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RULE 424(b)(3)
REGISTRATION NO. 333-40897
PROSPECTUS
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TRANSWITCH CORPORATION
1,600,000 Shares of Common Stock
($.001 par value)
All of the shares of Common Stock, par value $.001 per share ("Common
Stock"), of TranSwitch Corporation (the "Company") offered hereby (the "Shares")
will be sold from time to time by certain stockholders of the Company (the
"Selling Stockholders"). The Shares consist of 1,600,000 of Common Stock
issuable upon the conversion of 14,500 shares of the Company's Series A
Convertible Preferred Stock, $.01 par value per share (the "Series A Stock").
The Company will not receive any of the proceeds from the sale of the Shares
offered hereby. All brokerage commissions and other similar expenses incurred
by the Selling Stockholders will be borne by the Selling Stockholders. Other
expenses of the offering, estimated at $25,000, will be borne by the Company.
The sale of the Shares by the Selling Stockholders may be effected from
time to time in one or more transactions (which may involve block transactions)
on the Nasdaq National Market (the "Nasdaq") or in the over-the-counter market,
in negotiated transactions or by a combination of such methods of sale, at fixed
prices, at market prices prevailing at the time of the sale, at prices related
to the prevailing market prices or at negotiated prices. The Selling
Stockholders may effect such transactions with or through one or more broker-
dealers, which may act as agent or principal. The Selling Stockholders and/or
any broker-dealer effecting the sales may be deemed to be an "underwriter"
within the meaning of Section 2(11) of the Securities Act of 1933, as amended
(the "Securities Act"), and any commissions received by the broker-dealer and
any profit on the resale of shares as principal may be deemed to be underwriting
discounts and commissions under the Securities Act. The Selling Stockholders
may transfer the Shares and the Series A Stock to other persons who may, in
turn, resell Shares in the manner described above. Additionally, the Selling
Stockholders may pledge or make gifts of the Shares, and the Shares may also be
sold by the pledgees or transferees. The Selling Stockholders may also transfer
the Shares pursuant to Rule 144 under the Securities Act, whether or not the
Registration Statement of which this Prospectus forms a part is effective at the
time of any such transfer. The Company has agreed to indemnify the Selling
Stockholders against certain liabilities, including certain liabilities under
the Securities Act, and to the extent any indemnification by an indemnifying
party is prohibited or limited by law, the Company has agreed to make the
maximum contribution with respect to any amounts for which it would otherwise be
liable under such indemnification provision to the fullest extent permitted by
law. See "Plan of Distribution."
The Common Stock is currently traded on the Nasdaq National Market under
the symbol "TXCC." On February 11, 1998 the closing bid price of the Common
Stock, as reported by the Nasdaq National Market, was $10.50 per share.
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THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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The date of this Prospectus is February 13, 1998
AVAILABLE INFORMATION
TranSwitch Corporation, a Delaware corporation, is subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and in accordance therewith, files reports and other
information with the Securities and Exchange Commission (the "Commission").
Reports and other information filed by the Company with the Commission pursuant
to the informational requirements of the Exchange Act may be inspected and
copied at the public reference facilities maintained by the Commission at
Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the following Regional Offices of the Commission: Seven World Trade Center,
Suite 1300, New York, New York 10048; and 500 West Madison Avenue, Suite 1400,
Chicago, Illinois 60661. Copies of such material may be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission also maintains a
Web site (at http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding the Company. The Company's Common
Stock is traded on the Nasdaq National Market, and such reports and other
information can be inspected at the offices of Nasdaq Operations, 1735 K Street,
N.W., Washington, D.C. 20006.
The Company has filed with the Commission in Washington, D.C. a
Registration Statement on Form S-3 under the Securities Act with respect to the
securities offered hereby. As permitted by the rules and regulations of the
Commission, this Prospectus omits certain information contained in the
Registration Statement. For further information with respect to the Company and
the securities offered hereby, reference is hereby made to the Registration
Statement and to the exhibits and schedules filed therewith. Statements
contained in this Prospectus regarding the contents of any documents filed with,
or incorporated by reference in, the Registration Statement as exhibits are not
necessarily complete, and each such statement is qualified in all respects by
reference to the copy of the applicable documents filed with the Commission.
The Registration Statement, including the exhibits and schedules thereto, may be
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inspected at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, and copies of all or any part
thereof may be obtained from such office upon payment of the prescribed fees.
INFORMATION INCORPORATED BY REFERENCE
The following documents heretofore filed by the Company with the Commission
(File No. 0-25996) pursuant to the Exchange Act are incorporated by reference in
this Prospectus:
(1) Annual Report on Form 10-K for the fiscal year ended December 31, 1996;
(2) Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31,
1997, June 30, 1997 and September 30, 1997;
(3) Current Report on Form 8-K filed on February 13, 1998;
(4) The Company's Proxy Statement for its Annual Meeting of Stockholders,
which was held on May 29, 1997;
(5) All other documents filed by the Company pursuant to Section 13(a) or
15(d) of the Exchange Act since the end of the fiscal year covered by the Annual
Report referred to in (1) above; and
(6) The "Description of Capital Stock" contained in the Company's
Registration Statement No. 33-91694 on Form S-1, as amended.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of this offering shall be deemed to be incorporated by reference
in this Prospectus and to be a part hereof from the date of filing such
documents. Any statement contained herein or in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein, or in any subsequently filed document which also is or is
deemed to be incorporated by reference herein, modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
Copies of the documents incorporated herein by reference (excluding exhibits
unless such exhibits are specifically incorporated by reference into such
documents) may be obtained upon written or oral request without charge by
persons, including beneficial owners, to whom this Prospectus is delivered.
Request should be made to Mr. Michael C. McCoy, Controller, TranSwitch
Corporation, Three Enterprise Drive, Shelton, Connecticut 06484 (Telephone 203-
929-8810).
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PROSPECTUS SUMMARY
The following summary information is qualified in its entirety by the more
detailed information appearing elsewhere in this Prospectus or incorporated
herein by reference and the financial statements which are incorporated herein
by reference.
The Company............... TranSwitch Corporation (the "Company") develops and
markets high-speed semiconductor solutions to
telecommunications and data communications original
equipment manufacturers.
Risk Factors.............. The offering involves substantial risk. See "Risk
Factors."
Securities Offered........ 1,600,000 shares of the Company's Common Stock, par
value $.001 per share.
Offering Price............ All or part of the Shares offered hereby may be sold
from time to time in amounts and on terms to be
determined by the Selling Stockholders at the time
of sale.
Use of Proceeds........... The Company will receive no part of the proceeds
from the sale of any of the Shares by the Selling
Stockholders.
Selling Stockholders...... The Shares being offered hereby are being offered
for the account of the Selling Stockholders
specified under the caption "Selling Stockholders."
Stock Market Symbols: Nasdaq National Market
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Common Stock TXCC
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RISK FACTORS
OPERATING LOSSES
The Company has largely not been profitable since its inception. As of
September 30, 1997, the Company had an accumulated deficit of $30.4 million.
For 1996 and the first three quarters of 1997, the Company incurred net losses
of approximately $10.1 million and $2.3 million, respectively. The Company
expects to continue to incur losses at least through 1997, and there can be no
assurance that the Company will achieve or maintain profitability in the future.
FACTORS AFFECTING OPERATING RESULTS
The Company's quarterly and annual operating results are affected by a wide
variety of factors that could materially and 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 customers' 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 from a distributor or
directly from the Company. Sudden shortages of raw materials or production
capacity constraints can lead producers to allocate available supplies or
capacity to customers with resources greater than those of the Company, which
could interrupt the Company's ability to meet its production obligations.
Historically, average selling prices in the semiconductor industry have
decreased over the life of a product, and as a result, the average selling
prices of the Company's products may be subject to significant pricing pressures
in the future. The Company's business is characterized by short-term orders and
shipment schedules, and customer orders typically can be canceled or rescheduled
without significant penalty to the customer. 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. In addition, the Company is limited in its ability to reduce costs
quickly in response to any revenue shortfalls. From time to time, in response
to anticipated long lead times to obtain inventory and materials from its
foundries, the Company may order in advance of anticipated customer demand,
which might result in excess inventory levels if expected orders fail to
materialize or other factors render the customer's product less marketable. As
a result of the foregoing or other factors, the Company may experience material
fluctuations in future operating
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results on a quarterly or annual basis which could materially and adversely
affect its business, financial condition and operating results.
DEPENDENCE ON VERY LARGE SCALE INTEGRATED CIRCUIT ("VLSI") FABRICATION
FACILITIES
The Company does not own or operate a VLSI fabrication facility, and all of
its semiconductor device requirements are currently supplied by four outside
foundries. There are 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 technology demanding process.
Although the Company has undertaken to diversify its sources of semiconductor
device supply and works closely with 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.
The Company purchases semiconductor devices from outside foundries pursuant
to purchase orders and does not have a guaranteed level of production capacity
at any of its foundries. The Company provides the foundries with rolling
forecasts of its production requirements; however, the ability of each foundry
to provide wafers to the Company is limited by the foundry's available capacity.
Therefore, the Company's foundry suppliers could choose to prioritize capacity
for other customers or uses or reduce or eliminate deliveries to the Company on
short notice. Accordingly, there is no assurance that the Company's foundries
will allocate sufficient capacity to satisfy the Company's requirements. In
addition, the Company has been, and expects in the future to be, particularly
dependent upon a limited number of foundries for its VLSI device requirements.
In particular, as of the date of this filing, all of the Company's BiCMOS
devices were manufactured by a single foundry supplier. Any sudden demand for
an increased amount of semiconductor devices or sudden reduction or elimination
of any existing source or sources of semiconductor devices could result in a
material delay in the shipment of the Company's products. There can be no
assurance that material disruptions in supply, which have occurred periodically
in the past, will not occur in the future. In the event of any such disruption,
if the Company were unable to qualify alternative manufacturing sources for
existing or new products in a timely manner or if such sources were unable to
produce VLSI devices with acceptable manufacturing yields, the Company's
business, financial condition and operating results would be materially and
adversely affected.
DEPENDENCE ON TELECOMMUNICATIONS AND DATA COMMUNICATIONS MARKETS
Virtually all of the Company's product revenues are derived from sales of
products for telecommunications and data communications applications. These
markets are characterized by
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intense competition, rapid technological change and short product life cycles.
In addition, the telecommunications and data communications equipment markets
have undergone a period of rapid growth and consolidation in the last few years.
The Company's business, financial condition and operating results would be
materially and adversely affected in the event of a significant slowdown in
these markets.
Products for telecommunications and data communications applications are
based on industry standards, which are continually evolving. The emergence of
new industry standards could render the Company's products unmarketable or
obsolete. There can be no assurance that the Company will be able to
successfully develop and introduce new products based on emerging industry
standards and the failure of the Company to introduce such products could
materially and adversely affect the Company's business, financial condition and
operating results. In addition, a substantial majority of the Company's revenues
has been, and will continue to be, derived from sales of Synchronous Optical
Network/Synchronous Digital Hierarchy ("SONET/SDH") and Asynchronous Transfer
Mode ("ATM")-based products. During the year ended December 31, 1996 and the
nine months ended September 30, 1997, sales of these products represented
approximately 83% and 72% of the Company's total revenues, respectively. There
can be no assurance that SONET/SDH and ATM-based products will achieve a
significant degree of market acceptance and that the Company's customers will be
able to assimilate the Company's SONET/SDH and ATM-based products. Failure of
SONET/SDH and ATM-based products to achieve market acceptance or of the
Company's customers to assimilate the Company's SONET/SDH and ATM-based products
would materially and adversely affect the Company's business, financial
condition and operating results.
DEPENDENCE ON NEW PRODUCTS; RISK OF PRODUCT DEVELOPMENT DELAYS
The Company's success depends upon its ability to develop new VLSI devices
for existing and new markets, to introduce such products in a timely manner and
to have such products selected for design into new products of leading systems
manufacturers. The development of these new devices is highly complex and from
time to time the Company has experienced delays in completing the development of
new products. Successful product development and introduction depends on 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 and market acceptance of the Company's and
its customers' products. The Company's success also depends upon its ability to
accurately specify and certify the conformance of its products to applicable
standards and to develop its products in accordance with customer requirements.
There can be no assurance that the Company will be able to adjust to changing
market conditions as quickly and cost-effectively as necessary to compete
successfully. Furthermore, there can be no assurance that the Company will be
able to introduce new products in a timely and cost-effective manner or in
sufficient quantities to meet customer demand or that such products will achieve
market acceptance. In addition, there can be no assurance that the electronic
systems manufactured by the Company's customers will be introduced in a timely
manner or that such systems will achieve market acceptance. The Company's or
its customers' failure to develop and introduce new products successfully and in
a timely manner would materially and adversely affect the Company's business,
financial condition and operating results.
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The Company's new products are generally incorporated into a customer's
products or systems at the design stage. However, customer decisions to use the
Company's products (design wins), which can often require significant
expenditures by the Company without any assurance of success, often precede the
generation of volume sales, if any, by a year or more. Moreover, the value of
any design win will largely depend upon the commercial success of the customer's
product and on the extent to which the design of the customer's electronic
system accommodates components manufactured by the Company's competitors. There
can be no assurance that the Company will continue to achieve design wins.
CUSTOMER CONCENTRATION
Historically, a relatively small number of customers have accounted for a
significant portion of the Company's total revenues in any particular period.
The Company has no long-term volume purchase commitments from any of its major
customers. For the nine months ended September 30, 1997, Insight Electronics,
Inc. (a distributor selling to various end users, none of which comprise more
than 10% of the Company's total revenues) and Tellabs Operations, Inc. accounted
for 41% and 16% of total revenues, respectively. In 1996 ECI Telecom Ltd,
Insight Electronics, Inc. and Tellabs Operations, Inc. accounted for 22%, 16%
and 14% of total revenues, respectively. In 1995, Tellabs Operations, Inc. and
Insight Electronics, Inc. accounted for 17% and 16% of total revenues,
respectively. In 1994, ECI Telecom Ltd. accounted for approximately 16% of total
revenues. The Company anticipates that sales of its products to relatively few
customers will continue to account for a significant portion of its total
revenues. The reduction, delay or cancellation of orders from one or more
significant customers could materially and adversely affect the Company's
business, financial condition and operating results. In addition, since the
Company's products are often sole sources to its customers, the Company's
business, financial condition and operating results could be materially and
adversely affected if one or more of its major customers were to develop other
sources of supply. Furthermore, in view of the relatively short product life
cycles in the telecommunications and data communications equipment markets, the
Company's business, financial condition and operating results would be
materially and adversely affected if one or more of its significant customers
were to select devices manufactured by one of the Company's competitors for
inclusion in future product generations. There can be no assurance that the
Company's current customers will continue to place orders with the Company, that
orders by existing customers will continue at the levels of previous periods or
that the Company will be able to obtain orders from new customers. Loss of one
or more of the Company's current customers or a disruption in the Company's
sales and distribution channels could materially and adversely affect the
Company's business, financial condition and operating results.
PATENTS, LICENSES AND INTELLECTUAL PROPERTY CLAIMS
The Company's success depends in part on its ability to obtain patents and
licenses and to preserve other intellectual property rights covering its
products and development and testing tools. To that end, the Company has
obtained certain domestic and foreign patents and intends to continue to seek
patents on its inventions when appropriate. The process of seeking patent
protection can be time consuming and expensive and there can be no assurance
that patents will issue from currently pending or future applications or that
the Company's existing patents or any new patents that may be issued will be
sufficient in scope or strength to provide meaningful protection or any
commercial advantage to the Company. There can be no assurance that foreign
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intellectual property laws will protect the Company's intellectual property
rights. Furthermore, there can be no assurance that others will not
independently develop similar products, duplicate the Company's products or
design around any patents issued to the Company. The Company may be subject to
or may initiate interference proceedings in the patent office, which can demand
significant financial and management resources. From time to time, the Company
may be notified that it is infringing certain patents and other intellectual
property rights of others. As claims arise, the Company evaluates their merits.
No assurance can be given that licenses will be obtainable on acceptable terms,
that damages for infringement will not be assessed or that litigation will not
occur. Litigation, which could result in substantial cost to and diversion of
resources of the Company, may be necessary to enforce patents or other
intellectual property rights of the Company or to defend the Company against
claimed infringement of the rights of others. The failure to obtain necessary
licenses or other rights or litigation arising out of any such claims could have
a material adverse effect on 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 the Company, are also
becoming intensely competitive because of deregulation and heightened
international competition. This is likely to result in pricing pressures on the
Company's products, potentially affecting its margins.
TranSwitch believes that the principal bases of competition include product
definition, product design, test capabilities, reliability, functionality, time-
to-market, reputation and price. 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.
The Company's competition consists of suppliers from the United States as
well as other countries, including competition from semiconductor divisions of
vertically integrated companies like AT&T, 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. Certain of the
Company's competitors are more established, benefit from greater market
recognition, and have substantially greater financial, development,
manufacturing, and marketing resources than the Company.
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FOREIGN SALES
For the nine months ended September 30, 1997 and the fiscal years ended
December 31, 1996 and 1995, foreign sales accounted for approximately 28%, 46%
and 38%, respectively, of the Company's total revenues. Specifically, sales to
Europe and the Middle East accounted for $2.7 million, $6.3 million and $3.1
million, respectively; sales to the Far East accounted for $1.9 million, $2.0
million and $1.8 million, respectively; and sales to Canada and other foreign
regions accounted for $534,000, $592,000 and $1.6 million, respectively. The
Company anticipates that foreign sales will continue to account for a
significant percentage of its revenues. A significant portion of the Company's
total revenues will therefore 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, difficulties in accounts receivable collection, difficulties in
managing distributors or representatives, difficulties in staffing and managing
foreign operations, difficulties in protecting the Company's intellectual
property overseas, seasonality of sales and potentially adverse tax
consequences. In particular, sales to Korea and other Pacific Rim countries may
be impacted by the current financial instability plaguing these nations. The
currency fluctuations and difficulty of obtaining loans from unstable banking
and other financial institutions in the Far East may cause the Company's
customers in that region to delay or reduce their orders. Although the Company's
sales to date have been denominated in United States dollars, the value of the
United States dollar in relation to foreign currencies may also adversely affect
the Company's sales to foreign customers. To the extent that the Company expands
its international operations or changes its pricing practices to denominate
prices in foreign currencies, the Company will be exposed to increased risks of
currency fluctuations.
THE SEMICONDUCTOR INDUSTRY
The Company provides semiconductor devices to the telecommunications and
data communications markets. The semiconductor industry is highly cyclical and
has been subject to significant economic downturns at various times,
characterized by diminished product demand, accelerated erosion of average
selling prices and production over-capacity. Although the semiconductor
industry has in recent periods experienced increased demand and production
capacity constraints, there can be no assurance as to how long this condition
will continue. The Company may experience substantial period-to-period
fluctuations in future operating results due to general semiconductor industry
conditions, overall economic conditions, or other factors.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant extent upon the continued
service of its executive officers, including Dr. Santanu Das, President and
Chief Executive Officer, and other key management and technical personnel,
including Daniel C. Upp, Vice President, Technology Strategy, and on its ability
to continue to attract, retain and motivate qualified personnel, such as
experienced mixed-signal circuit designers and systems applications engineers.
the competition for such employees is intense. The loss of the services of one
or more of the Company's design engineers, executive officers or other key
personnel or the Company's inability to recruit replacements for such personnel
or to otherwise attract, retain and motivate qualified personnel could have a
material adverse effect on the Company's business, financial condition and
operating results. To help retain the continued services of Dr. Das and Mr. Upp,
the Company has entered into a Severance Agreement with each of them, providing
for severance payments equal to, in the case of Dr. Das, twelve
months' then-current base salary and one hundred percent (100%) of the highest
annual bonus paid to him over the previous five years or, in the case of Mr.
Upp, six months' then-current base salary and fifty percent (50%) of the highest
annual bonus paid to him over the previous five years upon the occurrence of a
termination without cause or upon resignation prompted by a significant
reduction in the nature or scope of employment. The Company has also entered
into Executive Agreements with Dr. Das, Mr. Upp and other designated key
personnel, which provide for severance payments equal to, in the case of Dr.
Das, twelve months' then-current base salary and one hundred percent (100%) of
the highest annual bonus paid to him over the previous five years; in the case
of Mr. Upp, six months' then-current base salary and fifty percent (50%) of the
highest annual bonus paid to him over the previous five years; or, in the case
of other designated key personnel, three months' then-current base salary and
twenty five percent (25%) of the highest annual bonus paid to each such person
over the previous five years in the event of a termination without cause after
a change in control of the Company. In the event that either Dr. Das or Mr. Upp
is entitled to payments under both agreements, the maximum amount payable to him
is equal to the payment required under one of the agreements. The Company has no
long-term employment contracts with any of its employees.
TRANSITION TO NEW PROCESS TECHNOLOGIES
The Company's future success is also dependent upon its ability to develop
products that utilize new process technologies, to introduce them to the
marketplace ahead of competitors and
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to have them selected to be designed into products of leading systems
manufacturers. Semiconductor design and process methodologies are subject to
rapid technological change, and require large expenditures for research and
development. Most of the Company's products are currently manufactured using a
0.8 or O.5 micron CMOS process or a 1.0 micron BiCMOS process. The Company
continuously evaluates the benefits, on a product-by-product basis, of migrating
to smaller geometry process technologies in order to reduce costs. Other
companies in the industry have experienced difficulty in effecting transitions
to new manufacturing processes and, consequently, have suffered reduced yields
or delays in product deliveries. The Company believes that transitioning its
products to a smaller geometry will be important for the Company to remain
competitive. The Company's business, financial condition and operating results
could be materially adversely affected if such transitions are substantially
delayed or inefficiently implemented.
MANAGEMENT OF GROWTH
Due to the level of technical and marketing expertise necessary to support
its existing and new customers, the Company must attract highly qualified and
well-trained personnel. There may be only a limited number of persons with the
requisite skills to serve in these positions and it may become increasingly
difficult for the Company to hire such personnel. Future expansion by the
Company may also significantly strain the Company's management, manufacturing,
financial and other resources. There can be no assurance that the Company's
systems, procedures, controls and existing space will be adequate to support the
Company's operations. Failure to manage the Company's growth properly could
have a material adverse effect on the Company's business, financial condition
and operating results.
VOLATILITY OF STOCK PRICE AND DILUTION
The market for securities of high technology companies, including those of
the Company, has been highly volatile. The market price of the Company's Common
Stock has fluctuated between $21.625 and $3.625 from June 19, 1995 to February
11, 1998 and was $10.50 on February 11, 1998, and it is likely that the price of
the Common Stock will continue to fluctuate widely in the future. The trading
price of the Company's Common Stock could be subject to wide fluctuations in
response to quarter-to-quarter variations in operating results, announcements of
technological innovations or new products by the Company or its competitors,
general conditions in the telecommunications and data communications equipment
markets, changes in earnings estimates by analysts, or other events or
factors.
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DILUTION
"Dilution" represents the difference between the assumed price to public per
share of Common Stock and the net tangible book value per share immediately
after the completion of this offering. "Net tangible book value per share"
represents the amount of total tangible assets less total liabilities, divided
by the number of shares of Common Stock outstanding.
On October 10, 1997, the Company issued 14,500 shares of the Series A Stock
to the Selling Stockholders as part of a private placement transaction. Each
share of Series A Stock is convertible into shares of Common Stock at any time
at the option of the Selling Stockholder holding such share of Series A Stock,
subject to certain limitations, at the lesser of (i) $10.58 per share and (ii)
ninety percent (90%) of the average of the closing bid price of the Company's
Common Stock, as reported by the Nasdaq National Market, for the ten (10)
trading days immediately preceding the date written notice of conversion is
received by the Company; provided, however, that in no event shall the
conversion price per share of Series A Stock be less than $4.86 per share.
Unless converted sooner at the option of the holders of the Series A Stock, all
shares of Series A Stock will convert to Common Stock on October 10, 2002 if, at
that time, the Registration Statement of which this Prospectus is a part is in
force and effect and the Company is in compliance with the terms of the Series A
Stock. No Series A Stock may be converted until the earlier of (i) January 8,
1998 or (ii) the date the Registration Statement of which this Prospectus is a
part is declared effective. As of February 11, 1998, 6,750 shares of Series A
Stock have been converted into an aggregate of 846,875 shares of Common Stock.
As of September 30, 1997, the net tangible book value of the Company's Common
Stock was $14,594,000 or $1.19 per share of Common Stock. The pro forma net
tangible book value of the Company's Common Stock at September 30, 1997,
assuming full conversion of the Series A Stock, (based upon a conversion price
of $10.58 for the Common Stock), resulting in the issuance of approximately
1,370,510 shares, would be $29,094,000 or $2.14 per share. Assuming a price to
the public of $10.58 per share, there would be an immediate dilution per share
of $8.44 to new investors.
The following table illustrates the dilution per share described above:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed Offering price per share $10.58
Net tangible book value per share before the Offering $ 1.19
Increase per share attributable to new investors 0.95
------
Pro forma net tangible book value per share after the Offering 2.14
------
Dilution per share to new investors (1) $ 8.44
======
</TABLE>
(1) As of September 30, 1997, there were 683,199 shares of Common Stock
issuable upon the exercise of outstanding Stock Options at a weighted average
exercise price of $3.82 per share and 1,400 shares of Common Stock issuable
upon the exercise of outstanding warrants at a weighted exercise price of $0.82
per share. The issuance of shares upon exercise of these options and these
warrants is not reflected in the preceding table. If all the outstanding Options
and Warrants were exercised in full, the dilution per share to new investors
would be $8.54.
USE OF PROCEEDS
The Company will receive no part of the proceeds from the sale of any of
the Shares by any of the Selling Stockholders. The Company has, however,
received proceeds from the sale of the Series A Stock to the Selling
Stockholders, which proceeds were applied to working capital.
-12-
<PAGE>
SELLING SHAREHOLDERS
<TABLE>
<CAPTION>
Number of Shares Percentage of
Number of Shares of Acquired or Number of Class to be
Common Stock Owned to be Acquired upon Shares of Held upon
Prior Conversion of Common Stock Completion of
Names to the Offering Series A Stock to be Sold Offering
- ------------------ --------------------- -------------------- ------------ ---------------------
<S> <C> <C> <C> <C>
Deltec Asset 385,650(1) (2) 534,848(3) 3.1%
Management
Corporation
Tudor BVI Futures 0(1) (2) 163,927(3) --
Ltd.
Raptor Global 0(1) (2) 63,901(3) --
Fund, L.P.
Raptor Global 0(1) (2) 177,820(3) --
Fund, Ltd.
Tudor Arbitrage 200(1) (2) 22,224(3) (4)
Partners, Ltd.
John D. Gruber 146,000(1) (2) 28,105(3) 1.1%
and Linda W.
Gruber JTWROS
Gruber and 19,500(1) (2) 42,158(3) (4)
McBaine
International
Lagunitas 45,000(1) (2) 140,528(3) (4)
Partners, L.P.
Clarion Capital 0(1) (2) 52,792(3) --
Corporation
Unigestion Holding 0(1) (2) 55,792(3) --
The Kaufman Fund, 0(1) (2) 320,905(3) --
Inc.
</TABLE>
____________________
(1) Does not include shares of Common Stock issuable upon conversion of the
Series A Stock.
(2) The Selling Stockholder can receive shares of Common Stock through
conversion of the Series A Stock. The Series A Stock is convertible into
Common Stock at the lesser of (i) $10.58 and (ii) ninety percent (90%) of
------
the average market price for the Common Stock for the ten (10) trading days
immediately preceding the date on which the Series A Stock is converted.
(3) Consists of shares of Common Stock included in this offering that either
have been issued or are issuable upon conversion of the Series A Stock held
by such Selling Stockholder.
(4) Percentage of class to held upon completion of offering is less than 1.0%.
-13-
<PAGE>
PLAN OF DISTRIBUTION
The distribution by the Selling Stockholders of the Shares may be effected
in one or more transactions that may take place in the over-the-counter market,
or such other market on which the Company's securities may from time to time be
trading, including ordinary broker's transactions or through sales to one or
more dealers for resale of the Shares as principals, in privately negotiated
transactions, through the writing of options on the Shares (whether such options
are listed on an options exchange or otherwise) or by a combination of such
methods of sale, at fixed prices that may be changed, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or at negotiated prices. If the Selling Stockholders effect such
transactions by selling the Shares through underwriters, dealers or agents, such
underwriters, dealers or agents may receive compensation in the form of
underwriting discounts, concessions or commissions from the Selling Stockholders
and/or the purchasers of the Shares for whom they may act as agent. The Selling
Stockholders and any such underwriters, dealers or agents that participate in
the distribution of the Shares may be deemed to be underwriters, and any profit
on the sale of the Shares by them and any discounts, commissions or concessions
received by them may be deemed to be underwriting discounts and commissions
under the Securities Act. The Selling Stockholders may also sell the Shares
pursuant to Rule 144 under the Securities Act. Brokers or dealers acting in
connection with the sale of the Shares may receive fees or commissions in
connection therewith. The Company will not receive any of the proceeds from the
sale of the Shares by the Selling Stockholders.
Under applicable rules and regulations under the Exchange Act, any person
engaged in a distribution of shares of Common Stock may not simultaneously
engage in market making activities with respect to such shares of Common Stock
for a period of up to five business days prior to the commencement of such
distribution, subject to certain exceptions. In addition and without limiting
the foregoing, the Selling Stockholders and any other person participating in
the distribution of the Shares will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, including, without
limitation, Rule 10b-5 and Regulation M, which provisions may limit the time of
purchases and sales of any Shares by the Selling Stockholders or any other such
person. All of the foregoing may affect the marketability of the Shares.
The Company has agreed with the Selling Stockholders to file the
Registration Statement of which this Prospectus is a part with the Commission,
and has agreed with the Selling Stockholders to keep the Registration Statement
effective until October 10, 2003 or such earlier time as all of the Shares have
been sold. The Company will pay all of the expenses incident to the
registration of the Shares and certain other expenses related to the offering.
The Company has agreed to indemnify the Selling Stockholders against certain
liabilities they may incur in connection with the issuance and sale of the
Shares, including liabilities under the Securities Act. To the extent any
indemnification by an indemnifying party is prohibited or limited by law, the
Company has agreed to make the maximum contribution with respect to any amounts
for which it would otherwise be liable under such indemnification provision to
the fullest extent permitted by law.
-14-
<PAGE>
In order to comply with certain states' securities laws, if applicable, the
Shares may be sold in such jurisdictions only through registered or licensed
brokers or dealers. In certain states, the Shares may not be sold unless the
Shares have been registered or qualified for sale in such state or an exemption
from registration or qualification is available and is complied with.
LEGAL MATTERS
Certain legal matters with respect to the validity of the securities
offered hereby will be passed upon for the Company by Testa, Hurwitz &
Thibeault, LLP, Boston, Massachusetts.
EXPERTS
The consolidated financial statements and schedule of the Company and
consolidated subsidiaries included in the Company's Annual Report on Form 10-K
as of December 31, 1996 and 1995, and for each of the years in the three-year
period ended December 31, 1996, have been incorporated by reference herein and
elsewhere in the Registration Statement, in reliance upon the report set forth
therein of KPMG Peat Marwick LLP, independent certified public accountants,
incorporated by reference herein, and upon the authority of said firm as experts
in accounting and auditing.
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
-15-
