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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 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
(I.R.S. EMPLOYER IDENTIFICATION
(STATE OF INCORPORATION) NUMBER)
8 PROGRESS DRIVESHELTON, 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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of Common Stock on February 28,
1997, as reported on the Nasdaq National Market, was approximately
$60,956,972. Shares of Common Stock held by each executive officer and
director and by each person who to the Company's knowledge owns 5% or more of
the outstanding voting stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
COMMON STOCK, PAR VALUE $.001 PER SHARE, OUTSTANDING AT FEBRUARY 28, 1997:
12,025,074
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following document are incorporated by reference in Part III of
this Form 10-K Report: (1) Proxy Statement for Registrant's 1997 Annual
Meeting of Shareholders--Items 10, 11, 12 and 13.
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<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
TranSwitch Corporation, a Delaware corporation established in April 1988
("TranSwitch" or the "Company"), designs, develops, markets and supports
highly integrated digital and mixed-signal semiconductor solutions for the
telecommunications and data communications markets. The Company's customers
are the original equipment manufacturers (OEM's) who serve four communications
market segments; worldwide public network infrastructure, including cable
television (CATV), internet infrastructure, corporate wide area networks (WAN)
and local area networks (LAN).
TranSwitch's VLSI devices are compliant with asynchronous (called PDH in
Europe), synchronous optical network (SONET, SDH in Europe) and asynchronous
transfer mode (ATM) data and telecommunications transmission standards and are
designed to transparently integrate these standards. The Company's mixed-
signal and digital design capability, in conjunction with its
telecommunications systems expertise, enables the Company to determine and
implement optimal combinations of design elements for desired analog and
digital functionality. The Company believes that this approach allows its
customers to achieve faster time-to-market and to introduce systems that offer
greater functionality, improved performance, lower power dissipation and
greater reliability relative to competing discrete solutions, while reducing
system size and cost.
Statements in this Form 10-K which are not historical facts, so-called
"forward looking statements," are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. Investors are
cautioned that all forward looking statements involve risks and uncertainties,
including those detailed in the Company's filings with the Securities and
Exchange Commission. See also "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Certain Factors That May Affect
Future Results."
PRODUCTS AND APPLICATIONS
TranSwitch supplies high-speed (broadband) VLSI devices to systems vendors
of public network equipment, such as multiplexers and DACS (Digital Access
Cross-connect Systems); ISP's (Internet Service Providers) and CATV systems
equipment; and LAN and WAN equipment, such as routers, bridges and hubs. The
Company's core competencies as a systems innovation leader include an in-depth
understanding of relevant asynchronous/PDH, SONET/SDH and ATM standards and
associated nuances, the ability to design complex mixed-signal high-speed VLSI
devices, and the capability to verify the design against customers'
requirements and standards' requirements through analysis, simulation and
certification.
The Company believes that its "chip-set" approach and broad product coverage
in all three product lines position it as a "one-stop source" for broadband
communications VLSI products. Systems vendors can mix and match TranSwitch's
VLSI devices to optimally configure a specific system. The Company's three
sets of products can be grouped synergistically, providing seamless
integration of asynchronous/PDH, SONET/SDH and ATM applications.
The prices for the Company's products typically range from $15 to $300
depending on volume, complexity and functionality.
Asynchronous/PDH Products
TranSwitch's asynchronous products provide high bandwidth connections and
can be used to configure transmission products for use in the public network,
to ease the management burden of public networks and to enable CPE (Customer
Premises Equipment) products like hubs and routers used in LANs and WANs to
access the public network for communication with similar products in other
locations.
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The Company's asynchronous VLSI products include devices that provide
physical interfaces for DS-series and E-series standards. This product line
also includes multiplexers, devices that combine multiple low speed lines to
form a higher speed line, and demultiplexers, which perform the reverse
function. In addition, the Company offers framers, devices that identify the
starting point of a defined bit stream, permitting a system to recognize other
bits.
SONET/SDH Products
In the SONET/SDH area, the Company offers devices that provide a direct
interface for fiber optic transmission in North America, Europe and the Far
East. The Company's "mappers" bridge the interconnection between SONET/SDH
equipment and asynchronous equipment, allowing DS-series and E-series
transmission lines to be connected with SONET/SDH lines. Asynchronous signals
can therefore be transported across the SONET/SDH network transparently.
TranSwitch's SONET/SDH products are used in Add/Drop multiplexers (ADM),
DACS and other telecommunications and data communications equipment. The
SONET/SDH products also have applications in CPE products such as routers and
LAN-switches, as well as in microwave transmission products. CATV vendors are
now using optical fiber technology based on SONET/SDH standards to upgrade
their infrastructure and provide new value-added services.
ATM Products
In the ATM area, TranSwitch offers devices that convert data communications
packets (such as those on LANs and WANs) into the cell format needed for
transmission on ATM networks, along with devices that provide ATM interfaces
to both asynchronous and SONET/SDH transmission links. The Company believes
that its CUBIT device will be a cornerstone of its ATM product line, because
CUBIT is designed to provide a low-to-medium (under 1 Gbps) capacity ATM
switch based on the Company's CellBus architecture.
There can be no assurance that the Company's CUBIT device will achieve
market acceptance or significant customer demand. The success of this product
is subject to risks and uncertainties, including without limitation risks and
uncertainties associated with challenges to the Company's intellectual
property rights by third parties, the manufacture of these products by third
party VLSI fabrication facilities, the willingness of OEM's to incorporate the
Company's CUBIT device into their products, risks associated with competition
and competitive pricing if competitors introduce competing products, and risks
associated with technological advances by others which could render the
Company's CUBIT product obsolete.
TECHNOLOGY
The Company believes that one of its core competencies is the
telecommunications and data communications knowledge and expertise of its key
executives and its engineering organization. The group possesses substantial
telecommunications and data communications design experience, as well as
extensive knowledge of relevant standards. A key aspect of "know-how" includes
not only a thorough understanding of the actual written standards promulgated,
but also an awareness of and appreciation for the nuances associated with
these standards necessary for assuring that device designs are fully
compliant. The Company's telecommunications and data communications experience
and participation in the standards development and promulgation process
provide it with significant advantages in designing semiconductor devices
meeting the evolving needs of its customers.
Complementing the Company's accumulated communications industry expertise is
its VLSI design competence. The Company's VLSI design staff has extensive
experience in designing analog and mixed-signal devices, which require a
sophisticated understanding of complex technology, as well as the specifics of
manufacturing processes and their resulting impact on device performance.
TranSwitch has also developed a large number of VLSI blocks that operate under
the demanding requirements of the telecommunications and data
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communications industry. These blocks have been designed to be merged using
standard programming languages such as VHDL and M (a C-like language) to
create new devices that meet expanding customer requirements.
TranSwitch has also developed a proprietary toolset called the "Test Bench,"
which facilitates on-time development of products and ensures that products
meet customer and standards requirements. TranSwitch has also developed a
large library of reusable portable cells. In addition to standard logic
functions, the cell library consists of a large number of analog cells such as
clock-recovery functions, phase-locked-loops, and equalizers. The library also
includes key asynchronous, SONET/SDH and ATM functions. The Company is
investing significant resources in developing an architecture which allows
increased programmability. Programmability provides accelerated time-to-market
by decoupling hardware and software verification. In addition, programmability
permits standards upgrades and fixes to be effected more easily. Further,
customers can have the flexibility to tailor their products to their specific
requirements.
SALES AND MARKETING
TranSwitch's sales and marketing strategy is to focus on worldwide suppliers
of high-speed communications and communications-oriented equipment. These
customers are easily identifiable and include telecommunications, data
communications, CPE, computing, process control and defense equipment vendors.
The Company has established a direct sales force and a worldwide network of
independent distributors and sales representatives for marketing its products.
TranSwitch's direct sales force, technical support personnel and key
engineers work together in teams to support key customers. TranSwitch has
located technical support capabilities in key geographical locations,
including Europe and the Far East. These field sales engineers and independent
distributors and sales representatives support the rest of the Company's
customers. TranSwitch maintains a technical support team at the Company's
headquarters as a backup to the field sales engineers.
TranSwitch has established foreign distributors and sales representative
relationships in Australia, Benelux, Brazil, Canada, Finland, France, Germany,
Israel, Italy, Japan, Korea, People's Republic of China, Spain, Sweden,
Switzerland, Taiwan and the United Kingdom. The Company also sells its
products through a domestic distributor and a network of domestic sales
representatives. The Company has regional sales/technical support capabilities
in Boston, Ma., Sunnyvale, Ca., Morristown, N.J., Great Falls, Va., Brussels,
Belgium, Taipei, Taiwan, as well as in its headquarters facility in Shelton,
Connecticut.
CUSTOMERS
Since shipping its first product in 1990, the Company has sold its products
and services to over 300 customers. The Company's customers include: public
network systems suppliers that incorporate the Company's products into
telecommunications systems; LAN and WAN equipment suppliers; ISP's;
communications test and performance measurement equipment suppliers; and
government, university and private laboratories that use the Company's
products in advanced public network and LAN/WAN developments.
In 1996 ECI Telecom Ltd, Insight Electronics, Inc. and Tellabs Operations,
Inc. accounted for 21.8%, 15.6% and 14.4% of total revenues, respectively. In
1995 Tellabs Operations, Inc. and Insight Electronics, Inc. accounted for
16.8% and 15.9% of total revenues, respectively. In 1994, ECI Telecom Ltd.
accounted for approximately 16.3% of total revenues. No other customer
accounted for 10% or more of revenues during 1996, 1995, and 1994. Export
revenues represented 45.9%, 38.0%, and 47.0% of total revenues in 1996, 1995
and 1994, respectively.
RESEARCH AND DEVELOPMENT
The Company believes that the continued introduction of new products in its
target markets is essential to its growth. As of December 31, 1996 the Company
had 46 full-time employees engaged in research and
3
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development efforts. The Company currently anticipates only slight increases
in its research and development staffing in 1997. Expenditures for research
and development in 1996, 1995 and 1994 were approximately $8.9 million, $6.7
million and $5.6 million, respectively.
Currently, the Company's major development programs include new SONET/SDH
products, new ATM products and new Asynchronous/PDH products which are
targeted at end markets in the public network transmission structure, the
Internet infrastructure, the corporate wide area network (WAN) and in local
area networks (LAN).
PATENTS AND LICENSES
The Company has 23 patents issued and five patent applications pending in
the U.S. Of the 23 issued patents, one is co-owned by ECI Telecom Ltd. Of the
five pending applications, one is co-owned by Siemens Telecommunications
Systems Ltd. The Company has three patents issued and 13 patent applications
pending in Canada. The Company has six patents issued in Taiwan, with one
patent being co-owned by Siemens Telecommunications Systems Ltd. The Company
has three patents issued in the People's Republic of China. The Company has 12
patent applications pending in selected countries in the European Patent
Office (EPO), and one patent issued in France, Germany, and the U.K. In
addition, the Company has seven patent applications pending in Japan and five
patent applications pending in Israel and two patents in Israel. Further, the
Company has three patent applications pending under the Patent Cooperation
Treaty (PCT) with the possibility of filing five PCT applications in the EPO,
Canada, Japan and Israel and one of the applications in Canada, the EPO and
Japan.
The Company also has been granted registration of five trade or service
marks in the U.S., and it has six more U.S. applications for trademarks
awaiting approval.
The Company's ability to compete depends upon its ability to protect its
proprietary information through various means, including ownership of patents,
copyrights, mask work registrations and trademarks. While no intellectual
property right of the Company has been invalidated or declared unenforceable,
there can be no assurance that such rights will be upheld in the future. The
Company believes that, in view of the rapid pace of technological change in
the semiconductor industry, the technical experience and creative skills of
its engineers and other personnel are the most important factors in
determining the Company's future technological success.
TranSwitch has entered into various license agreements for product or
technology exchange. The purpose of these licenses has, in general, been to
obtain second sources for standard products or to convey or receive rights to
certain proprietary or patented cores, cells or other technology. In March
1995, the Company entered into an agreement with StrataCom, Inc., whereby the
Company obtained the right to use intellectual property covered by two
StrataCom, Inc. patents. The Company entered into an OEM relationship with IBM
Corporation in 1994, whereby it was granted the right to purchase and resell
two ATM line interface products.
The Company sells its products into the telecommunications industry, an
industry whose products are subject to various standards which are agreed upon
by recognized industry standards committees. Where applicable, the Company
designs its product to be in conformity with these standards. The Company has
received and expects to continue to receive, in the normal course of business,
communications from third parties stating that if certain of TranSwitch's
products meet a particular standard, these products may infringe one or more
patents of that third party. After a review of the circumstances of each
communication, the Company in its discretion and upon the advice of counsel
has taken or may take in the future one of the following courses of action;
the Company may negotiate payment for a license under the patent or patents
that may be infringed, the Company may use its technology and/or patents to
negotiate a cross-license with the third party or the Company may decline to
obtain a license on the basis that it does not infringe the claimant's patent
or patents, or that such patents are not valid, or other basis. There can be
no assurance that licenses for any of these patents will be available to the
Company on reasonable terms, or that the Company would prevail in any
litigation seeking damages or expenses from the Company or to enjoin the
Company from selling its products on the basis of any of the alleged
infringements.
4
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MANUFACTURING AND QUALITY
TranSwitch's manufacturing objective is to produce reliable, high quality
devices cost-competitively. To this end, the Company seeks to differentiate
itself by maximizing the reliability and quality of its products, achieving
on-time delivery of its products to its customers, minimizing capital and
other resource requirements by subcontracting capital-intensive manufacturing
and achieving a gross margin compatible with the value of its products.
All of the Company's VLSI devices are manufactured by established
independent foundries. This approach permits the Company to focus on its
design strengths, minimize fixed costs and capital expenditures and access
diverse manufacturing technologies. Currently, the Company utilizes four
foundries, Texas Instruments Incorporated (TI), Symbios Logic Inc., LSI Logic
Corporation in the U.S. and Taiwan Semiconductor Manufacturing Company Limited
(TSMC) in Taiwan to process its wafers. Foundries are required to have
qualified and reliable processes, high-frequency test capability, ISO-9002
qualification and quick turnaround prototyping. The selection of a foundry for
a specific device is based on availability of the required process technology
and the foundry's capability to support the particular set of tools used by
TranSwitch for that device. Currently, TI manufactures all of the Company's
BiCMOS devices. The Company entered into a foundry agreement with TI in
December, 1995, pursuant to which the Company received access to TI's process
technology through 2000. The Company also has an agreement with TSMC that
guarantees the Company a minimum capacity level for four years, in return the
Company has agreed to pay for unutilized commitment below an agreed minimum
level.
There are certain significant risks associated with the Company's reliance
on outside foundries, including the lack of assured wafer supply and control
over delivery schedules, the unavailability of or delays in obtaining access
to key process technologies and limited control over quality assurance,
manufacturing yields and production costs. In addition, the manufacture of
integrated circuits is a highly complex and technologically demanding process.
Although the Company has undertaken to diversify its sources of semiconductor
device supply and works closely with all its foundries to minimize the
likelihood of reduced manufacturing yields, the Company's foundries have from
time to time experienced lower than anticipated manufacturing yields,
particularly in connection with the introduction of new products and the
installation and start up of new process technologies. Such reduced yields
have at times adversely affected the Company's operating results. There can be
no assurance that the Company's foundries will not experience lower than
expected manufacturing yields in the future, which could materially and
adversely affect the Company's business, financial condition and operating
results.
COMPETITION
The semiconductor industry is intensely competitive and is characterized by
price erosion, rapid technological change, shortage in fabrication capacity,
heightened international competition in many markets, and unforeseen
manufacturing yield problems. The telecommunications and data communications
industries, which are the primary target markets for TranSwitch, are also
becoming intensely competitive because of deregulation and heightened
international competition. This heightened competition is likely to result in
pricing pressures on the Company's products, potentially affecting its
margins.
TranSwitch believes that the principal bases of competition in the
semiconductor industry include product definition, product design, test
capabilities, reliability, functionality, time-to-market, reputation and
price. The Company believes that it competes favorably with respect to these
factors. TranSwitch also believes that its competitive strengths include the
distribution channels it has established, the Company's workforce of highly
experienced digital and mixed-signal circuit designers with strong systems
architecture skills, and its proprietary design and development tools,
including its proprietary simulations and testing software and its library of
analog and digital blocks and cells.
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The ability of the Company to compete successfully in the rapidly evolving
area of high performance integrated circuit technology depends on factors both
within and outside its control, including success in designing and
subcontracting the manufacture of new products that implement new
technologies, protection of Company products by effective utilization of
intellectual property laws, product quality, reliability, price, efficiency of
production, the pace at which customers incorporate the Company's integrated
circuits into their products, success of competitors' products and general
economic conditions. Although the Company believes that it competes favorably
on the basis of functionality, reliability and price, there is no assurance
that the Company will be able to compete successfully in the future.
The Company's competition consists of suppliers of similar products from the
United States as well as other countries, including internal competition from
semiconductor divisions of vertically integrated companies like Lucent
Technologies, IBM Corporation, NEC Corporation and Siemens Corporation. New
entrants are also likely to attempt to obtain a share of the market for the
Company's current and future products. The Company's principal competitors in
the asynchronous/PDH and SONET/SDH areas are AMCC Corporation, AT&T, Brooktree
Corporation, Crystal Semiconductor, Inc., Dallas Semiconductor Corp., EXAR
Corporation, Integrated Telecom Technology, Inc., National Semiconductor
Corporation, PMC/Sierra Corporation, Texas Instruments, Inc., Triquint
Semiconductor Inc., Vitesse Semiconductor Corp. and VLSI Technology. In
addition, there are a number of ASIC vendors, including AMI Industries, Inc.,
LSI Logic Corp., and SGS-Thompson Microelectronics, Inc. who compete with the
Company by supplying customer-specific products to OEMs. In the ATM area, the
Company's principal competitors include all the vendors mentioned above and
AMD Corporation and IDT. Numerous other domestic and international vendors
have announced plans to enter this market.
BACKLOG
As of December 31, 1996, the Company's backlog was $4.9 million, as compared
to $8.1 million as of December 31, 1995. Backlog represents firm orders
anticipated to be shipped within the next 12 months. The Company's business
and, to a large extent, that of the entire semiconductor industry is
characterized by short-term order and shipment schedules. Since orders
constituting the Company's current backlog are subject to changes in delivery
schedules or to cancellation at the option of the purchaser without
significant penalty, backlog is not necessarily an indication of future
revenue.
EMPLOYEES
As of December 31, 1996, the Company had 99 full time employees. The
Company's employees are not represented by any collective bargaining agreement
and the Company has never experienced a work stoppage. The Company believes
that its employee relationships are good.
ITEM 2. PROPERTIES
FACILITIES
The Company's headquarters are located in a suburban office park in Shelton,
Connecticut where it leases approximately 40,000 square feet in a two story
office building. Most product development and all final inspection and
shipping, marketing and administration activities are located at this
facility. Approximately 75% of the existing space is fully utilized and the
Company believes its current space to be adequate to meet its needs for the
next 12 months, although there can be no assurance that the space will be
adequate or that the Company will be able to obtain additional space on
commercially reasonable terms, if necessary. The lease is due to expire in
March, 1999. The Company also leases approximately 1,100 square feet in
Research Triangle Park, North Carolina where additional product development
efforts take place. The Company leases a 1,100 square foot sales and support
facility in Sunnyvale, California. The Company also maintains a small sales
office in Brussels, Belgium. In February, 1996 the Company opened a new leased
facility of 2,000 square feet Taipei, Taiwan.
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ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matters were submitted to a vote of security holders during the three
months ended December 31, 1996.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded on the Nasdaq National Market
tier of The Nasdaq Stock Market under the symbol "TXCC" since its initial
public offering on June 14, 1995. The following table sets forth, for the
periods indicated, the range of quarterly high and low bid information for the
Company's Common Stock as reported on the Nasdaq National Market:
<TABLE>
<CAPTION>
HIGH BID LOW BID
-------- -------
<S> <C> <C>
1995
Second Quarter (June 14, 1995 to June 30, 1995)............. $ 9.63 $ 8.94
Third Quarter............................................... 14.25 9.13
Fourth Quarter.............................................. 14.00 8.63
1996
First Quarter............................................... $13.75 $ 7.88
Second Quarter.............................................. 21.63 12.44
Third Quarter............................................... 13.25 5.50
Fourth Quarter.............................................. 7.00 3.63
</TABLE>
As of February 28, 1997, there were approximately 315 holders of record of
the Company's Common Stock and at least 3,000 beneficial holders, based on
information obtained from the Company's transfer agent.
The Company has never paid cash dividends on its Common Stock. The Company
currently intends to retain earnings, if any, for use in its business and does
not anticipate paying any cash dividend in the foreseeable future. In
addition, the Company's loan agreement prohibits the payment of cash dividends
without prior bank approval. Any future declaration and payment of dividends
will be subject to the discretion of the Company's Board of Directors, will be
subject to applicable law and will depend upon the Company's results of
operations, earnings, financial condition, contractual limitations, cash
requirements, future prospects and other factors deemed relevant by the
Company's Board of Directors.
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ITEM 6. SELECTED FINANCIAL DATA
The following table includes selected consolidated financial data for each
of the five years ended December 31, 1996 which are derived from and more
fully described in the consolidated financial statements and notes included in
this report at Item 14.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1996 1995 1994 1993 1992
-------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPER-
ATIONS DATA:
Total revenues................. $ 19,650 17,466 12,101 12,018 7,792
Gross profit................... 5,844 10.071 6,185 6,006 4,293
Net loss (4)................... (10,077) ( 1,773) (3,937) (1,094) (128)
Net loss per share
(1)(2)(3)(4).................. $ (.86) (.18) (.48)
Shares used in calculation of
net loss per share............ 11,751 10,062 8,178
<CAPTION>
DECEMBER 31,
---------------------------------------------
1996 1995 1994 1993 1992
-------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DA-
TA:
Cash, cash equivalents and
short term investments........ $ 12,688 17,250 3,352 6,702 1,276
Working capital................ 14,650 21,811 3,656 7,634 2,239
Total assets................... 23,311 32,670 8,969 10,994 4,713
Note payable to bank........... 0 0 1,191 128 285
Mandatorily redeemable convert-
ible preferred stock.......... 0 0 20,252 20.211 13.070
Stockholders' equity (defi-
cit).......................... $ 17,299 26,706 (15,324) (11,445) (10,347)
</TABLE>
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(1) See Note 1 of Notes to Consolidated Financial Statements included in this
Report at Item 14.
(2) Gives effect to the mandatory conversion of all outstanding Preferred
Stock into 7,009,742 shares of Common Stock on completion of the Company's
initial public offering in June, 1995. 1994 per share amount based on pro-
forma weighted average shares outstanding for 1994.
(3)Net loss per share amounts prior to 1994 are not meaningful.
(4) Refer to Item 7. "Managements Discussion and Analysis of Financial
Condition and Results of Operations" for discussion of Net loss.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and the notes thereto included in this Report at Item 14.
OVERVIEW
TranSwitch Corporation commenced its operations in April, 1988. Since
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 seven 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/PDH, SONET/SDH and the emerging ATM standards. The Company's
products are generally incorporated into original equipment manufacturer's
(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 has not been profitable, on a yearly basis, since its inception.
As of December 31, 1996, the Company had an accumulated deficit of $28.1
million and there can be no assurance the Company will achieve profitability
in the future. The Company's operating results are subject to quarterly and
annual fluctuations as a result of a wide variety of factors that could
materially and adversely affect profitability, including but not limited to
competitive pressures on selling prices, availability and cost of
semiconductor foundry capacity and materials, fluctuations in yields, changes
in product mix, the Company's ability to introduce new products and
technologies on a timely basis, market acceptance of products of both the
Company and its customers, scheduling of orders by its customers, decisions by
customers to withhold or delay orders, fluctuations of inventory cycles in the
industry, foreign sales and currency fluctuations, the level of orders that
are received and can be shipped in a quarter and whether the Company's
customers buy through a distributor or directly from the Company. See "Certain
Factors that May Affect Future Results."
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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, consolidated
statements of operations data as a percentage of total revenues:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Revenues:
Product revenues, net.............................. 97.9% 94.3% 84.4%
Research and development contracts................. 2.1 5.0 14.6
License and royalty fees........................... 0.0 .7 1.0
------- ------- -------
Total revenues................................... 100.0 100.0 100.0
Cost of revenues:
Cost of products sold.............................. 54.0 39.6 41.0
Write down of product license...................... 15.9
Cost of research and development contracts......... 0.3 2.8 7.9
------- ------- -------
Total cost of revenues........................... 70.2 42.4 48.9
Gross profit......................................... 29.7 57.6 51.1
Operating expenses:
Research and development........................... 45.4 38.1 45.9
Marketing and sales................................ 27.8 24.8 27.6
General and administrative......................... 11.3 8.4 11.2
------- ------- -------
Total operating expenses......................... 84.5 71.3 84.7
Operating loss....................................... (54.7) (13.6) (33.6)
Interest income, net............................... 3.5 3.5 1.1
------- ------- -------
Loss before provision for taxes...................... (51.3) (10.2) (32.5)
Provision for taxes................................ -- -- --
------- ------- -------
Net loss............................................. (51.3)% (10.2)% (32.5)%
======= ======= =======
</TABLE>
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Revenues. The Company derives its revenues principally from product
revenues. The Company also derives revenues from sponsorship of development
programs, non-recurring engineering contracts for research and development
programs, and product licenses and royalties. The Company intends to continue
to emphasize product revenues and expects that contract revenues will remain
relatively stable or decrease as a percentage of total revenues, although
there can be no assurances that this will be so. The Company's ability to
generate contract revenues and license and royalty fees will depend on a
number of factors, including without limitation the fact that the Company has
shifted its strategic focus to product sales, and is expending less effort on
generating contract revenues and license fees. The Company generated no
license and royalty fees in 1996 and at this time does not anticipate any in
1997. In 1996 the Company reported revenues of $19.7 million, an increase of
13.0% over 1995. The increase was primarily in product revenues as this was
the Company's focus. In 1995 the Company reported revenues of $17.5 million,
an increase of 44.3% over 1994. This increase was primarily due to the
continued increase of product revenues which grew to 94.3% of total revenues
in 1995.
The Company recognizes product revenues upon shipment to customers. Sales to
certain distributors are made under distributor agreements which provide
certain price protection and return and allowance rights to the distributor.
Revenues from research and development contracts are recognized as the related
costs are incurred over the term of the agreement. The Company recognizes
license and royalty fees when its obligations under the license and royalty
agreements are fulfilled.
11
<PAGE>
In 1996 ECI Telecom, Ltd., Insight Electronics, Inc. and Tellabs Operations,
Inc. accounted for 21.8%, 15.6% and 14.4% of total revenues, respectively. In
1995 Tellabs Operations, Inc. and Insight Electronics, Inc. accounted for
16.8% and 15.9% of total revenues, respectively. In 1994, ECI Telecom, Ltd.
accounted for approximately 16.3% of total revenues. No other customer
accounted for more than 10.0% of the Company's total revenues during these
periods.
Foreign sales, primarily consisting of sales to customers in Europe and the
Far East, constituted 45.9%, 38.0% and 47.0% of total revenues in 1996, 1995
and 1994, respectively. All sales are denominated in U.S. dollars. The Company
anticipates that international revenues will continue to represent a
significant portion of total revenues, particularly as the Company opens
direct sales offices in foreign countries. The Company maintains a sales
support office in Europe and one in the Far East which opened in February,
1996. A significant portion of the Company's total revenues may be subject to
risks associated with foreign sales, including unexpected changes in legal and
regulatory requirements and policy changes affecting the telecommunications
and data communications markets, changes in tariffs, exchange rates and other
barriers, political and economic instability, and potentially adverse tax
consequences.
Product revenues, net. In 1996 product revenues grew 16.8% to $19.2 million
from $16.5 million in 1995. This growth was primarily driven by increased
sales of SONET/SDH products. In 1995 product revenues grew 61.2% to $16.5
million from $10.2 million in 1994. Revenues from ATM products as a portion of
total product revenues grew significantly both in absolute dollars and as a
percentage of total revenues during 1995 as systems manufacturers designed
products incorporating the new ATM standard and the Company introduced new ATM
VLSI devices.
Contract revenues and license and royalty fees. Contract revenues include
revenues from customers who sponsor development programs for specific products
and for specific research and development projects. In 1996 contract revenues
at 2.1% of total revenues declined to $414 thousand or a decline of 53% from
$877 thousand in 1995 as the Company continued its focus on product revenue.
Contract revenues and licenses and royalty fees declined 46.9% to $1.0 million
or 5.7% of total revenues in 1995 versus 1994, as the Company reduced its
efforts to obtain new contracts and license fees and shifted its strategic
focus to product sales. Although the Company expects to continue to promote
customer sponsorships, it anticipates that overall contract revenues will
remain relatively stable or decrease as a percentage of total revenues in the
future. The Company currently does not anticipate any royalty or license fees
in 1997. In December 1995, the Company repurchased from Texas Instruments its
license agreement ( the "TI License") which was the sole source of license and
royalty fees in 1995 and 1994.
Gross profit. Gross profit is derived both from product sales and contract
and license and royalty fees. Cost of products sold includes the costs of
production of finished semiconductors produced by third-party vendors, direct
and indirect costs associated with procurement, testing and other quality
assurance procedures followed by the Company, and the amortization of product
licenses. Cost of research and development contracts associated with non-
recurring engineering contracts are recognized as incurred. Gross margin in
1996 decreased to 29.7% of total revenues due primarily to the write down of
the TI License in the fourth quarter of 1996. The TI License was written down
to its net realizable value as the incremental revenue which was originally
forecast did not materialize. Gross margin increased in 1995 to 57.6% of total
revenues from 51.1% in 1994 as product sales, which carry a higher margin,
grew as a percentage of total revenues.
In 1996 product gross profit decreased to $5.8 million, as the Company
recognized $3.1 million of the cost of repurchasing the TI License in cost of
sales. In the fourth quarter of 1996 the Company reviewed the drop in product
revenue that occurred in the third and fourth quarters and as a result
determined that the originally forecasted revenues were not going to
materialize. Also in the cost of sales is the write down of approximately $600
thousand of ATM product inventory which was primarily related to those
specific products for which there was a significant decline in revenue the
last two quarters of the year. In 1995, product gross profit increased to $9.6
million from $5.3 million in 1994, which represents a 58.0% product gross
margin. The increase was
12
<PAGE>
attributable to the decline in unit costs of products as additional volume
milestones were achieved and the reduction in costs of products that were
moved to, and produced at, more efficient foundries. The Company has step
pricing arrangements with its major semiconductor foundry vendors, whereby as
the Company's volume of purchases from the vendor meets agreed-upon
milestones, the unit cost to the Company declines.
Research and development. In 1996, research and development expenditures
were $8.9 million, or 45.3% of total revenues, an increase of 34.0% over 1995.
The increase was primarily attributable to increases in staff and in non-
recurring engineering charges related to the introduction of new products
during the year. In 1995, research and development expense grew at a slower
rate than revenue, resulting in expenditures in 1995 of $6.7 million, a 20.0%
increase over 1994, but a decline to 38.1% as a percentage of total revenues.
The Company believes that the continued introduction of new products is
essential to its competitiveness and is committed to continued investment in
research and development. The Company believes that its research and
development expenses will increase in absolute dollars in the future as it
continues to add products to all of its product lines.
Marketing and sales. In 1996 marketing and sales expense increased 26.0% to
$5.4 million or 27.8% of total revenues, from $4.3 million, or 24.8% of total
revenues in 1995. During the year, the Company added new staff in this area,
including a new Vice President of Sales, opened a new sales office in
Sunnyvale, California and Taipei, Taiwan, and expanded its manufacturing
representative coverage. In 1995, marketing and sales expense increased 29.2%
to $4.3 million from $3.3 million in 1994, but declined as a percentage of
total revenues to 24.8% as the Company experienced higher volume of revenue,
but did not proportionately increase resources. The Company anticipates that
it will continue to incur higher marketing and sales expenses in absolute
dollars as it expands its marketing and sales efforts.
General and administrative. In 1996 general and administrative expenses
increased 51.4% to $2.2 million or 11.2% of total revenues from $1.5 million
or 8.0% of total revenues in 1995. Included in the 1996 expense is $195
thousand of non-cash expense related to the adoption of a new accounting
pronouncement, SFAS#123, requiring the recognition of compensation expense
using a fair value approach to non-employee stock option grants, and the
remaining increase is attributed to the legal and investor relations expenses
required by the Company's being public for the full year in 1996 versus 1995,
in which the Company was a public company for approximately six months. In
1995, general and administrative expenses increased 8.5% to $1.5 million from
$1.4 million in 1994, or 8.4% of total revenues. The increase in absolute
dollars was attributable to the Company's decision to continue building its
administrative organization to support its anticipated growth. The decrease as
a percentage of total revenues was due to the Company's increased revenue
growth.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations and met its capital requirements
since incorporation in 1988 primarily through cash generated from its
operations, private placements of preferred stock and borrowings under a
working capital line, and equipment financing from Silicon Valley Bank. In
addition, the Company received equipment financing from Comdisco, Inc. and
Dominion Ventures, Inc. The Company completed an initial public offering by
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.
The Company's principal sources of liquidity as of December 31, 1996
consisted of $12.7 million in cash and short-term investments and $4.0 million
available under the Company's working capital line of credit and equipment
line of credit provided by Silicon Valley Bank. As of December 31, 1996 the
Company had no outstanding balance under these lines of credit.
In 1996, the Company used $2.2 million in cash for operating activities, the
result of a loss of $10.1 million, offset by non-cash charges of $2.2 million
for depreciation and amortization and $3.1 million write-down of the TI
License, a decrease of $2.5 million in accounts receivables and the remainder
in other working capital items. In 1995 the Company used $4.9 million of cash
for operating activities to finance an increase of $3.1 million in accounts
receivable, a result of the growth in total revenues, as well as a $1.4
million increase in inventories to
13
<PAGE>
support the growth in shipments of products, while it sustained a loss of $1.8
million. The increase of $0.7 million in accounts payable was primarily due to
the increase in inventory. In 1994, the Company used $3.2 million of cash for
operating activities as it sustained a $3.9 million loss. In 1994, the Company
increased its inventory by $1.0 million in order to respond to its customers'
requirements, offset in part by an increase in other current liabilities of
$0.7 million.
In 1996 and 1995, the Company paid fees of $0.8 million and $2.1 million
primarily to Texas Instruments for the repurchase of a license agreement.
Capital expenditures, including purchases of computer equipment, test
equipment, furniture and fixtures and software, were $1.9 million in 1996 and
$1.3 million in each of 1995 and 1994. In 1994 these expenditures were funded
through existing cash and a fixed asset line provided by Silicon Valley Bank.
In 1996 and 1995 they were funded from existing cash and by funds generated in
the initial public offering.
Net cash provided by financing activities consists primarily of proceeds
from the exercise of stock options of $0.3, $0.3 and $0.1 million in 1996,
1995 and 1994 respectively, and the proceeds from the issuance of common stock
for $23.2 million in 1995. In June 1995, the Company retired all outstanding
Notes Payable totaling $1.1 million to Silicon Valley Bank.
The Company believes that its existing cash resources and cash generated
from operations will fund necessary purchases of capital equipment and provide
adequate working capital through the end of 1997. 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.
Inflation has not had a significant impact on the Company's operations.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
From time to time, information provided by the Company, statements made by
its employees or information included in its filings with the Securities and
Exchange Commission (including this Form 10-K) may contain statements which
are not historical facts, so-called "forward-looking statements," which
involve risks and uncertainties. In particular, statements in "Item 1.
Business" relating to product introductions and the availability of third
party VLSI fabrication facilities, in "Item 2. Properties" concerning the
adequacy of the Company's current facility space, and in "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations"
relating to anticipated levels of contract revenues and license and royalty
fees, the anticipated level of foreign sales, and the availability of capital
for working capital and for the purchase of capital equipment, may be forward-
looking statements. The Company's actual future results may differ
significantly from those stated in any forward-looking statements. Factors
that may cause such differences include, but are not limited to, the factors
discussed below. Each of these factors, and others, are discussed from time to
time in the Company's filings with the Securities and Exchange Commission.
The Company's future results are subject to substantial risks and
uncertainties. The Company currently relies on four third-party VLSI
fabrication foundries to manufacture its products. There are significant risks
associated with this reliance on outside foundries, including the lack of
assured wafer supply and control over delivery schedules, the unavailability
of or delays in obtaining access to key process technologies and limited
control over quality assurance, manufacturing yields and production costs,
among others. Also, the Company relies on certain intellectual property
protections to preserve its intellectual property rights. Any invalidation of
the Company's intellectual property rights or lengthy and expensive defense of
those rights could have a material adverse affect on the Company. The
development of new technologies, commercialization of those technologies into
products, and market acceptance and customer demand for those products is
critical to the Company's success. Successful product development and
introduction depends upon a number of factors, including accurate new product
definition, timely completion and introduction of new product designs,
availability of foundry capacity, achievement of manufacturing yields, market
acceptance of the Company's products and its customers'
14
<PAGE>
products, and the ability to accurately specify and certify the conformance of
its products to applicable standards and to develop its products in
conformance with customer standards. The Company believes that factors
affecting its ability to achieve market acceptance of its products include
product performance, time to market, price and other factors. The
semiconductor industry is intensely competitive and is characterized by price
erosion, rapid technological change, shortage in fabrication capacity,
heightened international competition, and unforeseen manufacturing yield
problems. The telecommunications and data communications markets, which are
the Company's primary target markets, are also becoming intensely competitive.
Certain current and potential competitors of the Company are more established,
benefit from greater market recognition, and have substantially greater
financial, development, manufacturing and marketing resources than the
Company. Competitive pressures or other factors could result in significant
price erosion that could have a material adverse effect on the Company's
results of operations. The Company derives a significant portion of its total
revenues from foreign sales. Foreign sales are subject to significant risks,
including unexpected changes in legal and regulatory requirements and policy
changes affecting the Company's markets, changes in tariffs, exchange rates
and other barriers, political and economic instability, difficulties in
accounts receivable collection, difficulties in managing distributors and
representatives, difficulties in staffing and managing foreign operations,
difficulties in protecting the Company's intellectual property and potentially
adverse tax consequences. Historically, a relatively small number of customers
have accounted for a significant portion of the Company's total revenues. Loss
of, or a decrease in orders from any one or more of the Company's customers
could have a material adverse effect on the Company's results of operations.
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 timing
and cancellation of customer 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 that 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 from 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 increasing 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.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is contained in the financial
statements and schedules set forth in Item 14 (a) of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has been no change of accountants nor any disagreements with
accountants on any matter of accounting principles or practices or financial
statement disclosure required to be reported under this Item.
15
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated herein by reference to
the information in the sections entitled "Election of Directors," "Occupations
of Directors and Executive Officers," and "Compensation and Other Information
Concerning Directors and Officers" contained in the Company's definitive proxy
statement to be filed with the Securities and Exchange Commission not later
than 120 days after the close of the fiscal year ended December 31, 1996.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to
the information in the section entitled "Compensation and Other Information
Concerning Directors and Officers" contained in the Company's definitive proxy
statement to be filed with the Securities and Exchange Commission not later
than 120 days after the close of the fiscal year ended December 31, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference to
the information in the section entitled "Management and Principal
Stockholders" contained in the Company's definitive proxy statement to be
filed with the Securities and Exchange Commission not later than 120 days
after the close of the fiscal year ended December 31, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
16
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Consolidated Financial Statements
For the following financial information included herein, see Index on page
F-1:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1996 and December 31, 1995
Consolidated Statements of Operations for the years ended December 31,
1996, December 31, 1995 and December 31, 1994.
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1996, December 31, 1995 and December 31, 1994.
Consolidated Statements of Cash Flows for the years ended December 31,
1996, December 31, 1995 and December 31, 1994.
Notes to Consolidated Financial Statements
2. Financial Statement Schedule
The following financial statement schedule is included herein:
Schedule II Valuation and Qualifying Accounts
All other schedules are not submitted because they are not applicable,
not required or because the information is included in the Consolidated
Financial Statements or Notes to Consolidated Financial Statements.
3. Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.2* Amended and Restated Certificate of Incorporation of the Company
3.3* By-laws, as amended and restated, of the Company
4.1* Specimen certificate representing the Common Stock
4.2* Fourth Amended and Restated Registration Rights Agreement
4.3* Warrants issued to Dominion Ventures, Inc.
4.4* Form of Series C Warrant
4.5* Form of Series D Warrant
10.1* 1989 Stock Option Plan
10.2** Second Amended and Restated 1995 Stock Plan
10.3* 1995 Employee Stock Purchase Plan
10.4* 1995 Non-Employee Director Stock Option Plan
10.5* Form of Incentive Stock Option Agreement for 1989 Stock Option Plan
10.6* Form of Non-Qualified Stock Option Agreement for 1989 Stock Option
Plan
10.7*** Form of Incentive Stock Option Agreement under the 1995 Stock Plan
of the Company
10.8*** Form of Non-Qualified Stock Option Agreement under the 1995 Stock
Plan of the Company
10.9*** 1995 Employee Stock Purchase Plan Enrollment/Authorization Form of
the Company
10.10*** Form of Non-Qualified Stock Option Agreement under the 1995 Non-
Employee Director Stock Option Plan of the Company
#10.11* Agreement with Texas Instruments Incorporated
10.12* Authorized Distributor Agreement with Insight Electronics, Inc.
10.13* Authorized Distributor Agreement with Paltek Corporation
10.14* Development Agreement with Connecticut Innovations, Incorporated
#10.15* Master Integrated Circuit Foundry Agreement with NCR Corporation
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.16* Master Lease Agreement with Dominion Ventures, Inc.
10.17* Master Lease with Comdisco, Inc.
10.18* Lease Agreement, as amended, with Robert D. Scinto
10.19* Amended and Restated Promissory Note (Working Capital Line of
Credit) with Silicon Valley Bank
10.20* Promissory Note (Equipment Line of Credit) with Silicon Valley Bank
10.21* Commitment Letter, as amended, from Silicon Valley Bank
10.22* Security Agreement with Silicon Valley Bank
10.23* Development and License Agreement with Adaptive Corporation
10.24* OEM Agreement for Acquisition of Triquint Semiconductor Products
10.25* OEM Agreement for Acquisition of IBM Products with International
Business Machines Corporation
#10.26* License Agreement with StrataCom, Inc.
#10.27**** Agreement with Texas Instruments Incorporated
#10.28**** Integrated Circuit Foundry Agreement with Texas Instruments
Incorporated
11.1** Computation of Earnings Per Share
21.1** Subsidiary of the Company
23.1** Consent of KPMG Peat Marwick LLP
27.1** Financial Data Schedule
</TABLE>
- --------
# Confidential treatment obtained as to certain portions.
* Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (File No. 33-91694) and incorporated herein by reference.
** Filed herewith.
*** Previously filed as an exhibit to the Company's Registration Statement on
Form S-8 (File No. 33-94324) and incorporated herein by reference.
**** Previously filed as an exhibit to the Company's Annual Report of Form 10-
K for the fiscal year ended December 31, 1995
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the fourth quarter
ended December 31, 1996.
(c) Exhibits
The Company hereby files as exhibits to this Form 10-K those exhibits listed
in Item 14 (a) (3) above.
(d) Financial Statement Schedule
The Company hereby files as a financial statement schedule to this Form 10-
K, the financial statement schedule listed in Item 14(a) (2) above.
18
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE COMPANY HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
March 25, 1997
TranSwitch Corporation
/s/ Dr. Santanu Das
By: _________________________________
Name: Dr. Santanu Das
Title: President and Chief
Executive Officer
POWER OF ATTORNEY AND SIGNATURES
WE, THE UNDERSIGNED OFFICERS AND DIRECTORS OF TRANSWITCH CORPORATION, HEREBY
SEVERALLY CONSTITUTE AND APPOINT SANTANU DAS AND MICHAEL MCCOY, AND EACH OF
THEM SINGLY, OUR TRUE AND LAWFUL ATTORNEYS, WITH FULL POWER TO THEM AND EACH
OF THEM SINGLY, TO SIGN FOR US IN OUR NAMES IN THE CAPACITIES INDICATED BELOW,
ALL AMENDMENTS TO THIS REPORT, AND GENERALLY TO DO ALL THINGS IN OUR NAMES AND
ON OUR BEHALF IN SUCH CAPACITIES TO ENABLE TRANSWITCH CORPORATION TO COMPLY
WITH THE PROVISIONS OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED AND ALL
REQUIREMENTS OF THE SECURITIES AND EXCHANGE COMMISSION.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE COMPANY
AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE(S) DATE
/s/ Dr. Santanu Das President, Chief March 25, 1997
- ------------------------------------- Executive Officer
DR. SANTANU DAS and Director
(principal
executive officer)
/s/ Michael F. Stauff Senior Vice March 25, 1997
- ------------------------------------- President, Chief
MICHAEL F. STAUFF Financial Officer
and Treasurer
(principal
financial and
accounting officer)
/s/ Dr. Steward S. Flaschen Chairman of the March 25, 1997
- ------------------------------------- Board of Directors
DR. STEWARD S. FLASCHEN
19
<PAGE>
/s/ Dr. Charles Lee Director March 25, 1997
- -------------------------------------
DR. CHARLES LEE
/s/ John C. McDonald Director March 25, 1997
- -------------------------------------
JOHN C. MCDONALD
/s/ Dr. Ljubomir Micic Director March 25, 1997
- -------------------------------------
DR. LJUBOMIR MICIC
/s/ James J. Millar Director March 25, 1997
- -------------------------------------
JAMES J. MILLAR
/s/ Dr. Albert E. Paladino Director March 25, 1997
- -------------------------------------
DR. ALBERT E. PALADINO
20
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995............. F-3
Consolidated Statements of Operations for the years ended December 31,
1996, 1995 and 1994..................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1996, 1995 and 1994.................................. F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994..................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of TranSwitch Corporation:
We have audited the accompanying consolidated balance sheets of TranSwitch
Corporation and subsidiary as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity (deficit), and
cash flows for each of the years in the three-year period ended December 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of TranSwitch
Corporation and subsidiary as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-
year period ended December 31, 1996, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Stamford, Connecticut
February 11, 1997
F-2
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 3,911 $ 13,630
Short-term investments................................... 8,777 3,620
Accounts receivable, less allowance for doubtful accounts
of $140 in 1996 and $138 in 1995........................ 2,893 5,380
Inventories, net......................................... 3,524 2,771
Prepaid expenses and other assets........................ 305 499
-------- --------
Total current assets................................... 19,410 25,900
Property and equipment, net................................ 2,647 2,245
Product licenses........................................... 1,254 4,525
-------- --------
Total assets........................................... $ 23,311 $ 32,670
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable......................................... $ 1,805 $ 2,021
Accrued expenses......................................... 724 203
Accrued compensation..................................... 535 628
Warranty reserve......................................... 286 251
Sales allowance reserve.................................. 356 309
Royalty payable.......................................... 209 203
Product license fee payable, current portion............. 845 474
-------- --------
Total current liabilities.............................. 4,760 4,089
-------- --------
Product license fee payable, less current portion.......... 1,252 1,875
Commitments and contingencies
Stockholders' equity (deficit):
Common Stock $.001 par value; authorized 25,000,000
shares; issued and outstanding 11,912,486 shares in
1996; 11,503,606 shares in 1995......................... 12 12
Additional paid in capital............................... 45,375 44,705
Accumulated deficit...................................... (28,088) (18,011)
-------- --------
Total stockholders' equity............................. 17,299 26,706
-------- --------
Total liabilities and stockholders' equity............. $ 23,311 $ 32,670
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Revenues:
Product revenues, net.......................... $ 19,236 $16,464 $10,213
Research and development contracts............. 414 877 1,763
License and royalty fees....................... -- 125 125
-------- ------- -------
Total revenues............................... 19,650 17,466 12,101
-------- ------- -------
Cost of revenues:
Cost of products sold.......................... 10,615 6,913 4,958
Write-down of product license.................. 3,128 -- --
Cost of research and development contracts..... 63 482 958
-------- ------- -------
Total cost of revenues....................... 13,806 7,395 5,916
-------- ------- -------
Gross profit..................................... 5,844 10,071 6,185
-------- ------- -------
Operating expenses:
Research and development....................... 8,928 6,660 5,551
Marketing and sales............................ 5,454 4,329 3,348
General and administrative..................... 2,229 1,472 1,357
-------- ------- -------
Total operating expenses..................... 16,611 12,461 10,256
-------- ------- -------
Operating loss................................... (10,767) (2,390) (4,071)
-------- ------- -------
Interest income (expense):
Interest income................................ 819 664 160
Interest expense............................... (129) (47) (26)
-------- ------- -------
Interest income, net......................... 690 617 134
-------- ------- -------
Net loss......................................... (10,077) (1,773) (3,937)
======== ======= =======
Net loss per share............................... $ (.86) $ (.18) $ (.48)**
======== ======= =======
Shares used in per share calculation............. 11,751 10,062 8,178
======== ======= =======
</TABLE>
- --------
* Based on pro forma weighted average common and common equivalent shares
outstanding.
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
----------------- PAID IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- ------ ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1993....................... 707,739 $ 1 $ 814 $(12,260) $(11,445)
Shares of common stock
issued upon exercise of
stock options and
warrants................... 364,253 -- 99 -- 99
Accretion to redemption
value of redeemable
convertible preferred
stock...................... -- -- -- (41) (41)
Net loss.................... -- -- -- (3,937) (3,937)
---------- ---- ------- -------- --------
Balance at December 31,
1994....................... 1,071,992 1 913 (16,238) (15,324)
Shares of common stock
issued upon exercise of
stock options and
warrants................... 546,871 1 288 -- 289
Common stock offered by the
company in initial public
offering................... 2,875,000 3 23,169 -- 23,172
Conversion of preferred
stock to common stock...... 7,009,743 7 20,235 -- 20,242
Compensation related to
issuance of stock options.. -- -- 100 -- 100
Net loss.................... -- -- -- (1,773) (1,773)
---------- ---- ------- -------- --------
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 and
warrants................... 408,880 -- 319 -- 319
Compensation related to
issuance of stock options.. -- -- 351 -- 351
Net loss.................... -- -- -- (10,077) (10,077)
---------- ---- ------- -------- --------
Balance at December 31,
1996....................... 11,912,486 $ 12 $45,375 $(28,088) $ 17,299
========== ==== ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss......................................... $(10,077) $(1,773) $(3,937)
-------- ------- -------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................. 2,195 802 656
Write-down of product license.................. 3,128 -- --
Stock compensation expense..................... 351 100 --
Changes in assets and liabilities:
Decrease(increase) in accounts receivable.... 2,487 (3,084) 246
(Increase) in inventories.................... (753) (1,440) (939)
Decrease(increase) in prepaids and other
current assets.............................. 194 (250) (22)
Increase in accounts payable................. 470 742 37
Increase (decrease) in other liabilities and
deferred revenue............................ (170) 13 712
-------- ------- -------
Total adjustments.......................... 7,902 (3,117) 690
-------- ------- -------
Net cash used in operating activities...... (2,175) (4,980) (3,247)
-------- ------- -------
Cash flows from investing activities:
Purchase of product licenses..................... (814) (2,176) --
Proceeds from the sale of property and
equipment....................................... -- 3 --
Capital expenditures............................. (1,892) (1,309) (1,266)
Purchases of short-term investments.............. (24,057) (5,620) --
Proceeds from sale of short-term investments..... 18,900 2,000 --
-------- ------- -------
Net cash used in investing activities...... (7,863) (7,102) (1,266)
-------- ------- -------
Cash flows from financing activities:
Proceeds from borrowings......................... -- -- 1,108
Principal payments of borrowings................. -- (1,191) (45)
Proceeds from the exercise of stock options and
warrants........................................ 319 289 100
Proceeds from the issuance of common stock....... -- 23,172 --
-------- ------- -------
Net cash provided by financing activities.. 319 22,270 1,163
-------- ------- -------
(Decrease) increase in cash and cash equivalents... (9,719) 10,278 (3,350)
Cash and cash equivalents at beginning of year..... 13,630 3,352 6,702
-------- ------- -------
Cash and cash equivalents at end of year........... $ 3,911 $13,630 $ 3,352
======== ======= =======
Supplemental disclosure of cash flows information:
Cash paid for interest........................... $ 129 $ 47 $ 17
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
TranSwitch Corporation (the "Company") was incorporated in Delaware on April
26, 1988. On January 28, 1994, the Company formed a wholly-owned subsidiary
TranSwitch Europe N.V./S.A. in Brussels, Belgium. Since the Company's
formation, the Company has been designing and supplying specialized
semiconductor components and subsystems for the telecommunications and
datacommunications industries.
Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. All intercompany accounts and transactions
have been eliminated in consolidation.
Basis of Presentation
Amended Certificate of Incorporation and Stock Split
On April 11, 1995, the Company's Board of Directors approved a two-for-one
reverse stock split of the issued and outstanding Common Stock and an
amendment to the Certificate of Incorporation of the Company to increase the
number of authorized shares of capital stock of the Company to 25,000,000
shares from 24,000,000 shares, $.001 par value per share, effective April 19,
1995 and April 25, 1995, respectively. All share and per share amounts have
been adjusted to retroactively reflect the reverse stock split. In addition,
on April 11, 1995 the Company's Board of Directors approved an Amended and
Restated Certificate of Incorporation to decrease the number of authorized
shares of Preferred stock to 1,000,000 shares; $.01 par value per share,
effective June 19, 1995.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year's presentation.
Cash Equivalents
Cash and cash equivalents in the consolidated balance sheet include cash
equivalents of $2,989,000 and $11,507,000 at December 31, 1996 and 1995,
respectively, and consist of certificates of deposit, U.S. Treasury Bills,
commercial paper and U.S. Agency notes. For purposes of the Statement of Cash
Flows, the Company considers all certificates of deposit, U.S. Treasury Bills,
commercial paper and U.S. Agency notes with an original maturity of three
months or less to be cash equivalents.
Investment Securities
The Company adopted Statement of Financial Accounting Standard ("SFAS") No.
115 "Accounting for Certain Investments in Debt and Equity Securities." Under
SFAS No. 115 the Company's short term investments were classified as
available-for-sale and were recorded at fair market value in the accompanying
balance sheet.
Inventories
Inventories are carried at the lower of cost (on a first-in, first-out
basis) or estimated net realizable value.
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation.
Depreciation of property and equipment is provided on the straight-line
method, based on the related assets estimated useful lives ranging from three
to seven years. Depreciation of semiconductor tooling costs is provided on the
straight-line method using
F-7
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the lesser of three years or the life of the related semiconductor it
produces. Repairs and maintenance are charged to operations as incurred.
Product Licenses
Product licenses are amortized over the lesser of the Company's estimated
product sales volume or the straight-line method over three to five years.
Revenue Recognition
Sales of product are recognized upon shipment to distributors and original
equipment manufacturers. Sales to certain distributors are made under
distributor agreements which provide the distributor certain price protection
and return and allowance rights. Revenues are reduced for estimated price
protection and returns based upon historical experience.
Revenues from development contracts are derived from agreements with third
parties. These agreements provide for payments to the Company for the
development of new products, and reimbursement for expenses incurred, based on
the achievement of certain milestones. Revenues are recognized as the related
costs are incurred over the term of the agreement. The Company primarily
retains exclusive ownership of technology developed in connection with the
design of semiconductors. Technology developed in connection with customized
computer boards generally transfers to third parties.
The Company recognizes royalties and license fees when its obligations under
the license and royalty agreements are fulfilled and when payment has been
received or is reasonably assured.
Concentration of Credit Risk
The Company sells its products to customers in the United States and
overseas. Credit evaluations are done on all new customers and periodically
evaluated for existing customers. The Company establishes an allowance for
doubtful accounts based upon factors surrounding the credit risk of specific
customers, historical trends and other information.
Product Warranties
The Company provides for its expected costs that may be incurred under its
product warranties. Estimated warranty costs are accrued as products are sold
and charged to cost of revenues.
Research and Development Costs
Research and development costs are expensed as incurred.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Computation of Earnings per Share
Net loss per share is based upon the weighted average number of shares of
Common Stock and common stock equivalents consisting of warrants and stock
options (using the Treasury Stock method), and Preferred
F-8
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Stock (using the if-converted method) outstanding for each of the periods
presented. Common stock equivalents are not considered if the result would be
anti-dilutive. 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 as if they were outstanding for all periods presented
whether they are antidilutive or not.
Pro forma net loss per common and common equivalent share has been presented
for the year ended December 31, 1994 and assumes the Preferred Stock and
Warrants which are convertible into Preferred Stock have been converted to
Common Stock, upon completion of the offering and have been outstanding for
the entire period.
Fully dilutive and supplemental loss per common share are not presented as
they are the same as primary earnings per share.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent liabilities to prepare these financial statements in conformity
with generally accepted accounting principles. Actual results could differ
from those estimates.
Accounting Changes
During 1996, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 121--"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires companies to
review assets for possible impairment and provides guidelines for recognition
of impairment losses related to long-lived assets, certain intangibles and
assets to be disposed of. The impact of the adoption of SFAS No. 121 was not
material.
During 1996, the Company adopted SFAS No. 123--"Accounting for Stock-Based
Compensation." The Company plans not to recognize compensation cost for stock-
based employee compensation arrangements, in its financial statements but
rather, will disclose in the notes to the consolidated financial statements
the impact on net income and earnings per share as if the fair value based
compensation cost had been recognized (See note 9).
(2) SHORT-TERM INVESTMENTS
Short-term investments classified as available for sale, consists of the
following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1996 1995
------------------------- -------------------------
AMORT. UNREALIZED MARKET AMORT. UNREALIZED MARKET
COST GAIN (LOSS) VALUE COST GAIN (LOSS) VALUE
------ ----------- ------ ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Commercial paper and
corporate debt
securities (average
maturity of 4 months in
1996 and 1995)......... $3,774 $ -- $3,774 $1,424 $ -- $1,424
Corporate bonds......... 1,004 -- 1,004 724 (4) 720
U.S. Treasury Bill...... 3,999 -- 3,999
U.S. government
securities (average
maturity of 7 months in
1995).................. -- -- -- 1,472 4 1,476
------ ----- ------ ------ ----- ------
Total................. $8,777 $ -- $8,777 $3,620 $ -- $3,620
====== ===== ====== ====== ===== ======
</TABLE>
Gross realized gains and losses on sales of securities in 1996 and 1995 were
immaterial.
F-9
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(3) FINANCIAL INSTRUMENTS
Financial instruments estimated values (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1996 1995
--------------- ----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------ -------- -------
<S> <C> <C> <C> <C>
Cash and cash equivalents.................. $3,911 $3,911 $13,630 $13,630
Short-term investments..................... 8,777 8,777 3,620 3,620
Accounts receivable, net................... 2,893 2,893 5,380 5,380
</TABLE>
The fair value amounts for cash and accounts receivables, net, approximate
carrying amounts due to the short maturities of these instruments.
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and trade accounts
receivable. The Company places its cash primarily in market rate accounts. The
Company, by policy, limits the amount of credit exposure to any one financial
institution or commercial issuer.
(4) INVENTORIES
Inventories consist of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1995
------ ------
<S> <C> <C>
Raw materials.................................................. $ 600 $ 458
Work in process................................................ 1,500 1,315
Finished goods................................................. 1,424 998
------ ------
Total........................................................ $3,524 $2,771
====== ======
</TABLE>
(5) PROPERTY AND EQUIPMENT
Property and equipment consist of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
USEFUL
LIVES 1996 1995
---------- ------- -------
<S> <C> <C> <C>
Purchased computer software................... 3 years $ 2,756 $ 2,008
Equipment..................................... 3-7 years 2,356 1,853
Semiconductor tooling......................... 3 years 771 504
Furniture..................................... 3-7 years 351 246
Leasehold improvements........................ Lease term 158 140
Construction in progress...................... 418 167
------- -------
6,810 4,918
Less accumulated depreciation and
amortization................................. (4,163) (2,673)
------- -------
Net property and equipment.................... $ 2,647 $ 2,245
======= =======
</TABLE>
F-10
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(6) PRODUCT LICENSES
On December 15, 1995 the Company entered into a new agreement with Texas
Instruments (TI) in which it repurchased its license agreement for a total of
$4,474,654 representing an upfront payment of $2,125,000 in cash and the
discounted present value of future minimum payments. The Company has recorded
the repurchased license in its consolidated balance sheet under the caption
product licenses and is being amortized over a five year period based upon the
estimated related incremental product sales. Interest expense is accrued over
the three year minimum payment period.
In the fourth quarter of 1996, the T.I. License was written down to its net
realizable value as the incremental revenue which was originally forecast did
not materiallize.
The Company has purchased other licenses during 1996 for $314,000 which will
be amortized over a three year period.
(7) INCOME TAXES
The tax effect of temporary differences that give rise to deferred tax
assets and deferred tax liabilities are presented below (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
-------- -------
<S> <C> <C>
Deferred tax assets:
Inventory obsolescence.................................. $ 497 $ 123
Vacation accrual........................................ 79 90
Warranty reserve........................................ 119 104
Accrued rent............................................ -- 24
Sales allowance reserve................................. 148 128
Product license......................................... 267 --
Net operating losses.................................... 10,637 6,696
Research and development credit......................... 1,739 1,483
Other................................................... 59 57
-------- -------
Total gross deferred tax assets........................... 13,545 8,705
Less valuation allowance.................................. (13,384) (8,426)
-------- -------
Net deferred tax assets................................... 161 279
Deferred tax liabilities:
Property and equipment.................................. (161) (279)
-------- -------
Total deferred taxes, net of valuation allowance.......... $ -- $ --
======== =======
</TABLE>
The net change in the total valuation allowance for the year ended December
31, 1996 was an increase of $4,958,000. Due to the Company's prior operating
losses, there is uncertainty surrounding whether the Company will ultimately
realize its tax assets. Accordingly, these assets have been fully reserved.
The difference between the statutory federal income tax rate and the
Company's effective tax rate for the years ended December 31, 1996, 1995 and
1994 is principally due to net operating losses.
At December 31, 1996, the Company had available, for federal income tax
purposes, net operating loss carryforwards of approximately $25,574,889 and
research and development tax credit carryforwards of approximately $1,739,204
expiring in varying amounts from 2003 through 2010. The Company's ability to
utilize its net operating loss and research and development tax credit
carryforwards may be limited in the future if it is determined that the
Company experienced an ownership change, as defined in Section 382 of the
Internal Revenue Code, as a result of the initial public offering or prior
transactions.
F-11
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(8) MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Company's Mandatorily Redeemable Convertible Preferred Stock was
recorded at fair value on the date of issuance less costs of issuance. The
excess of the redemption amount over the initial carrying value was added to
the carrying value by periodic accretions from equity using the interest
method.
The Company had authorized a total of 14,091,368 shares of Mandatorily
Redeemable Convertible Preferred Stock at December 31, 1994. The shares
presented in the table below are the number of shares of Mandatorily
Redeemable Preferred Stock that have been converted into Company Stock at the
rate of one share of Common Stock for each two shares of Mandatorily
Redeemable Convertible Preferred Stock upon the Company's initial public
offering (in thousands, except share data):
<TABLE>
<CAPTION>
PREFERRED STOCK
-----------------------------------------------------------------------------------
SERIES A SERIES B SERIES D SERIES E TOTAL
------------------- ------------------- ------------------- -------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------- ----------- ------- ---------- ------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1993.. 1,836,000 $ 1,824 1,923,077 $ 2,486 7,222,562 $ 9,286 3,037,845 $ 6,615 14,019,484 $ 20,211
Accretion on
Preferred Stock.. -- 3 -- 3 -- 20 -- 15 -- 41
---------- ------- ----------- ------- ---------- ------- ----------- -------- ----------- --------
Balance at
December 31, 1994.. 1,836,000 1,827 1,923,077 2,489 7,222,562 9,306 3,037,845 6,630 14,019,484 20,252
Conversion of
preferred stock
to common
stock.......... (1,836,000) (1,827) (1,923,077) (2,489) (7,222,562) (9,306) (3,037,845) (6,630) (14,019,484) (20,252)
Balance at
December 31,
1995 and 1996.. -- $ -- -- $ -- -- $ -- -- $ -- -- $ --
========== ======= =========== ======= ========== ======= =========== ======== =========== ========
</TABLE>
Each share of preferred stock was convertible at the option of the holder
and was mandatorily converted into Common Stock if the amount raised in the
Company's initial public offering was $10,000,000 in the aggregate and at
least $8 per share. On June 19, 1995 the Company completed its initial public
offering of 2,500,000 shares of Common Stock at $9 per share, raising a total
of $24,000,000; concurrent with consummation of the offering, all outstanding
shares of Mandatorily Redeemable Preferred Convertible Stock were converted
into 7,009,743 shares of Common Stock.
(9) STOCKHOLDERS' EQUITY
Common Stock
All share and per share amounts have been restated to reflect a 2-for-1
reverse stock split authorized by the Board of Directors on April 11, 1995 and
effective April 19, 1995.
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.
Preferred Stock
The Company has 1,000,000 shares, $.01 par value per share, of preferred
stock authorized. None have been issued as of December 31, 1996.
F-12
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Stock Option Plans
1989 Stock Option Plan
Effective January 12, 1989, the Company adopted a Stock Option Plan. Under
the Plan, the Board of Directors (or an appointed committee) grants to all new
employees, and to certain key employees and consultants, incentive stock
options ("qualified" options) and non-qualified stock options to purchase
Common Stock. In 1993, the Company amended the Stock Option Plan, increasing
the total number of common shares reserved for issuance to 1,827,413.
The option price for incentive stock options shall not be less than 100% of
the fair market value (110% in the case of an employee owning more than 10% of
the combined voting power) on the date of grant; and the option price for non-
qualified stock options shall not be less than 85% of the fair market value on
the date of grant.
1995 Stock Plan
On April 11, 1995, the Company's Board of Directors adopted the 1995 Stock
Plan which was approved by the Company's stockholders on April 19, 1995. The
1995 Plan took effect upon the completion of the Initial Public Offering. In
1996, the Company increased the total number of shares of Common Stock
authorized under the 1995 Stock Plan and amended and restated the 1995 Stock
Plan (as amended and restated, "The 1995 Plan.") Under the terms of the 1995
Plan, 1,519,019 shares of the Company's Common Stock are reserved for issuance
pursuant to the grant to employees of incentive stock options and the grant of
non-qualified stock option, awards or direct purchases of the Company's Common
Stock to employees, consultants, directors and officers of the Company. The
terms of the options granted will be subject to the provisions of the 1995
Plan as determined by the Compensation Committee of the Board of Directors.
The 1995 Plan will terminate ten years after its adoption unless earlier
terminated by the Board of Directors.
1995 Employee Stock Purchase Plan
On April 11, 1995, the Company's Board of Directors adopted the 1995
Employee Stock Purchase Plan (the "1995 Purchase Plan") which was approved by
the Company's stockholders on April 19, 1995. Under the terms of the 1995
Purchase Plan, all employees, except five percent or more stockholders, of the
Company may contribute through payroll tax deductions, up to 5% of their
annual compensation toward the purchase of the Company's Common Stock. The
Company has reserved 100,000 shares for issuance under the 1995 Purchase Plan.
The purchase price per share is the lesser of (a) 85% of the fair market value
of the Common Stock on the date of the grant of the option, as defined, or (b)
85% of the fair market value of the Common Stock on the date of exercise of
the option, as defined.
Director Stock Option Plan
The 1995 Non-Employee Director Stock Option Plan (the "Director Plan") was
adopted by the Board of Directors on April 11, 1995, and approved by the
Company's stockholders on April 19, 1995. The Director Plan provides for the
automatic grant of options to purchase shares of Common Stock to non-employee
directors of the Company. The Director Plan will be administered by the
Compensation Committee of the Board of Directors.
No option granted under the Director Plan may be exercised after the
expiration of five years from the date of grant. The exercise price of options
under the Director Plan must be equal to the fair market value of the Common
Stock on the date of grant. Options granted under the Director Plan are
generally nontransferable.
F-13
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The options expire five or ten years from the date of grant and are
generally exercisable ratably over four years from the date of grant.
Information regarding the Company's stock options are set forth as follows:
<TABLE>
<CAPTION>
OPTIONS
AVAILABLE FOR NUMBER WEIGHTED AVERAGE
ISSUANCE OF SHARES PRICE PER SHARE
------------- --------- ----------------
<S> <C> <C> <C>
Outstanding at December 31,
1993........................... 549,476 1,277,937 $ 0.37
Granted....................... (327,450) 327,450 0.70
Exercised..................... -- (364,100) 0.29
Canceled...................... 50,375 (50,375) 0.47
---------- ---------
Outstanding at December 31,
1994........................... 272,401 1,190,912 0.51
Authorized.................... 500,000 -- --
Granted....................... (556,225) 556,225 10.34
Exercised..................... -- (390,055) 0.43
Canceled...................... 50,373 (50,373) 2.00
---------- ---------
Outstanding at December 31,
1995........................... 266,549 1,306,709 3.86
Authorized.................... 900,000 -- --
Granted....................... (1,524,630) 1,524,630 7.63
Exercised..................... -- (296,954) 0.58
Canceled...................... 778,968 (778,968) 10.17
---------- ---------
Outstanding at December 31,
1996........................... 420,887 1,755,417 $ 4.81
========== =========
</TABLE>
At December 31, 1996, 1,755,417 options were outstanding with a weighted
average share price of $4.81 and a weighted average remaining contractual life
of 6.6 years. At December 31, 1996, 650,452 options were exercisable at
exercise prices ranging from $.40-$16.25 per share.
In connection with stock options granted in January 1995 through March 31,
1995, the Company recorded deferred compensation expense for the excess of the
deemed value for accounting purposes of the Common Stock issuable upon
exercise of such stock options over the aggregate exercise price of such
options of $618,000. The Company records compensation expense over the
applicable vesting periods (primarily four years). The Company recorded
$156,000 and $100,000 of compensation expense for the options granted in
January 1995 through March 31, 1995 for the year ended December 31, 1996 and
1995, respectively.
As discussed in Note 1, the Company adopted SFAS No. 123 during 1996. The
Company did not recognize compensation expense relating to "employee" stock
options, because the exercise price of the option equals the fair value of the
stock on the date of grant. If the Company had determined the compensation
based on the fair value of the options on the date of grant in accordance with
SFAS No. 123, the proforma net loss income and loss per share would be as
follows:
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
Net loss--as reported.................................... $(10,077) $(1,773)
Net loss--pro forma...................................... $(12,599) $(2,189)
Primary loss per share--as reported...................... $ (0.86) $ (0.18)
Primary loss per share--pro forma........................ $ (1.07) $ (0.22)
</TABLE>
The pro forma effect on net loss for 1996 and 1995 is not representative of
the pro forma effect on net income in future years because it does not take
into consideration pro forma compensation expense related to grants made prior
to 1995. Fully diluted loss per share are not presented as they are the same
as primary.
F-14
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As reflected in the table above, the fair value of each option granted in
1996 and 1995 was $3.00 and $4.70, respectively. The fair value of each option
granted was estimated on the date of grant using the modified Black-Scholes
option pricing model based on the following weighted average assumptions:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Risk-free interest rate.......................................... 6.0% 5.5%
Expected life in years........................................... 6.0 6.0
Expected volatility.............................................. 52.0% 52.0%
Expected dividend yield.......................................... -- --
</TABLE>
The Company recognized additional compensation expense of $195,000 as
required by SFAS No. 123, relating to stock options granted to "non"-employees
during 1996.
Warrants
Warrants to purchase Common Stock and Preferred Stock have been granted to
the original investors in consideration of additional financing and loans, and
for services performed by various other parties. The warrants presented in the
table below are convertible into Common Stock and Preferred Stock at a rate of
one share of Common Stock and Preferred Stock for each warrant to purchase
Common Stock and Preferred Stock, respectively. During 1995, 58,396 shares of
Preferred Stock warrants were converted into 29,198 shares of Common Stock at
a rate of one share of Common Stock for each two shares of Preferred Stock and
13,488 shares of Preferred Stock warrants were canceled.
<TABLE>
<CAPTION>
WARRANTS--COMMON STOCK WARRANTS--PREFERRED STOCK
----------------------------------------- ----------------------------------------
NUMBER PRICE PER SHARE EXPIRATION DATE NUMBER PRICE PER SHARE EXPIRATION DATE
-------- --------------- --------------- ------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at December
31, 1993............... 215,562 .06-1.00 12/96-11/98 71,884 $1.00--1.30 8/90--7/00
Granted................ (153) -- -- -- -- --
Outstanding at December
31, 1994............... 215,409 $.06-1.00 12/96-11/98 71,884 $1.00--1.30 8/90--7/00
Exercised.............. (122,964) -- 12/96-11/98 (58,396) $1.00--1.30 8/99--7/00
Canceled............... -- -- -- (13,488) $1.00--1.30 8/99--7/00
-------- --------- ----------- ------- ----------- ----------
Outstanding at December
31, 1995............... 92,445 $.06-1.00 12/96-11/98
Exercised.............. (82,011) -- 12/96-11/98 -- -- --
Outstanding at December
31, 1996............... 10,434 $.40-1.00 12/96-11/98 -- -- --
======== ========= =========== ======= =========== ==========
</TABLE>
(10) EMPLOYEE SAVINGS PLAN
On November 21, 1988, the Company established a 401(k) retirement savings
plan. All employees are entitled to contribute from 1% to 15% of their pre-tax
income, not exceeding the IRS maximum for income deferrals, to the Plan, and
may elect to invest their contributions in various established funds, which
include fixed income, growth and equity funds. The Company made no matching
contributions to the 401(k) Plan in 1995. In 1995, the maximum contribution
was 20% of pre-tax income subject to IRS limitations. The Company began
providing matching contributions in 1996 for 50 percent of the employees'
deferred compensation up to a maximum of 6 percent. In 1996, the Company's
contribution expense amounted to $156,493.
F-15
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(11) COMMITMENTS AND CONTINGENCIES
Line of Credit
The Company has available as of December 31, 1996 with Silicon Valley Bank
lines of credit of $2,000,000 for working capital purposes, bearing interest
at prime + 1/4% due on January 3, 1998 and a line of credit of $2,000,000 for
equipment purchases, bearing interest at prime +1% due on May 31, 2002. The
lines are secured by all corporate assets except intellectual property of the
Company.
The Agreement contains certain financial restrictions and covenants which,
among other things, include provisions for maintaining a minimum amount of
cash, net worth and profitability.
Development Agreements
From time to time, the Company has entered into agreements with third
parties for the development and/or licensing of products for its manufacture
and sale, or the licensing of technology the Company may use in the
manufacture of products, for which royalties are paid against actual sales of
these products. The Company recognized royalty expense of $1,265,698,
$828,671, and $342,456 in 1996, 1995 and 1994, respectively, under these
agreements, which is included in cost of products sold in the consolidated
statements of operations.
Lease Agreements
Total rental expense under all operating lease agreements aggregated
$446,463, $585,644, and $447,153 during 1996, 1995 and 1994, respectively.
At December 31, 1996, the minimum annual and in the aggregate rental
payments under existing noncancellable operating leases are as follows (in
thousands):
<TABLE>
<S> <C>
1997.................................. $ 507
1998.................................. 476
1999.................................. 128
------
$1,111
======
</TABLE>
License and Royalty Agreements
On May 8, 1991, the Company entered an Agreement with Texas Instruments (TI)
which granted TI manufacturing and distribution rights for certain of the
Company's products, in return for the payment of non-refundable license and
royalty fees. Through December 31, 1996, the Company had received $2.6 million
in license and royalty fees from TI under the Agreement, of which $125,000,
was recognized in 1995 and 1994.
On December 15, 1995 the Company entered into a new agreement with TI in
which it repurchased its license agreement and paid $2,125,000 and $500,000 in
cash in 1995 and 1996, respectively. The Company will make future minimum cash
payments of $1,000,000 and $1,250,000 in 1997 and 1998, respectively. In
addition to the minimum payments the Company is required to pay incremental
royalties based upon exceeding certain sales volumes. Such royalties will be
accrued as excess volumes are to be achieved.
F-16
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Foundry Purchase Commitments
On April 10, 1996, the Company entered into a foundry agreement with Taiwan
Semiconductor Manufacturing Co., Ltd which includes future minimum purchase
commitments as follows (in thousands):
<TABLE>
<S> <C>
1997.................................. $ 403
1998.................................. 454
1999.................................. 403
------
$1,260
======
</TABLE>
Concentration of Sales
The following table summarizes the percentage of revenues accounted for by
the Company's significant customers:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Tellabs.......................................... 14% 17% --
Insight.......................................... 16% 16% --
ECI Telecom Ltd.................................. 22% -- 16%
</TABLE>
Export revenues represented 46%, 38%, and 47% of total revenues in 1996,
1995 and 1994, respectively.
Revenues from customers outside the United States were as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Europe and Middle East............................ $ 6,332 $ 3,084 $ 3,411
Far East.......................................... 1,976 1,798 1,331
Canada and other.................................. 592 1,626 942
-------- -------- --------
Total........................................... $ 8,900 $ 6,508 $ 5,684
======== ======== ========
</TABLE>
F-17
<PAGE>
SCHEDULE II
TRANSWITCH CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
--------------------
BALANCE CHARGED TO CHARGES BALANCE
BEGINNING COSTS AND TO OTHER AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
----------- --------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1996:
Deductions from asset
account:
Allowance for
doubtful.............. $138 14 -- (12) $ 140
Inventory valuation.... 295 1,261 -- (360) 1,196
---- ----- --- ---- ------
$433 1,275 -- (372) $1,336
==== ===== === ==== ======
Year ended December 31,
1995:
Deductions from asset
account:
Allowance for
doubtful.............. $ 36 110 -- (8) $ 138
Inventory valuation.... 597 31 -- (333)(2) 295
---- ----- --- ---- ------
$633 141 -- (341) $ 433
==== ===== === ==== ======
Year ended December 31,
1994:
Deductions from asset
account:
Allowance for
doubtful.............. $ 31 7 1 (3) $ 36
Inventory valuation.... 44 583(1) (88) (118) 597
---- ----- --- ---- ------
$ 75 590 (89) (121) $ 633
==== ===== === ==== ======
</TABLE>
- --------
(1) Includes a reserve for inventory on hand which was built up in
anticipation of a major customer's order in 1994 which did not
materialize.
(2) Includes a reversal of a reserve for inventory on hand which was built up
in anticipation of a major customer's order in 1994 which was no longer
required as products have been shipped.
F-18
<PAGE>
-1-
EXHIBIT 10.2
------------
TRANSWITCH CORPORATION
SECOND AMENDED AND RESTATED
1995 STOCK PLAN
---------------
1. PURPOSE. The purpose of the TranSwitch Corporation 1995 Stock Plan
-------
(the "Plan") is to encourage key employees of TranSwitch Corporation (the
"Company") and of any present or future parent or subsidiary of the Company
(collectively, "Related Corporations") and other individuals who render services
to the Company or a Related Corporation, by providing opportunities to
participate in the ownership of the Company and its future growth through (a)
the grant of options which qualify as "incentive stock options" ("ISOs") under
Section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code");
(b) the grant of options which do not qualify as ISOs ("Non-Qualified Options");
(c) awards of stock in the Company ("Awards"); and (d) opportunities to make
direct purchases of stock in the Company ("Purchases"). Both ISOs and Non-
Qualified Options are referred to hereafter individually as an "Option" and
collectively as "Options." Options, Awards and authorizations to make Purchases
are referred to hereafter collectively as "Stock Rights." As used herein, the
terms "parent" and "subsidiary" mean "parent corporation" and "subsidiary
corporation," respectively, as those terms are defined in Section 424 of the
Code.
2. ADMINISTRATION OF THE PLAN.
---------------------------
A. BOARD OR COMMITTEE ADMINISTRATION. The Plan shall be administered by
---------------------------------
the Board of Directors of the Company (the "Board") or by a committee appointed
by the Board (the "Committee"); provided that the Plan shall be administered:
(i) to the extent required by applicable regulations under Section 162(m) of the
Code, by two or more "outside directors" (as defined in applicable regulations
thereunder) and (ii) to the extent required by Rule 16b-3 promulgated under the
Securities Exchange Act of 1934 or any successor provision ("Rule 16b-3"), by a
disinterested administrator or administrators within the meaning of Rule 16b-3.
Hereinafter, all references in this Plan to the "Committee" shall mean the Board
if no Committee has been appointed. Subject to ratification of the grant or
authorization of each Stock Right by the Board (if so required by applicable
state law), and subject to the terms of the Plan, the Committee shall have the
authority to (i) determine to whom (from among the class of employees eligible
under paragraph 3 to receive ISOs) ISOs shall be granted, and to whom (from
among the class of individuals and entities eligible under paragraph 3 to
receive Non-Qualified Options and Awards and to make Purchases) Non-Qualified
Options, Awards and authorizations to make Purchases may be granted; (ii)
determine the time or times at which Options or Awards shall be granted or
Purchases made; (iii) determine the purchase price of shares subject to each
Option or Purchase, which prices shall not be less than the minimum price
specified in paragraph 6; (iv) determine whether each Option granted shall be an
ISO or a Non-Qualified Option; (v) determine (subject to paragraph 7) the time
or times when each Option shall become exercisable and the duration of the
exercise period; (vi) extend the period during which outstanding Options may be
exercised; (vii) determine whether restrictions such as repurchase options are
to be imposed on shares subject to Options, Awards and Purchases and the nature
of such restrictions, if any, and (viii) interpret the Plan and prescribe and
rescind rules and regulations relating to it. If the Committee determines to
issue a Non-Qualified Option, it shall take whatever actions it deems necessary,
under Section 422 of the Code and the regulations promulgated thereunder, to
ensure that such Option is not treated as an ISO. The interpretation and
construction by the Committee of any provisions of the Plan or of any Stock
Right
<PAGE>
-2-
granted under it shall be final unless otherwise determined by the Board.
The Committee may from time to time adopt such rules and regulations for
carrying out the Plan as it may deem advisable. No member of the Board or the
Committee shall be liable for any action or determination made in good faith
with respect to the Plan or any Stock Right granted under it.
B. COMMITTEE ACTIONS. The Committee may select one of its members as its
-----------------
chairman, and shall hold meetings at such time and places as it may determine.
A majority of the Committee shall constitute a quorum and acts of a majority of
the members of the Committee at a meeting at which a quorum is present, or acts
reduced to or approved in writing by all the members of the Committee (if
consistent with applicable state law), shall be the valid acts of the Committee.
From time to time the Board may increase the size of the Committee and appoint
additional members thereof, remove members (with or without cause) and appoint
new members in substitution therefor, fill vacancies however caused, or remove
all members of the Committee and thereafter directly administer the Plan.
C. GRANT OF STOCK RIGHTS TO BOARD MEMBERS. Subject to the provisions of
--------------------------------------
the first sentence of paragraph 2(A) above, if applicable, Stock Rights may be
granted to members of the Board. All grants of Stock Rights to members of the
Board shall in all other respects be made in accordance with the provisions of
this Plan applicable to other eligible persons. Consistent with the provisions
of the first sentence of Paragraph 2(A) above, members of the Board who either
(i) are eligible to receive grants of Stock Rights pursuant to the Plan or (ii)
have been granted Stock Rights may vote on any matters affecting the
administration of the Plan or the grant of any Stock Rights pursuant to the
Plan, except that no such member shall act upon the granting to himself or
herself of Stock Rights, but any such member may be counted in determining the
existence of a quorum at any meeting of the Board during which action is taken
with respect to the granting to such member of Stock Rights.
3. ELIGIBLE EMPLOYEES AND OTHERS. ISOs may be granted only to employees of
-----------------------------
the Company or any Related Corporation. Non-Qualified Options, Awards and
authorizations to make Purchases may be granted to any employee, officer or
director (whether or not also an employee) or consultant of the Company or any
Related Corporation. The Committee may take into consideration a recipient's
individual circumstances in determining whether to grant a Stock Right. The
granting of any Stock Right to any individual or entity shall neither entitle
that individual or entity to, nor disqualify such individual or entity from,
participation in any other grant of Stock Rights.
4. STOCK. The stock subject to Stock Rights shall be authorized but
-----
unissued shares of Common Stock of the Company, par value $.001 per share (the
"Common Stock"), or shares of Common Stock reacquired by the Company in any
manner. The aggregate number of shares which may be issued pursuant to the Plan
is 2,469,019, subject to adjustment as provided in paragraph 13. If any Stock
Right granted under the Plan shall expire or terminate for any reason without
having been exercised in full or shall cease for any reason to be exercisable in
whole or in part or shall be repurchased by the Company, the shares of Common
Stock subject to such Stock Right shall again be available for grants of Stock
Rights under the Plan.
No employee of the Company or any Related Corporation may be granted Options
to acquire, in the aggregate, more than 400,000 of shares of Common Stock under
the Plan. If any Option granted under the Plan shall expire or terminate for
any reason without having been exercised in full or shall cease for any reason
to be exercisable in whole or in part or shall be repurchased by the Company,
the shares subject to such Option shall be included in the determination of the
aggregate number of shares of Common Stock deemed to have been granted to such
employee under the Plan.
<PAGE>
-3-
5. GRANTING OF STOCK RIGHTS. Stock Rights may be granted under the Plan at
------------------------
any time on or after April 11, 1995 and prior to April 11, 2005. The date of
grant of a Stock Right under the Plan will be the date specified by the
Committee at the time it grants the Stock Right; provided, however, that such
date shall not be prior to the date on which the Committee acts to approve the
grant. Options granted under the Plan are intended to qualify as performance-
based compensation to the extent required under Proposed Treasury Regulation
Section 1.162-27.
6. MINIMUM OPTION PRICE; ISO LIMITATIONS.
-------------------------------------
A. PRICE FOR NON-QUALIFIED OPTIONS, AWARDS AND PURCHASES. The exercise
-----------------------------------------------------
price per share specified in the agreement relating to each Non-Qualified Option
granted, and the purchase price per share of stock granted in any Award or
authorized as a Purchase, under the Plan shall in no event be less than the
minimum legal consideration required therefor under the laws of any jurisdiction
in which the Company or its successors in interest may be organized. Non-
Qualified Options granted under the Plan, with an exercise price less than the
fair market value per share of Common Stock on the date of grant, and Awards and
Purchases under the Plan with a purchase price per share less than the fair
market value per share of Common Stock on the date of grant or authorization, as
applicable, are intended to qualify as performance-based compensation under
Section 162(m) of the Code and any applicable regulations thereunder. Any such
Non-Qualified Options granted under the Plan or Awards made or Purchases
authorized under the Plan shall be exercisable or issued, as the case may be,
only upon the attainment of a pre-established, objective performance goal
established by the Committee. If the Committee grants Non-Qualified Options
with an exercise price less than the fair market value per share of Common Stock
on the date of grant, or makes Awards or authorizes Purchases under the Plan
with a purchase price per share less than the fair market value per share of
Common Stock on the date of grant or authorization, as applicable, such grant or
authorization will be submitted for, and will be contingent upon, shareholder
approval.
B. PRICE FOR ISOS. The exercise price per share specified in the
--------------
agreement relating to each ISO granted under the Plan shall not be less than the
fair market value per share of Common Stock on the date of such grant. In the
case of an ISO to be granted to an employee owning stock possessing more than
ten percent (10%) of the total combined voting power of all classes of stock of
the Company or any Related Corporation, the price per share specified in the
agreement relating to such ISO shall not be less than one hundred ten percent
(110%) of the fair market value per share of Common Stock on the date of grant.
For purposes of determining stock ownership under this paragraph, the rules of
Section 424(d) of the Code shall apply.
C. $100,000 ANNUAL LIMITATION ON ISO VESTING. Each eligible employee may
-----------------------------------------
be granted Options treated as ISOs only to the extent that, in the aggregate
under this Plan and all incentive stock option plans of the Company and any
Related Corporation, ISOs do not become exercisable for the first time by such
employee during any calendar year with respect to stock having a fair market
value (determined at the time the ISOs were granted) in excess of $100,000. The
Company intends to designate any Options granted in excess of such limitation as
Non-Qualified Options.
D. DETERMINATION OF FAIR MARKET VALUE. If, at the time an Option is
----------------------------------
granted under the Plan, the Company's Common Stock is publicly traded, "fair
market value" shall be determined as of the date of grant or, if the prices or
quotes discussed in this sentence are unavailable for such date, the last
business day for which such prices or quotes are available prior to the date of
grant and shall mean (i) the average (on that date) of the high and low prices
of the Common Stock on the principal
<PAGE>
-4-
national securities exchange on which the Common Stock is traded, if the Common
Stock is then traded on a national securities exchange; or (ii) the last
reported sale price (on that date) of the Common Stock on the Nasdaq National
Market, if the Common Stock is not then traded on a national securities
exchange; or (iii) the closing bid price (or average of bid prices) last quoted
(on that date) by an established quotation service for over-the-counter
securities, if the Common Stock is not reported on the Nasdaq National Market.
If the Common Stock is not publicly traded at the time an Option is granted
under the Plan, "fair market value" shall mean the fair value of the Common
Stock as determined by the Committee after taking into consideration all factors
which it deems appropriate, including, without limitation, recent sale and offer
prices of the Common Stock in private transactions negotiated at arm's length.
7. OPTION DURATION. Subject to earlier termination as provided in
---------------
paragraphs 9 and 10 or in the agreement relating to such Option, each Option
shall expire on the date specified by the Committee, but not more than (i) ten
years from the date of grant in the case of Options generally and (ii) five
years from the date of grant in the case of ISOs granted to an employee owning
stock possessing more than ten percent (10%) of the total combined voting power
of all classes of stock of the Company or any Related Corporation, as determined
under paragraph 6(B). Subject to earlier termination as provided in paragraphs
9 and 10, the term of each ISO shall be the term set forth in the original
instrument granting such ISO, except with respect to any part of such ISO that
is converted into a Non-Qualified Option pursuant to paragraph 16.
8. EXERCISE OF OPTION. Subject to the provisions of paragraphs 9 through
------------------
12, each Option granted under the Plan shall be exercisable as follows:
A. VESTING. The Option shall either be fully exercisable on the date of
-------
grant or shall become exercisable thereafter in such installments as the
Committee may specify.
B. FULL VESTING OF INSTALLMENTS. Once an installment becomes exercisable
----------------------------
it shall remain exercisable until expiration or termination of the Option,
unless otherwise specified by the Committee.
C. PARTIAL EXERCISE. Each Option or installment may be exercised at any
----------------
time or from time to time, in whole or in part, for up to the total number of
shares with respect to which it is then exercisable.
D. ACCELERATION OF VESTING. The Committee shall have the right to
-----------------------
accelerate the date that any installment of any Option becomes exercisable;
provided that the Committee shall not, without the consent of an optionee,
accelerate the permitted exercise date of any installment of any Option granted
to any employee as an ISO (and not previously converted into a Non-Qualified
Option pursuant to paragraph 16) if such acceleration would violate the annual
vesting limitation contained in Section 422(d) of the Code, as described in
paragraph 6(C).
9. TERMINATION OF EMPLOYMENT. Unless otherwise specified in the agreement
-------------------------
relating to such ISO, if an ISO optionee ceases to be employed by the Company
and all Related Corporations other than by reason of death or disability as
defined in paragraph 10, no further installments of his or her ISOs shall become
exercisable, and his or her ISOs shall terminate on the earlier of (a) ninety
(90) days after the date of termination of his or her employment, or (b) their
specified expiration dates, except to the extent that such ISOs (or unexercised
installments thereof) have been converted into Non-Qualified Options pursuant to
paragraph 16. For purposes of this paragraph 9, employment shall be considered
as
<PAGE>
-5-
continuing uninterrupted during any bona fide leave of absence (such as those
attributable to illness, military obligations or governmental service) provided
that the period of such leave does not exceed 90 days or, if longer, any period
during which such optionee's right to reemployment is guaranteed by statute. A
bona fide leave of absence with the written approval of the Committee shall not
be considered an interruption of employment under this paragraph 9, provided
that such written approval contractually obligates the Company or any Related
Corporation to continue the employment of the optionee after the approved period
of absence. ISOs granted under the Plan shall not be affected by any change of
employment within or among the Company and Related Corporations, so long as the
optionee continues to be an employee of the Company or any Related Corporation.
Nothing in the Plan shall be deemed to give any grantee of any Stock Right the
right to be retained in employment or other service by the Company or any
Related Corporation for any period of time.
10. DEATH; DISABILITY.
-----------------
A. DEATH. If an ISO optionee ceases to be employed by the Company and
-----
all Related Corporations by reason of his or her death, any ISO owned by such
optionee may be exercised, to the extent otherwise exercisable on the date of
death, by the estate, personal representative or beneficiary who has acquired
the ISO by will or by the laws of descent and distribution, until the earlier of
(i) the specified expiration date of the ISO or (ii) 180 days from the date of
the optionee's death.
B. DISABILITY. If an ISO optionee ceases to be employed by the Company
----------
and all Related Corporations by reason of his or her disability, such optionee
shall have the right to exercise any ISO held by him or her on the date of
termination of employment, for the number of shares for which he or she could
have exercised it on that date, until the earlier of (i) the specified
expiration date of the ISO or (ii) 180 days from the date of the termination of
the optionee's employment. For the purposes of the Plan, the term "disability"
shall mean "permanent and total disability" as defined in Section 22(e)(3) of
the Code or any successor statute.
11. ASSIGNABILITY. No Stock Right shall be assignable or transferable by
-------------
the grantee except by will, by the laws of descent and distribution or, in the
case of Non-Qualified Options only, pursuant to a valid domestic relations
order. Except as set forth in the previous sentence, during the lifetime of a
grantee each Stock Right shall be exercisable only by such grantee.
12. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by
-------------------------------
instruments (which need not be identical) in such forms as the Committee may
from time to time approve. Such instruments shall conform to the terms and
conditions set forth in paragraphs 6 through 11 hereof and may contain such
other provisions as the Committee deems advisable which are not inconsistent
with the Plan, including restrictions applicable to shares of Common Stock
issuable upon exercise of Options. The Committee may specify that any Non-
Qualified Option shall be subject to the restrictions set forth herein with
respect to ISOs, or to such other termination and cancellation provisions as the
Committee may determine. The Committee may from time to time confer authority
and responsibility on one or more of its own members and/or one or more officers
of the Company to execute and deliver such instruments. The proper officers of
the Company are authorized and directed to take any and all action necessary or
advisable from time to time to carry out the terms of such instruments.
13. ADJUSTMENTS. Upon the occurrence of any of the following events, an
-----------
optionee's rights with respect to Options granted to such optionee hereunder
shall be adjusted as hereinafter provided, unless otherwise specifically
provided in the written agreement between the optionee and the Company relating
to such Option:
<PAGE>
-6-
A. STOCK DIVIDENDS AND STOCK SPLITS. If the shares of Common Stock shall
--------------------------------
be subdivided or combined into a greater or smaller number of shares or if the
Company shall issue any shares of Common Stock as a stock dividend on its
outstanding Common Stock, the number of shares of Common Stock deliverable upon
the exercise of Options shall be appropriately increased or decreased
proportionately, and appropriate adjustments shall be made in the purchase price
per share to reflect such subdivision, combination or stock dividend.
B. CONSOLIDATIONS OR MERGERS. If the Company is to be consolidated with
-------------------------
or acquired by another entity in a merger, sale of all or substantially all of
the Company's assets or otherwise (an "Acquisition"), the Committee or the board
of directors of any entity assuming the obligations of the Company hereunder
(the "Successor Board"), shall, as to outstanding Options, either (i) make
appropriate provision for the continuation of such Options by substituting on an
equitable basis for the shares then subject to such Options either (a) the
consideration payable with respect to the outstanding shares of Common Stock in
connection with the Acquisition, (b) shares of stock of the surviving
corporation or (c) such other securities as the Successor Board deems
appropriate, the fair market value of which shall not materially exceed the fair
market value of the shares of Common Stock subject to such Options immediately
preceding the Acquisition; or (ii) upon written notice to the optionees, provide
that all Options must be exercised, to the extent then exercisable, within a
specified number of days of the date of such notice, at the end of which period
the Options shall terminate; or (iii) terminate all Options in exchange for a
cash payment equal to the excess of the fair market value of the shares subject
to such Options (to the extent then exercisable) over the exercise price
thereof.
C. RECAPITALIZATION OR REORGANIZATION. In the event of a
----------------------------------
recapitalization or reorganization of the Company (other than a transaction
described in subparagraph B above) pursuant to which securities of the Company
or of another corporation are issued with respect to the outstanding shares of
Common Stock, an optionee upon exercising an Option shall be entitled to receive
for the purchase price paid upon such exercise the securities he or she would
have received if he or she had exercised such Option prior to such
recapitalization or reorganization.
D. MODIFICATION OF ISOS. Notwithstanding the foregoing, any adjustments
--------------------
made pursuant to subparagraphs A, B or C with respect to ISOs shall be made only
after the Committee, after consulting with counsel for the Company, determines
whether such adjustments would constitute a "modification" of such ISOs (as that
term is defined in Section 424 of the Code) or would cause any adverse tax
consequences for the holders of such ISOs. If the Committee determines that
such adjustments made with respect to ISOs would constitute a modification of
such ISOs or would cause adverse tax consequences to the holders, it may refrain
from making such adjustments.
E. DISSOLUTION OR LIQUIDATION. In the event of the proposed dissolution
--------------------------
or liquidation of the Company, each Option will terminate immediately prior to
the consummation of such proposed action or at such other time and subject to
such other conditions as shall be determined by the Committee.
F. ISSUANCES OF SECURITIES. Except as expressly provided herein, no
-----------------------
issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no adjustment
by reason thereof shall be made with respect to, the number or price of shares
subject to Options. No adjustments shall be made for dividends paid in cash or
in property other than securities of the Company.
<PAGE>
-7-
G. FRACTIONAL SHARES. No fractional shares shall be issued under the
-----------------
Plan and the optionee shall receive from the Company cash in lieu of such
fractional shares.
H. ADJUSTMENTS. Upon the happening of any of the events described in
-----------
subparagraphs A, B or C above, the class and aggregate number of shares set
forth in paragraph 4 hereof that are subject to Stock Rights which previously
have been or subsequently may be granted under the Plan shall also be
appropriately adjusted to reflect the events described in such subparagraphs.
The Committee or the Successor Board shall determine the specific adjustments to
be made under this paragraph 13 and, subject to paragraph 2, its determination
shall be conclusive.
14. MEANS OF EXERCISING OPTIONS. An Option (or any part or installment
---------------------------
thereof) shall be exercised by giving written notice to the Company at its
principal office address, or to such transfer agent as the Company shall
designate. Such notice shall identify the Option being exercised and specify
the number of shares as to which such Option is being exercised, accompanied by
full payment of the purchase price therefor either (a) in United States dollars
in cash or by check, (b) at the discretion of the Committee, through delivery of
shares of Common Stock having a fair market value equal as of the date of the
exercise to the cash exercise price of the Option, (c) at the discretion of the
Committee, by delivery of the grantee's personal recourse note bearing interest
payable not less than annually at no less than 100% of the lowest applicable
Federal rate, as defined in Section 1274(d) of the Code, (d) at the discretion
of the Committee and consistent with applicable law, through the delivery of an
assignment to the Company of a sufficient amount of the proceeds from the sale
of the Common Stock acquired upon exercise of the Option and an authorization to
the broker or selling agent to pay that amount to the Company, which sale shall
be at the participant's direction at the time of exercise, or (e) at the
discretion of the Committee, by any combination of (a), (b), (c) and (d) above.
If the Committee exercises its discretion to permit payment of the exercise
price of an ISO by means of the methods set forth in clauses (b), (c), (d) or
(e) of the preceding sentence, such discretion shall be exercised in writing at
the time of the grant of the ISO in question. The holder of an Option shall not
have the rights of a shareholder with respect to the shares covered by such
Option until the date of issuance of a stock certificate to such holder for such
shares. Except as expressly provided above in paragraph 13 with respect to
changes in capitalization and stock dividends, no adjustment shall be made for
dividends or similar rights for which the record date is before the date such
stock certificate is issued.
15. TERM AND AMENDMENT OF PLAN. This Plan was adopted by the Board on
--------------------------
April 11, 1995, subject, with respect to the validation of ISOs granted under
the Plan, to approval of the Plan by the stockholders of the Company at the next
Meeting of Stockholders or, in lieu thereof, by written consent. If the
approval of stockholders is not obtained prior to April 11, 1996, any grants of
ISOs under the Plan made prior to that date will be rescinded. The Plan shall
expire at the end of the day on April 10, 2005 (except as to Options outstanding
on that date). Subject to the provisions of paragraph 5 above, Options may be
granted under the Plan prior to the date of stockholder approval of the Plan.
The Board may terminate or amend the Plan in any respect at any time, except
that, without the approval of the stockholders obtained within 12 months before
or after the Board adopts a resolution authorizing any of the following actions:
(a) the total number of shares that may be issued under the Plan may not be
increased (except by adjustment pursuant to paragraph 13); (b) the benefits
accruing to participants under the Plan may not be materially increased; (c) the
requirements as to eligibility for participation in the Plan may not be
materially modified; (d) the provisions of paragraph 3 regarding eligibility for
grants of ISOs may not be modified; (e) the provisions of paragraph 6(B)
regarding the exercise price at which shares may be offered pursuant to ISOs may
not be modified (except by adjustment pursuant to paragraph 13); (f) the
expiration date of the Plan may not be extended; and (g) the Board may not take
any action which would cause the Plan to fail to comply with Rule 16b-3. Except
as otherwise provided
<PAGE>
-8-
in this paragraph 15, in no event may action of the Board or stockholders alter
or impair the rights of a grantee, without such grantee's consent, under any
Option previously granted to such grantee.
16. CONVERSION OF ISOS INTO NON-QUALIFIED OPTIONS. The Committee, at the
---------------------------------------------
written request or with the written consent of any optionee, may in its
discretion take such actions as may be necessary to convert such optionee's ISOs
(or any installments or portions of installments thereof) that have not been
exercised on the date of conversion into Non-Qualified Options at any time prior
to the expiration of such ISOs, regardless of whether the optionee is an
employee of the Company or a Related Corporation at the time of such conversion.
Such actions may include, but shall not be limited to, extending the exercise
period or reducing the exercise price of the appropriate installments of such
ISOs. At the time of such conversion, the Committee (with the consent of the
optionee) may impose such conditions on the exercise of the resulting Non-
Qualified Options as the Committee in its discretion may determine, provided
that such conditions shall not be inconsistent with this Plan. Nothing in the
Plan shall be deemed to give any optionee the right to have such optionee's ISOs
converted into Non-Qualified Options, and no such conversion shall occur until
and unless the Committee takes appropriate action.
17. APPLICATION OF FUNDS. The proceeds received by the Company from the
--------------------
sale of shares pursuant to Options granted and Purchases authorized under the
Plan shall be used for general corporate purposes.
18. NOTICE TO COMPANY OF DISQUALIFYING DISPOSITION. By accepting an ISO
----------------------------------------------
granted under the Plan, each optionee agrees to notify the Company in writing
immediately after such optionee makes a Disqualifying Disposition (as described
in Sections 421, 422 and 424 of the Code and regulations thereunder) of any
stock acquired pursuant to the exercise of ISOs granted under the Plan. A
Disqualifying Disposition is generally any disposition occurring on or before
the later of (a) the date two years following the date the ISO was granted or
(b) the date one year following the date the ISO was exercised.
19. WITHHOLDING OF ADDITIONAL INCOME TAXES. Upon the exercise of a Non-
--------------------------------------
Qualified Option, the grant of an Award, the making of a Purchase of Common
Stock for less than its fair market value, the making of a Disqualifying
Disposition (as defined in paragraph 18), the vesting or transfer of restricted
stock or securities acquired on the exercise of an Option hereunder, or the
making of a distribution or other payment with respect to such stock or
securities, the Company may withhold taxes in respect of amounts that constitute
compensation includable in gross income. The Committee in its discretion may
condition (i) the exercise of an Option, (ii) the grant of an Award, (iii) the
making of a Purchase of Common Stock for less than its fair market value, or
(iv) the vesting or transferability of restricted stock or securities acquired
by exercising an Option, on the grantee's making satisfactory arrangement for
such withholding. Such arrangement may include payment by the grantee in cash
or by check of the amount of the withholding taxes or, at the discretion of the
Committee, by the grantee's delivery of previously held shares of Common Stock
or the withholding from the shares of Common Stock otherwise deliverable upon
exercise of a Option shares having an aggregate fair market value equal to the
amount of such withholding taxes.
20. GOVERNMENTAL REGULATION. The Company's obligation to sell and deliver
-----------------------
shares of the Common Stock under this Plan is subject to the approval of any
governmental authority required in connection with the authorization, issuance
or sale of such shares.
<PAGE>
-9-
Government regulations may impose reporting or other obligations on the
Company with respect to the Plan. For example, the Company may be required to
send tax information statements to employees and former employees that exercise
ISOs under the Plan, and the Company may be required to file tax information
returns reporting the income received by grantees of Options in connection with
the Plan.
21. GOVERNING LAW. The validity and construction of the Plan and the
-------------
instruments evidencing Options shall be governed by the laws of the State of
Delaware, or the laws of any jurisdiction in which the Company or its successors
in interest may be organized.
Date Approved by the Board of Directors of the Company: April 11, 1995
Date Approved by Stockholders of the Company: April 19, 1995
Amended and restated by the Board of Directors of the Company: January 25,
1996.
Amended and restated by the Board of Directors of the Company: March 6, 1997.
<PAGE>
Exhibit 11
----------
TRANSWITCH CORPORATION
COMPUTATION OF EARNINGS PER SHARE (1)
(in thousands, except per share data)
Twelve Months
ended December 31,
------------------
1996 1995 1994
---- ---- ----
Primary (2)
Weighted average number of common shares
outstanding (5) $ 11,751 $ 9,996 $ 923
Conversion of common equivalents issued
during the twelve month period prior to
the initial public offering (3) 0 66 198
Common Stock Equivalents - - -
--------- -------- --------
Weighted average common shares and
equivalents 11,751 10,062 1,121
Conversion of preferred stock to Common
Stock (4) - - 7,010
Conversion of preferred stock to Common
Stock (4) - - 16
Pro forma weighted average Common Stock and
equivalents 11,751 10,062 8,147
Net loss $(10,077) $(1,769) $(3,937)
- -------- --------- -------- --------
Net loss per share $ (0.86) $ (0.18) $ (3.51)
Pro forma net loss per share $ (0.86) $ (0.18) $ (0.48)
- ---------------------------- --------- --------- --------
- -----------
(1) This exhibit should be read in connection with "Stockholders' Equity and
Loss Per Share" in Note 1 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 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 1995 weighted average common shares outstanding include the Preferred
Stock converted to Common Stock as having been converted into Common Stock
at the beginning of the period.
<PAGE>
EXHIBIT 21.1
------------
Subsidiary of the Company
Name Jurisdiction
TranSwitch Europe N.V./S.A. Belgium
<PAGE>
REPORT AND CONSENT OF INDEPENDENT AUDITORS
The Board of DirectorsTranSwitch Corporation:
The audits referred to in our report dated February 11, 1997, included the
related financial statement schedule as of December 31, 1996, and for each of
the years in the three-year period ended December 31, 1996, included in the
Company's annual report on Form 10-K. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement schedule based on our audits. In our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
We consent to the use of our reports included here in and incorporated by
reference in the registration statements (No. 33-94234 and No. 333-03607) on
Form S-8 of TranSwitch Corporation relating to the consolidated balance sheets
of TranSwitch Corporation and subsidiary as of December 31, 1996, and 1995,
and the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for each of the years in the three-year period ended
December 31, 1996, and the related schedule, which reports appear in the
December 31, 1996, annual report on Form 10-K of TranSwitch Corporation.
KPMG Peat Marwick LLP
Stamford, Connecticut
March 25, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> OCT-01-1996 JAN-01-1996
<PERIOD-END> DEC-31-1996 DEC-31-1996
<CASH> 3,911 3,911
<SECURITIES> 8,777 8,777
<RECEIVABLES> 3,033 3,033
<ALLOWANCES> 140 140
<INVENTORY> 3,524 3,524
<CURRENT-ASSETS> 19,410 19,410
<PP&E> 6,810 6,810
<DEPRECIATION> 4,163 4,163
<TOTAL-ASSETS> 23,311 23,311
<CURRENT-LIABILITIES> 4,760 4,760
<BONDS> 0 0
0 0
0 0
<COMMON> 12 12
<OTHER-SE> 17,287 17,287
<TOTAL-LIABILITY-AND-EQUITY> 23,311 23,311
<SALES> 4,190 19,248
<TOTAL-REVENUES> 4,190 19,650
<CGS> 6,094 13,806
<TOTAL-COSTS> 4,951 16,611
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 23 129
<INCOME-PRETAX> (6,751) (10,077)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (6,751) (10,077)
<EPS-PRIMARY> (.57) (.86)
<EPS-DILUTED> (.57) (.86)
</TABLE>
