<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10 - Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
for the quarterly period ended March 31, 1997
or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
for the transition period from to
------------ ------------
Commission File Number 0-25996
TRANSWITCH CORPORATION
(Exact name of Registrant as Specified in its Charter)
Delaware 06-1236189
(State of Incorporation) (I.R.S. Employer Identification Number)
8 Progress Drive
Shelton, Connecticut 06484
(Address of Principal Executive Offices)
Telephone (203) 929-8810
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Common stock, par value $.001 per share, outstanding at April 30, 1997:
12,071,797
Page 1 of 12
----- -----
<PAGE>
TranSwitch Corporation
INDEX
For the quarter ended March 31, 1997
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1997
and December 31, 1996 3
Consolidated Statements of Operations for the Three
Months Ended March 31, 1997 and 1996 4
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
Page 2 of 12
<PAGE>
Part I FINANCIAL INFORMATION
Item 1. Financial Statements
TranSwitch Corporation
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(in thousands, except share data) March 31, December 31,
Assets 1997 1996
------ ---- ----
<S> <C> <C>
Current assets: (unaudited)
Cash and cash equivalents $ 4,650 $ 3,911
Short term investments 5,009 8,777
Accounts receivable, net 4,408 2,893
Inventories, net 3,426 3,524
Prepaid expenses and other current assets 605 305
----------- ------------
Total current assets 18,098 19,410
Property and equipment, net 3,140 2,647
Product licenses, net 1,214 1,254
----------- ------------
Total Assets $ 22,452 $ 23,311
============ =========== ============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 2,111 $ 1,805
Accrued liabilities 2,467 2,110
Product license fee payable, current portion 962 845
----------- ------------
Total current liabilities 5,540 4,760
Product license fee payable, less current portion 1,022 1,252
Stockholders' equity:
Common Stock, $.001 par value; authorized 25,000,000 shares; issued and
outstanding 11,912,486 shares December 31, 1996,
12,054,906 shares March 31, 1997 12 12
Additional paid in capital 45,558 45,375
Accumulated deficit (29,680) (28,088)
----------- ------------
Total stockholders' equity 15,890 17,299
----------- ------------
Total Liabilities and Stockholders' Equity $ 22,452 $ 23,311
========================================== =========== ============
</TABLE>
Page 3 of 12
---- ----
<PAGE>
TranSwitch Corporation
Consolidated Statements of Operations
Unaudited
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
---- ----
<S> <C> <C>
Revenues $ 5,056 $ 6,359
Cost of Revenues 2,374 2,854
-------- --------
Gross Profit 2,682 3,505
Operating Expenses:
Research and development 2,398 2,082
Marketing and sales 1,501 1,185
General and administrative 518 408
-------- --------
Total Operating Expenses 4,417 3,675
-------- --------
Operating Loss (1,735) (170)
Interest Income, net 143 233
-------- --------
Net Income (Loss) $ (1,592) $ 63
======== ========
Net Income (Loss) per Common Share $ (0.13) $ 0.01
======== ========
Weighted Average Number of Common Shares
Outstanding and Equivalents 12,033 12,109
======== ========
</TABLE>
Page 4 of 12
<PAGE>
TranSwitch Corporation
Consolidated Statements of Cash Flows
Unaudited
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------
<S> <C> <C>
1997 1996
---- ----
Cash flows from operating activities:
Net income (loss) $ (1,592) $ 63
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 376 256
Stock compensation expense 86 39
Changes in assets and liabilities:
(Decrease) increase in accounts receivable (1,515) 599
(Decrease) increase in prepaids and other current assets (300) 62
Decrease in inventories 98 169
Increase (decrease) in accounts payable 306 (264)
Increase (decrease) in accrued liabilities 474 (20)
-------- --------
Total adjustments (475) 841
-------- --------
Net cash provided by (used in) operating activities (2,067) 904
Cash flows from investing activities:
Capital expenditures and cost of product licenses (829) (636)
Purchase of short term investments (4,506) (5,634)
Proceeds from sale of short term investments 8,274 972
-------- --------
Net cash provided by (used in) investing activities 2,939 (5,298)
Cash flows from financing activities:
Proceeds from the exercise of stock options and warrants 97 40
Repayment of long term liabilities (230) (230)
-------- --------
Net cash provided by (used in) financing activities (133) (190)
Increase (decrease) in cash and cash equivalents 739 (4,584)
-------- --------
Cash and cash equivalents at beginning of year 3,911 13,630
Cash and cash equivalents at end of period $ 4,650 $ 9,046
======== ========
Supplemental disclosure of cash flows information:
Cash paid for interest $ 4 $ 34
</TABLE>
Page 5 of 12
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the first quarter ended March 31, 1996
Note 1. Interim Financial Statements
- -------------------------------------
The accompanying unaudited interim financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
for reporting on Form 10-Q. Accordingly, certain information and footnotes
required by generally accepted accounting principles for complete financial
statements are not included herein. The financial statements are prepared on a
consistent basis with and should be read in conjunction with the statements and
notes thereto contained in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996 filed with the Securities and Exchange
Commission on March 25, 1997.
In the opinion of management, these statements include all adjustments,
consisting of normal, recurring adjustments, which are necessary for a fair
presentation for such periods. The results of operations for any interim period
are not necessarily indicative of the results which may be achieved for the
entire fiscal year ending December 31, 1997.
Note 2. Inventories
- --------------------
Inventories are carried at the lower of cost (on a first in, first out
basis) or estimated net realizable value. Inventories are summarized as follows:
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
-------------- -----------------
<S> <C> <C>
Raw Materials $ 906,251 $ 600,035
Work in Process 1,158,505 1,500,306
Finished Goods 1,361,545 1,423,514
-------------- --------------
Total Inventories $ 3,426,301 $ 3,523,855
================= ============== ==============
</TABLE>
Page 6 of 12
<PAGE>
<TABLE>
<CAPTION>
Note 3. Consolidated Statement of Stockholders' Equity
- -------------------------------------------------------
(in thousands, except share data)
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit Total
-------- ------- ------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 11,912,486 $12 $45,375 ($28,088) $17,299
Shares of common stock issued upon exercise
of stock options 142,320 - 97 - 97
Exercise of warrants 100 - - - -
Compensation related to issuance of stock options - - 86 - 86
Net loss - - - (1,592) (1,592)
------- -------
Balance at March 31, 1997 12,054,906 $12 $45,558 ($29,680) $15,890
========================= ========================================================================
</TABLE>
Page 7 of 12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
General
TranSwitch Corporation, a Delaware Corporation ("TranSwitch" or the
"Company") was organized and commenced operations in April 1988. Since its
incorporation, the Company has designed, sourced and marketed 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). The Company's products are generally incorporated into OEM's products at
the design stage, which often requires significant expenditures by the Company
well in advance of substantial orders from the customer.
The Company believes that period to period comparisons of its financial
results are not necessarily meaningful and should not be relied upon as an
indication of future performance. In addition, the Company's results of
operations may fluctuate from period to period in the future.
Three month periods ended March 31, 1997 and 1996
Revenue
The Company derives its revenues principally from product sales. Total
revenues for the quarter ended March 31, 1997 were $5.1 million, representing a
decline from the $6.4 million recorded in the prior year comparable period. The
decline in revenue in the quarter is primarily attributable to the decline in
the revenue of a specific ATM product that was only partially offset by new ATM
products that are just being introduced.
Gross Profit
Gross profit declined to $2.7 million for the quarter ended March 31, 1997
from $3.5 million in the corresponding period of the prior year. The decrease in
gross profit for the first quarter of 1997 was primarily the result of lower
volume in the quarter versus the comparable quarter a year ago. Gross margin was
53.0% for the quarter ended March 31, 1997 as compared to 55.1% for the quarter
ended March 31, 1996. The decline in the gross margin is primarily attributable
to the lower volume absorbing fixed costs for the period.
Research and Development
Research and development expenses were 47.4% of total revenues for the
quarter ended
Page 8 of 12
<PAGE>
March 31, 1997 as compared to 32.7% of total revenues for the quarter ended
March 31, 1996; total spending increased 15.2% to $2.4 million for the quarter
ended March 31, 1997 as compared to $2.1 million for the quarter ended March 31,
1996. The increases were the result of the Company's continued investment in
research and development activities. The increase as a percentage of total
revenue in the quarter is partially attributed to the decline in the revenue
level in the quarter.
Marketing and Sales
Marketing and sales expenses were 29.7% of total revenues for the quarter
ended March 31, 1997 compared to 18.6% for the quarter ended March 31, 1996. The
marketing and sales expenses increased 26.7% to $1.5 million for the quarter
ended March 31, 1997 compared to $1.2 million for the quarter ended March 31,
1996. The increase in spending was the result of the increase in marketing and
sales personnel and expansion of the Company's distribution network as part of
the Company's continued investment in its marketing and sales infrastructure.
The increase as a percentage of total revenue in the quarter is partially
attributed to the decline in the revenue level in the quarter.
General and Administrative
General and administrative expenses for the quarter ended March 31, 1997
increased to $518,000 from $408,000 for the same quarter in the prior year, and
as a percentage of total revenues increased to 10.2% for the quarter ended March
31, 1997 compared to 6.4% for the quarter ended March 31, 1996. The increase in
expense in actual dollars is the result of the increase in some seasonal
expenses and in recruiting expenses that occurred in the quarter. The increase
as a percentage of total revenue in the quarter is partially attributed to the
decline in the revenue level in the quarter.
Interest Income, net
Interest income, net of interest expense, was $143,000 in the quarter ended
March 31, 1997 compared to $233,000 in the corresponding period in 1996. The
decline in interest income is primarily the result of the reduction in cash
between the two periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations and met its capital requirements
since it was incorporated in 1988 and through 1995 primarily through private
placements of preferred stock, borrowings from a working capital line and
equipment financing from Silicon Valley Bank, an initial public offering of its
common stock in June, 1995 and cash generated from its operations.
In the first three months of 1997, the Company used $2.1 million of cash in
its operating activities, the result of a net loss of $1.6 million and in
increase in Working Capital of $1.0 million,
Page 9 of 12
<PAGE>
partially offset by non-cash items of $0.5 million. Capital expenditures in this
period were $0.8 million, including purchases of computer equipment, tooling,
software acquisitions and product licenses.
At March 31, 1997 the Company had cash and cash equivalents and short term
investments of approximately $9.7 million. The Company believes its existing
cash, the cash flow from operations if any and cash under its lines of credit
will be sufficient to satisfy the Company's cash needs for at least the next 12
months. However, there can be no assurance that events in the future will not
require the Company to seek additional capital sooner or, if so required, that
such capital will be available on terms favorable or acceptable to the Company,
if at all.
Certain Factors That May Affect Future Results
The Company's quarterly and annual operating results are affected by a wide
variety of factors that could materially adversely affect revenues and
profitability, including: competitive pressures on selling prices; the timing
and cancellation of customers orders; the timing and provision of pricing
protections and returns from certain distributors; availability of foundry
capacity and raw materials; fluctuations in yields; changes in product mix; the
Company's ability to introduce new products and technologies on a timely basis;
introduction of products and technologies by the Company's competitors; market
acceptance of the Company's and its competitors' products; the level of orders
received which can be shipped in a quarter; the amount and timing of recognition
of non-recurring engineering revenue; the timing of investments in research and
development, including tooling expenses associated with product development and
pre-production; and whether the Company's customers buy directly from the
Company or a distributor. Due to the absence of a substantial noncancellable
backlog, the Company typically plans its production and inventory levels based
on internal forecasts of customer demand, which are highly unpredictable and can
fluctuate substantially. Because the Company is continuing to increase its
operating expenses for personnel and new product development and for inventory
in anticipation of future sales levels, operating results would be adversely
affected if increased sales are not achieved. As a result of the foregoing and
other factors, the Company may experience material fluctuations in future
operating results on a quarterly or annual basis which could materially and
adversely affect its business, financial condition, operating results and stock
price .
Page 10 of 12
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 11, Statement re: computation of per share earnings.
Exhibit 27, Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the first quarter ended
March 31, 1997.
Page 11 of 12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TranSwitch Corporation
` (Registrant)
Date: May 9, 1997 /s/ Dr. Santanu Das
----------------------------------
Dr. Santanu Das
President, Chief Executive Officer
(Principal Executive Officer)
/s/ Michael F. Stauff
----------------------------------
Michael F. Stauff
Senior Vice President and Chief
Financial Officer and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
Page 12 of 12
<PAGE>
Exhibit 11:
TranSwitch Corporation
Computation of Earnings per Share (1)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
---- ----
<S> <C> <C>
Primary (2)
Weighted average number of common shares outstanding 12,033 11,571
Common stock issuable with respect to common equivalents
for stock options and warrants - 538
-------- --------
Weighted average common shares and equivalents 12,033 12,109
Net income (loss) $ (1,592) $ 63
- ---------------- -------- --------
Income (loss) per share $ (0.13) $ 0.01
============================== ======== ========
</TABLE>
- ----------
(1) This exhibit should be read in connection with "Consolidated Statement of
Stockholders' Equity" in Note 3 of the notes to the Consolidated Financial
Statements.
(2) Fully diluted per share amounts are the same as primary.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 4,650
<SECURITIES> 5,009
<RECEIVABLES> 4,548
<ALLOWANCES> 140
<INVENTORY> 3,426
<CURRENT-ASSETS> 18,098
<PP&E> 7,648
<DEPRECIATION> 4,508
<TOTAL-ASSETS> 22,452
<CURRENT-LIABILITIES> 5,540
<BONDS> 0
12
0
<COMMON> 0
<OTHER-SE> 15,878
<TOTAL-LIABILITY-AND-EQUITY> 22,452
<SALES> 4,994
<TOTAL-REVENUES> 5,056
<CGS> 2,374
<TOTAL-COSTS> 4,417
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,592)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,592)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,592)
<EPS-PRIMARY> ($0.13)
<EPS-DILUTED> ($0.13)
</TABLE>
