<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10 - Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
for the quarterly period ended June 30, 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 July 31, 1997:
12,147,654 shares.
<PAGE>
TranSwitch Corporation
INDEX
For the quarter ended June 30, 1997
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1997
and December 31, 1996 3
Consolidated Statements of Operations for the Three and Six Months Ended
June 30, 1997 and 1996 4
Consolidated Statements of Cash Flows for the Three and Six Months Ended
June 30, 1997 and 1996 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
</TABLE>
<PAGE>
Part I FINANCIAL INFORMATION
Item 1. Financial Statements
TranSwitch Corporation
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(in thousands, except share data) June 30, December 31,
Assets 1997 1996
------ ---- ----
<S> <C> <C>
Current assets: (unaudited)
Cash and cash equivalents $ 8,534 $ 3,911
Short term investments 991 8,777
Accounts receivable, net 4,226 2,893
Inventories, net 3,435 3,524
Prepaid expenses and other current assets 535 305
--------- ---------
Total current assets 17,721 19,410
Property and equipment, net 2,926 2,647
Product licenses, net 1,169 1,254
--------- ---------
Total Assets $ 21,816 $ 23,311
============ ========= =========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 1,545 $ 1,805
Accrued liabilities 3,256 2,110
Product license fee payable, current portion 1,052 845
--------- ---------
Total current liabilities 5,853 4,760
Product license fee payable, less current portion 792 1,252
Stockholders' equity:
Common Stock, $.001 par value; authorized 25,000,000 shares;
issued and outstanding; 11,912,486 shares at December 31, 1996,
and 12,116,661 shares at June 30, 1997 12 12
Additional paid in capital 45,731 45,375
Accumulated deficit (30,572) (28,088)
--------- ---------
Total stockholders' equity 15,171 17,299
--------- ---------
Total Liabilities and Stockholders' Equity $ 21,816 $ 23,311
========================================== ========= =========
</TABLE>
<PAGE>
TranSwitch Corporation
Consolidated Statements of Operations
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- --------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues 6,256 6,486 11,312 12,845
Cost of Revenues 2,803 2,787 5,177 5,641
--------- --------- --------- --------
Gross Profit 3,453 3,699 6,135 7,204
Operating Expenses:
Research and development 2,216 2,002 4,614 4,083
Marketing and sales 1,673 1,289 3,174 2,474
General and administrative 567 505 1,085 914
--------- --------- --------- --------
Total Operating Expenses 4,456 3,796 8,873 7,471
--------- --------- --------- --------
Operating Loss (1,003) (97) (2,738) (267)
Interest Income, net 111 189 254 422
--------- --------- --------- --------
Net Income (Loss) $ (892) $ 92 $ (2,484) $ 155
========= ========= ========= ========
Net Income (Loss) per Common Share $ (0.07) $ 0.01 $ (0.21) $ 0.01
========= ========= ========= ========
Weighted Average Number of Common Shares
Outstanding and Equivalents 12,093 12,284 12,063 12,236
========= ========= ========= ========
</TABLE>
<PAGE>
TranSwitch Corporation
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (2,484) $ 155
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 766 530
Stock compensation expense 166 78
Changes in assets and liabilities:
(Increase) in accounts receivable (1,333) (833)
(Increase) decrease in prepaids and other current assets (230) 77
Decrease (increase) in inventories 89 (702)
(Decrease) increase in accounts payable (260) 68
Increase in accrued liabilities 1,353 94
------------ -----------
Total adjustments 551 (688)
------------ -----------
Net cash (used) in operating activities (1,933) (533)
Cash flows from investing activities:
Capital expenditures and cost of product licenses (960) (1,519)
Purchase of short term investments (4,506) (11,773)
Proceeds from sale of short term investments 12,292 8,127
------------ -----------
Net cash provided by (used in) investing activities 6,826 (5,165)
Cash flows from financing activities:
Proceeds from the exercise of stock options and warrants 190 179
Repayment of long term liabilities (460)
------------ -----------
Net cash provided by (used in) financing activities (270) 179
(Decrease) increase in cash and cash equivalents 4,623 (5,519)
------------ -----------
Cash and cash equivalents at beginning of period 3,911 13,630
Cash and cash equivalents at end of period $ 8,534 $ 8,111
=========== ============
Supplemental disclosure of cash flows information:
Cash paid for interest $ 4 $ 68
</TABLE>
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the second quarter ended June 30, 1997
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>
June 30, 1997 December 31, 1996
------------- -----------------
<S> <C> <C>
Raw Materials $ 581,860 $ 600,035
Work in Process 1,321,759 1,500,306
Finished Goods 1,531,669 1,423,514
---------- ----------
Total Inventories $3,435,288 $3,523,855
================= ========== ==========
</TABLE>
<PAGE>
Note 3. Consolidated Statement of Stockholders' Equity
- -------------------------------------------------------
(in thousands, except share data)
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit Total
---------- ------ ------- -------- -------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 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
Shares of common stock issued upon exercise of stock options 61,755 - 93 - 93
Compensation related to issuance of stock options - - 80 - 80
Net loss - - - (892) ( 892)
---------- ------ ------- -------- -------
Balance at June 30, 1997 12,116,661 $12 $45,731 ($30,572) $15,171
======================== ========== ====== ======= ======== =======
</TABLE>
<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 and six month periods ended June 30, 1997 and 1996
Revenue
The Company derives its revenues principally from product sales. Total
revenues for the quarter ended June 30, 1997 were $6.3 million and were
relatively flat from the $6.5 million recorded in the prior year comparable
period. Total revenues for the six months ended June 30, 1997 were $11.3
million a decline of 12% from the $12.8 million for the six months ended June
30, 1996. The decline in revenue in the six months 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 was $3.5 million for the quarter ended June 30, 1997 compared
to $3.7 million in the corresponding period of the prior year. Gross profit for
six months ended June 30, 1997 was $6.1 million compared to $7.2 million for the
same period in 1996. The decrease in gross profit for the first six months of
1997 was primarily the result of lower volume in the period versus the
comparable period a year ago. Gross margin was 55.2% for the quarter ended
June 30, 1997 as compared to 57.0% for the quarter ended June 30, 1996 and for
six months ended June 30, 1997 was 54.2% compared to 56.0% for the same period a
year ago. The decline in the gross margin is primarily attributable to the
lower amount of revenue from research and development contracts that
<PAGE>
were recognized in 1997 versus 1996.
Research and Development
Research and development expenses were 35.4% of total revenues for the
quarter ended June 30, 1997 as compared to 30.8% of total revenues for the
quarter ended June 30, 1996; total spending increased 10.2% to $2.2 million for
the quarter ended June 30, 1997 as compared to $2.0 million for the quarter
ended June 30, 1996. In the six month period ended June 30, 1997 research and
development expenses were 40.8% of revenues as compared to 31.8% for the same
period a year ago; spending in the six months ended June 30, 1997 was $4.6
million a 13% increase over the $4.1 million for the comparable period a year
ago. 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 periods is partially attributed to the lower revenue level in the
comparable periods.
Marketing and Sales
Marketing and sales expenses were 26.7% of total revenues for the quarter
ended June 30, 1997 compared to 19.9% for the quarter ended June 30, 1996. The
marketing and sales expenses increased 29.7% to $1.7 million for the quarter
ended June 30, 1997 compared to $1.3 million for the quarter ended June 30,
1996. In the six month period ended June 30, 1997 marketing and sales expenses
were 28.0% of total revenues compared to 19.3% for the same period in 1996.
Total spending increased 28.3% to $3.2 million for the six month period in 1997
as compared to $2.5 million spent in the same period in 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 June 30, 1997
increased to $567,000 from $505,000 for the same quarter in the prior year, and
as a percentage of total revenues increased to 9.1% for the quarter ended June
30, 1997 compared to 7.8% for the quarter ended June 30, 1996. The total
spending for the six months period ended June 30, 1997 increased 18.7% to $1.1
million from the $0.9 million spent for the same period a year ago and as a
percentage of total revenues increased to 9.6% for the six months ended June 30,
1997 as compared to the 7.1% for the comparable period a year ago. The increase
in expense was the result of the Company's continued investment in the general
and administrative area. The increase as a percentage of total revenue in the
quarter is partially attributed to the lower revenue levels in the comparable
periods.
<PAGE>
Interest Income, net
Interest income, net of interest expense, was $111,000 in the quarter
ended June 30, 1997 compared to $189,000 in the corresponding period in 1996 and
for the six month period was $254,000 in 1997 as compared to $422,000 in the
same 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 six months of 1997, the Company used $1.9 million of cash in
its operating activities, the result of a net loss of $2.5 million and an
increase in working capital of $0.4 million, offset by non-cash items of $0.9
million. Capital expenditures in this period were $1.3 million, including
purchases of computer equipment, tooling, software acquisitions and product
licenses.
At June 30, 1997 the Company had cash and cash equivalents and short term
investments of approximately $9.5 million. In addition, in the quarter ended
June 30, 1997 the Company entered into a new financing arrangement Silicon
Valley Bank whereby the Company has a total credit facility of $8 million, made
up of a $2 million line of credit for capital equipment and a $6 million line of
credit for working capital purposes. The agreement contains certain financial
restrictions and covenants which, among other things, include provisions that
define line availability, maintaining a minimum amount of cash, net worth and
profitability. Although the Company anticipates that its existing cash, cash
flow from operations, if any, and its line of credit are sufficient to satisfy
its cash needs for at least 12 months, the Company believes that its ability to
take advantage of business opportunities and to increase the market penetration
of its products, among other things, would be enhanced by raising additional
capital. Therefore, the Company explores on a regular basis a variety of
capital raising opportunities. There can be no assurance that the Company would
be able to secure any additional financing or that additional financing will be
available on favorable terms. Further, there can be no assurance that events
will not occur that would otherwise require the Company to seek additional
financing, and under such circumstances, no assurances can be given that
financing would be available, if at all, on terms favorable to the Company.
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
<PAGE>
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>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
On May 9, 1996 the Company held its Annual Meeting of Stockholders, at which the
stockholders of the Company voted on the following matters:
1. The election of a Board of Director for the ensuing year. The number of
votes cast for the re-election of each of the directors listed below was
as follows:
<TABLE>
<CAPTION>
Nominee Number of Shares
------- ----------------
For Withhold Authority
--- ------------------
<S> <C> <C>
Dr. Santanu Das 9,672,335 421,953
Dr. Steward S. Flaschen 9,686,281 408,007
Dr. Charles Lee 9,619,470 474,818
Dr. Ljubomir Micic 9,638,077 456,211
Dr. Albert E. Paladino 9,636,346 457,942
</TABLE>
2. An amendment to the Company's Amended and Restated 1995 Stock Plan to
increase the number of shares of Common Stock authorized to be issued
thereunder by an additional 900,000 shares, for a total of 2, 469,019
shares, was approved by the following vote:
<TABLE>
<CAPTION>
Number of Shares
----------------
<S> <C>
For 4,070,058
Against 1,898,329
Abstain 58,067
Broker Non-Votes 4,067,834
</TABLE>
3. The selection of KPMG Peat Marwick LLP as auditors for the fiscal year
ending December 31, 1997 was ratified by the following vote:
<TABLE>
<S> <C>
For 10,048,039
Against 28,954
Abstain 17,295
Broker Non-Votes 0
</TABLE>
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11, Statement re: computation of per share earnings.
Exhibit 27, Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the second quarter ended
June 30, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TranSwitch Corporation
(Registrant)
Date: August 8, 1997 /s/ Dr. Santanu Das
---------------------------------------
Dr. Santanu Das
Chairman of the Board,
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>
Exhibit 11:
TranSwitch Corporation
Computation of Earnings per Share (1)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Primary (2)
Weighted average number of common shares outstanding 12,093 11,726 12,063 11,648
Common stock issuable with respect to common equivalents
for stock options and warrants - 558 - 588
--------- --------- --------- ---------
Weighted average common shares and equivalents 12,093 12,284 12,063 12,236
Net income (loss) $ (892) $ 92 $ (2,484) $ 155
--------- --------- --------- ---------
Net income (loss) per share $ (0.07) $ 0.01 $ (0.21) $ 0.01
=========================== ========= ========= ========= =========
</TABLE>
- ----------
(1) This exhibit should be read in connection with "Stockholders' Equity and
Loss Per Share" 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> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997
<PERIOD-END> JUN-30-1997 JUN-30-1997
<CASH> 8,534 8,534
<SECURITIES> 991 991
<RECEIVABLES> 4,366 4,366
<ALLOWANCES> 140 140
<INVENTORY> 3,435 3,435
<CURRENT-ASSETS> 17,721 17,721
<PP&E> 7,779 7,779
<DEPRECIATION> 4,853 4,853
<TOTAL-ASSETS> 21,816 21,816
<CURRENT-LIABILITIES> 5,853 5,853
<BONDS> 0 0
0 0
0 0
<COMMON> 12 12
<OTHER-SE> 15,159 15,159
<TOTAL-LIABILITY-AND-EQUITY> 21,816 21,816
<SALES> 6,256 11,312
<TOTAL-REVENUES> 6,256 11,312
<CGS> 2,803 5,177
<TOTAL-COSTS> 4,456 8,873
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (892) (2,484)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (892) (2,484)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (892) (2,484)
<EPS-PRIMARY> (0.07) (0.21)
<EPS-DILUTED> (0.07) (0.21)
</TABLE>
