)
<EPS-DILUTED> (.29) (.28)
</TABLE>
