<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 16, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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TRANSWITCH CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 3674 06-1236189
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION INDUSTRIAL IDENTIFICATION NUMBER)
OF INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
THREE ENTERPRISE DRIVE
SHELTON, CONNECTICUT 06484
(203) 929-8810
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-------------------
DR. SANTANU DAS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
TRANSWITCH CORPORATION
THREE ENTERPRISE DRIVE
SHELTON, CONNECTICUT 06484
(203) 929-8810
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
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COPIES OF ALL COMMUNICATIONS, INCLUDING ALL COMMUNICATIONS SENT TO THE AGENT
FOR SERVICE, SHOULD BE SENT TO:
TIMOTHY C. MAGUIRE, ESQ. PETER B. TARR, ESQ.
TESTA, HURWITZ & THIBEAULT, LLP HALE AND DORR LLP
HIGH STREET TOWER 60 STATE STREET
125 HIGH STREET BOSTON, MASSACHUSETTS 02109
BOSTON, MASSACHUSETTS 02110 (617) 526-6000
(617) 248-7000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following. [_]
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CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
PROPOSED
PROPOSED MAXIMUM
MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE(3)
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<S> <C> <C> <C> <C>
Common Stock, $.001 par
value per share 1,955,000 $29.625 $57,916,875 $16,101
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</TABLE>
(1)Includes 255,000 shares which the underwriters have the option to purchase
from TranSwitch to cover over-allotments, if any.
(2)Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Securities Act of 1933, as amended.
(3) Pursuant to Rule 457(c) under the Securities Act of 1933, the registration
fee has been calculated based upon the average of the high and low prices
per share of the common stock of TranSwitch Corporation on the Nasdaq
National Market on December 14, 1998.
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TRANSWITCH HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL TRANSWITCH SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY +
+NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN +
+OFFER TO SELL SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE +
+SECURITIES. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED DECEMBER 16, 1998
[LOGO]
1,700,000 SHARES
COMMON STOCK
TranSwitch Corporation is offering 1,700,000 shares of its common stock.
TranSwitch's common stock is traded on the Nasdaq National Market under the
symbol "TXCC." The last reported sale price of the common stock on the Nasdaq
National Market on December 15, 1998 was $28.50 per share.
--------------
INVESTING IN THE COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.
--------------
<TABLE>
<CAPTION>
Per share Total
--------- -----
<S> <C> <C>
Public Offering Price........................................... $ $
Underwriting Discounts and Commissions..........................
Proceeds to the Company.........................................
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
TranSwitch has granted the underwriters a 30-day option to purchase up to an
additional 255,000 shares of common stock to cover over-allotments. BancBoston
Robertson Stephens Inc. expects to deliver the shares of common stock to
purchasers on , 1999.
--------------
BANCBOSTON ROBERTSON STEPHENS
NATIONSBANC MONTGOMERY SECURITIES LLC
ADVEST, INC.
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE>
A stylized ring of TranSwitch semiconductor devices overlaid on a magnified
photograph of a TranSwitch integrated circuit, together with three blocks of
text, as follows:
SONET/SDH
The SONET/SDH standards are deployed worldwide for the fiber-based public
network transport infrastructure. TranSwitch's SONET/SDH products are used to
build add drop multiplexers, cross connects and hybrid transport systems.
ASYNCHRONOUS
TranSwitch's asynchronous products are used in the public network and in wide
area network equipment such as bandwidth managers, routers and Internet access
servers.
ATM
ATM is a technology for Broadband access and backbone networks. TranSwitch
cell/packet products are used to build multi-service platforms.
<PAGE>
Stylized representation, using block diagrams, of a global telecommunications
and data communications network, identifying TranSwitch applications in public
network, corporate WAN and Internet access applications.
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF THE COMMON STOCK. IN THIS PROSPECTUS, REFERENCES
TO THE "COMPANY," "TRANSWITCH," "WE," "US" AND "OUR" REFER TO TRANSWITCH
CORPORATION AND ITS SUBSIDIARIES.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Summary.................................................................. 3
Risk Factors............................................................. 5
Certain Information...................................................... 14
Use of Proceeds.......................................................... 14
Price Range of Common Stock.............................................. 15
Capitalization........................................................... 16
Dilution................................................................. 17
Dividend Policy.......................................................... 17
Selected Consolidated Financial Data..................................... 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 19
Business................................................................. 26
Management............................................................... 40
Principal Stockholders................................................... 42
Description of Capital Stock............................................. 43
Underwriting............................................................. 45
Legal Matters............................................................ 46
Experts.................................................................. 46
Where You Can Find More Information...................................... 47
Index to Consolidated Financial Statements............................... F-1
</TABLE>
---------------------
We own or have rights to trademarks or tradenames that we use in conjunction
with the sale of our products. TranSwitch, XBERT, SARA, COBRA, CUBIT and SALI-
25C are registered trademarks owned by us. CELLBUS, PHAME, ASPEN, McHDLC,
PHAST, Connectivity Engines and Engines for Global Connectivity are trademarks
of the Company.
<PAGE>
SUMMARY
Because this is only a summary, it does not contain all the information that
may be important to you. You should read the entire prospectus, especially
"Risk Factors" and the Consolidated Financial Statements and Notes, before
deciding to invest in our common stock. Unless otherwise indicated, all
information contained in this prospectus assumes that the underwriters will not
exercise their over-allotment option. This prospectus contains forward-looking
statements which involve risks and uncertainties. TranSwitch's actual results
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth under
"Risk Factors" and elsewhere in this prospectus.
THE COMPANY
OUR BUSINESS..........TranSwitch designs, develops, markets and supports
highly integrated digital and mixed-signal (analog
and digital) semiconductor solutions for the
telecommunications and data communications markets.
Our products are high-speed semiconductor solutions
that provide core functionality for equipment used in
communications networks. Our expertise in digital and
mixed-signal design, together with our
telecommunications experience, allows us to determine
and implement optimal combinations of design elements
to meet our customers' needs. We believe this
approach allows our customers to achieve faster time
to market and to introduce systems that offer greater
functionality and improved performance, while
reducing system size and cost.
OUR MARKET............We target our products to equipment suppliers who
supply three fast-growing market segments: the
worldwide public network infrastructure for data and
voice communications, the Internet infrastructure
that supports the World Wide Web and other data
services, and corporate wide area networks. There is
an increasing worldwide demand for improvements in
communications infrastructure in order to provide
greater capacity and improved performance in
transmitting voice and data. As a result, new network
equipment is being designed and incorporated into
public networks used by local and long distance
telecommunications service providers, specialized
networks used by Internet service providers and
private computer networks. New fiber optic networks
are being built and new standards for transporting
voice and data traffic are emerging. The complexity
of these new networks requires the use of
semiconductor devices to allow network equipment
manufacturers to design and develop equipment faster
and at a lower cost.
OUR PRODUCTS..........Our products are Very Large Scale Integrated (VLSI)
semiconductor solutions that provide core
functionality for communications network equipment.
Our three product lines are designed to be compliant
with SONET/SDH, asynchronous and ATM
telecommunications and data communications standards.
OUR CUSTOMERS.........We have sold our VLSI semiconductor devices to more
than 400 customers worldwide. We sell our products
through a direct sales force and worldwide network of
independent distributors and sales representatives
located in the United States and 15 other countries.
Our customers are primarily original equipment
manufacturers which incorporate our products into the
networking equipment they sell to the
telecommunications and data communications markets.
Our customers include Alcatel, Ascend Communications,
Cisco, ECI Telecom, Ericsson, IBM, Lucent, Nortel,
Newbridge Networks, Siemens and Tellabs.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company ...........1,700,000 shares
Common Stock Outstanding after the Offering....16,329,371 shares
Use of Proceeds................................Working capital, potential acquisitions and
general corporate purposes.
Nasdaq National Market Symbol..................TXCC
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
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1993 1994 1995 1996 1997 1997 1998
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<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Total revenues.......... $12,018 $12,101 $17,466 $ 19,650 $27,084 $ 18,750 $ 30,477
Gross profit............ 6,006 6,185 10,071 5,844 15,830 10,745 18,858
Operating income
(loss)................ (1,102) (4,071) (2,390) (10,767) (2,333) (2,674) 2,903
Net income (loss)....... (1,094) (3,937) (1,773) (10,077) (1,873) (2,306) 3,502
Basic earnings (loss)
per share(1).......... -- $ (0.48) $ (0.18) $ (0.86) $ (0.15) $ (0.19) $ 0.26
Weighted average shares
outstanding........... -- 8,178 10,062 11,751 12,152 12,103 13,701
Diluted earnings (loss)
per share(1) ......... -- $ (0.48) $ (0.18) $ (0.86) $ (0.15) $ (0.19) $ 0.24
Weighted average shares
and equivalents
outstanding .......... -- 8,178 10,062 11,751 12,152 12,103 14,579
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
----------------------
ACTUAL AS ADJUSTED(2)
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<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments ...... $24,331 $69,802
Working capital......................................... 29,330 74,801
Total assets............................................ 43,283 88,754
Total stockholders' equity.............................. 35,514 80,985
</TABLE>
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(1) Net loss per share amount for 1993 not meaningful.
(2) Adjusted to reflect the proceeds from the sale of 1,700,000 shares of
common stock by the Company at an assumed public offering price of $28.50
per share and after deducting underwriting discounts and estimated offering
expenses. See "Use of Proceeds" and "Capitalization."
4
<PAGE>
RISK FACTORS
An investment in this common stock is very risky. You should carefully
consider the following risk factors, in addition to the remainder of this
prospectus, before purchasing the common stock. This prospectus contains
forward-looking statements that involve risks and uncertainties. Many factors,
including those described below, may cause actual results to differ materially
from anticipated results.
OPERATING LOSSES
We have not completed a profitable year since our inception in 1988. As of
September 30, 1998, we had an accumulated deficit of $26.5 million. For 1997,
we incurred a net loss of approximately $1.9 million, and we realized net
income of approximately $3.5 million for the nine months ended September 30,
1998. Our revenues have increased in recent years, and revenues for recent
quarters have exceeded revenues for the same quarter of the prior year. Still,
we cannot be certain that we can sustain these growth rates or that we will
remain profitable on a quarterly basis or become profitable on an annual basis
in the future. For more information, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS
Our quarterly and annual operating revenues, expenses and operating results
may fluctuate due to a number of factors including:
. the timing and cancellation of . our ability to introduce new
customer orders; products and technologies on a
timely basis;
. market acceptance of our and
our customers' products; . introduction of products and
technologies by our
. the level of orders received competitors;
which can be shipped in a
quarter; . the timing of our investments
in research and development,
. the timing and provision of including tooling expenses
pricing protections and associated with product
returns from our distributors; development and pre-production;
. availability of foundry . whether our customers buy from
capacity and raw materials; a distributor or directly from
us;
. fluctuations in manufacturing
yields; . competitive pressures on
selling prices; and
. changes in product mix;
. general economic conditions.
Sudden shortages of raw materials or production capacity constraints can lead
semiconductor producers to allocate available supplies or capacity to larger
customers than us, which could interrupt our ability to meet our 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 our products may decrease in the future. Decreases in the price of
our products would adversely affect our operating results.
Our business is characterized by short-term orders and shipment schedules,
and customer orders typically can be canceled or rescheduled without
significant penalty to our customer. Because we do not have substantial
noncancellable backlog, we typically plan our production and inventory levels
based on internal forecasts of customer demand, which are highly unpredictable
and can fluctuate substantially.
Because we are continuing to increase our operating expenses for personnel
and new product development and for inventory in anticipation of increasing
sales levels, we must continue to generate increased sales to offset these
increased expenses. In addition, we are limited in our ability to reduce
expenses quickly in response to any revenue shortfalls. In response to
anticipated long lead times to obtain inventory and materials
5
<PAGE>
from our foundries, we may order in advance of anticipated customer demand,
which might result in excess inventory levels if the expected orders fail to
materialize. As a result, we cannot predict the timing and amount of sales to
our customers, and any significant downturn in customer demand for our products
would reduce our quarterly and our annual operating results.
MANAGEMENT OF GROWTH
Due to the level of technical and marketing expertise necessary to support
our existing and new customers, we 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 us to hire such personnel. As we expand, we may also
significantly strain our management, manufacturing, financial, systems and
other resources. We cannot be certain that our systems, procedures, controls
and existing space will be adequate to support our operations.
WE DEPEND ON OUTSIDE FABRICATION FACILITIES
We do not own or operate a Very Large Scale Integrated (VLSI) circuit
fabrication facility. Four foundries currently supply us with most of our
semiconductor device requirements. While we have had good relations with these
foundries, we cannot be certain that we will be able to renew or maintain
contracts with them or negotiate a new contract to replace the one that has
expired. In addition, we cannot be certain that renewed or new contracts will
contain terms as favorable as our current terms. There are other significant
risks associated with our reliance on outside foundries, including:
. the lack of assured semiconductor 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, manufacturing integrated circuits is a highly complex and
technology-demanding process. Although we try to diversify our sources of
semiconductor devices and work closely with our foundries to minimize the
likelihood of reduced manufacturing yields, our foundries occasionally
experience 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 manufacturing yields have at
times reduced our operating results.
LIMITED CAPACITY AND FEW FOUNDRIES ABLE TO SUPPLY OUR MANUFACTURING NEEDS
We purchase semiconductor devices from outside foundries pursuant to purchase
orders. We do not have a guaranteed level of production capacity at any of our
foundries. We provide the foundries with rolling forecasts of our production
requirements; however, the ability of each foundry to provide wafers to us is
limited by the foundry's available capacity. Therefore, our foundry suppliers
could choose to prioritize capacity for other customers or reduce or eliminate
deliveries to us on short notice. Accordingly, we cannot be certain that our
foundries will allocate sufficient capacity to satisfy our requirements.
We have been, and expect in the future to be, particularly dependent upon a
limited number of foundries for our VLSI device requirements. In particular, as
of the date of this prospectus, a single foundry supplier manufactures all of
our semiconductor devices manufactured utilizing the BiCMOS process. As a
result, we expect that we could experience a substantial delay or interruption
in the shipment of our products due to the following:
. sudden demand for an increased amount of semiconductor devices or
sudden reduction or elimination of any existing source or sources of
semiconductor devices;
. time required to qualify alternative manufacturing sources for
existing or new products could be substantial; or
. failure to find alternative manufacturing sources to produce VLSI
devices with acceptable manufacturing yields.
6
<PAGE>
DEPENDENCE ON TELECOMMUNICATIONS, INTERNET AND DATA COMMUNICATIONS MARKETS
We derive virtually all of our product revenues from sales of products for
telecommunications, Internet and data communications applications. These
markets are characterized by the following:
. intense competition;
. rapid technological change; and
. short product life cycles, especially in the data communications
market.
In addition, although the telecommunications, Internet and data
communications equipment markets have grown rapidly in the last few years, we
cannot be certain that these markets will continue to grow or that a
significant slowdown in these markets will not occur.
Products for telecommunications, Internet and data communications
applications are based on industry standards, which are continually evolving.
Our future success will depend, in part, upon our ability to successfully
develop and introduce new products based on emerging industry standards, which
could render our existing products unmarketable or obsolete. If the
telecommunications, Internet or data communications markets evolve to new
standards, we cannot be certain that we will be able to successfully design and
manufacture new products that address the needs of our customers or that such
new products will meet with substantial market acceptance. In addition, a
substantial majority of our revenues have been, and are expected to continue to
be, derived from sales of SONET/SDH (Synchronous Optical Network/Synchronous
Digital Hierarchy) and ATM (Asynchronous Transfer Mode) products. Failure of
our SONET/SDH and ATM-based products to achieve a significant degree of market
acceptance will reduce our operating results.
DEPENDENCE ON NEW PRODUCTS; RISK OF PRODUCT DEVELOPMENT DELAYS
Our success depends upon our ability to do the following:
. develop new VLSI devices for existing and new markets;
. introduce these products in a timely manner; and
. 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
we have experienced delays in completing the development of new products.
Successful product development and introduction depends on a number of factors,
including the following:
. accurate new product definition;
. timely completion and introduction of new product designs;
. availability of foundry capacity;
. achievement of manufacturing yields; and
. market acceptance of our products and our customers' products.
Our success also depends upon our ability to do the following:
. build products to applicable standards;
. develop products that meet customer requirements;
. adjust to changing market conditions as quickly and cost-effectively
as necessary to compete successfully;
7
<PAGE>
. introduce new products that achieve market acceptance; and
. introduce new products in a timely and cost-effective manner and in
sufficient quantities to meet customer demand.
In addition, we cannot ensure that the electronic systems manufactured by our
customers will be introduced in a timely manner or that such systems will
achieve market acceptance.
We generally incorporate our new products into our customers' products or
systems at the design stage. However, customer decisions to use our products
(design wins), which can often require significant expenditures by us 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 our competitors. We cannot ensure that we will continue to
achieve design wins.
CUSTOMER CONCENTRATION
Historically, a relatively small number of customers have accounted for a
significant portion of our total revenues in any particular period. We have no
long-term volume purchase commitments from any of our significant customers.
The following table sets forth, for the periods indicated, the percentage of
our total revenues derived from our significant customers listed below:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------- -----------------
CUSTOMER 1995 1996 1997 1998
-------- ------- ------- ------- -----------------
<S> <C> <C> <C> <C>
Columbia Technology (1).............. * * * 18%
Insight Electronics, Inc.(1)......... 16% 16% 41% 22%
Tellabs Operations, Inc.(2).......... 17% 14% 16% 20%
ECI Telecom Ltd. .................... * 22% * *
</TABLE>
- --------
* Below 10% of our total revenues
(1) Columbia Technology and Insight Electronics are distributors of our
products to various end-users, none of which comprised more than 10% of our
total revenues during the periods mentioned.
(2) The Company's sales to Tellabs during 1995, 1996 and 1997 were made through
Reptron Electronics, Inc., Tellabs' designated distributor. In the nine-
month period ended September 30, 1998, sales to Tellabs were made through
Reptron and Arrow Electronics, Inc., also Tellabs' designated distributor.
Sales to Tellabs through Arrow during this period represented 14% of the
Company's total revenues.
We anticipate that sales of our products to relatively few customers will
continue to account for a significant portion of our total revenues. Due to
these factors, some of the following may reduce our operating results:
. reduction, delay or cancellation of orders from one or more of our
significant customers;
. development by one or more of our significant customers of other
sources of supply;
. selection by one or more of our significant customers of devices
manufactured by one of our competitors for inclusion in future product
generations;
. loss of one or more of our current customers or a disruption in our
sales and distribution channels; or
. failure of one of our significant customers to make timely payment of
our invoices.
We cannot be certain that our current customers will continue to place orders
with us, that orders by existing customers will continue at the levels of
previous periods or that we will be able to obtain orders from new customers.
8
<PAGE>
OUR SUCCESS DEPENDS ON INTELLECTUAL PROPERTY
Our success depends in part on our ability to obtain patents and licenses and
to preserve other intellectual property rights covering our products and
development and testing tools. To that end, we have obtained certain domestic
and foreign patents and intend to continue to seek patents on our inventions
when appropriate. The process of seeking patent protection can be time
consuming and expensive. We cannot ensure the following:
. patents will issue from currently pending or future applications;
. our existing patents or any new patents will be sufficient in scope or
strength to provide meaningful protection or any commercial advantage to
us;
. foreign intellectual property laws will protect our intellectual property
rights; or
. others will not independently develop similar products, duplicate our
products or design around any patents issued to us.
Intellectual property rights are uncertain and involve complex legal and
factual questions. We may be unknowingly infringing on the proprietary rights
of others and may be liable for that infringement, which could result in
significant liability for us. We are not aware of any third party intellectual
property rights that would prevent our use and sale of our products, although
we have received correspondence from others alleging infringement. If we do
infringe the proprietary rights of others, we could be forced to either seek a
license to intellectual property rights of others or alter our products so that
they no longer infringe the proprietary rights of others. A license could be
very expensive to obtain or may not be available at all. Similarly, changing
our products or processes to avoid infringing the rights of others may be
costly or impractical.
We are responsible for any patent litigation costs. If we were to become
involved in a dispute regarding intellectual property, whether ours or that of
another company, we may have to participate in legal proceedings. These types
of proceedings may be costly and time consuming for us, even if we eventually
prevail. If we do not prevail, we might be forced to pay significant damages,
obtain a license or stop making a certain product.
We also rely on trade secrets, proprietary know-how and confidentiality
provisions in agreements with employees and consultants to protect our
intellectual property. Other parties may not comply with the terms of their
agreements with us and we may not be able to adequately enforce our rights
against these people.
COMPETITION
The semiconductor industry is intensely competitive and is characterized by
the following:
. price erosion;
. rapid technological change;
. shortage in fabrication capacity;
. heightened international competition in many markets; and
. unforeseen manufacturing yield problems.
These factors are likely to result in pricing pressures on our products,
potentially affecting our margins.
Our ability to compete successfully in the rapidly evolving area of high-
performance integrated circuit technology depends on factors both within and
outside our control, including:
. success in designing and subcontracting the manufacture of new
products that implement new technologies;
. protection of our products by effective utilization of intellectual
property laws;
. product quality;
9
<PAGE>
. reliability;
. price;
. efficiency of production;
. the pace at which customers incorporate our integrated circuits into
their products;
. success of competitors' products; and
. general economic conditions.
Our competition consists of suppliers from the United States as well as other
countries, including competition from semiconductor divisions of vertically
integrated companies like IBM Corporation, Lucent Technologies, NEC Corporation
and Siemens Corporation. New entrants will probably attempt to obtain a share
of the market for our current and future products. Certain of our competitors
are more established, benefit from greater market recognition and have
substantially greater financial, development, manufacturing, and marketing
resources than we have.
FOREIGN SALES
Foreign sales are a significant part of our total revenues. The table below
sets forth, for the periods indicated, the dollar amount of our revenue derived
from Europe, the Middle East, the Far East and Canada and other regions:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------- -----------------
REGION 1995 1996 1997 1998
------ ------------- ------------- ------------- -----------------
(IN MILLIONS) (IN MILLIONS) (IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C>
Europe ................. $3.1 $2.1 $3.9 $ 2.8
Middle East ............ -- 4.2 0.5 3.9
Far East................ 1.8 2.0 2.9 7.3
Canada and other
regions............... 1.6 0.6 1.7 0.5
---- ---- ---- -----
Total Foreign Sales..... $6.5 $8.9 $9.0 $14.5
</TABLE>
Foreign sales represented 38%, 46%, 33% and 48% of total revenues for the
years ended December 31, 1995, 1996 and 1997 and the nine months ended
September 30, 1998, respectively. We expect foreign sales to continue to
account for a significant percentage of our revenues. A significant portion of
our total revenues will therefore be subject to risks associated with foreign
sales, including the following:
. 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 our intellectual property overseas;
. seasonality of sales; and
. potentially adverse tax consequences.
In particular, sales to 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 our customers in that region to delay or
reduce their orders.
10
<PAGE>
Although our sales to date have been denominated in United States dollars, the
value of the United States dollar in relation to foreign currencies may also
reduce our sales to foreign customers. To the extent that we expand our
international operations or change our pricing practices to denominate prices
in foreign currencies, we will expose our margins to increased risks of
currency fluctuations.
THE SEMICONDUCTOR INDUSTRY
We provide semiconductor devices to telecommunications and data
communications OEMs. 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 selling prices; and
. production over-capacity.
We may experience substantial fluctuations in future operating results due to
general semiconductor industry conditions, overall economic conditions or other
factors.
TRANSITION TO NEW PROCESS TECHNOLOGIES
Our future success depends upon our ability to do the following:
. develop products that utilize new process technologies;
. introduce new process technologies to the marketplace ahead of
competitors; and
. have new process technologies 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. We currently manufacture our products using 0.8, 0.5 or 0.35
micron CMOS processes or a 1.0 micron BiCMOS process. We continuously evaluate
the benefits, on a product-by-product basis, of migrating to smaller geometry
process technologies. Other companies in the industry have experienced
difficulty in transitioning to new manufacturing processes and, consequently,
have suffered reduced yields or delays in product deliveries. We believe that
transitioning our products to smaller geometries will be important for us to
remain competitive, and we cannot be certain that we can successfully make such
transitions, if at all, without delay or inefficiencies.
DEPENDENCE ON KEY PERSONNEL
Our success depends largely upon the continued service of our executive
officers, including Dr. Santanu Das, President, Chief Executive Officer and
Chairman of the Board of Directors, and other key management and technical
personnel, including Daniel C. Upp, Vice President, Technology Strategy, and on
our ability to continue to attract, retain and motivate other qualified
personnel. The competition for such employees is intense. To help retain the
continued services of Dr. Das and Mr. Upp, we have entered into a Severance
Agreement with each of them, which provides for the following payments in case
of termination without cause or resignation due to a significant reduction in
the nature or scope of employment:
. 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; and
. 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.
11
<PAGE>
We have also entered into Executive Agreements with Dr. Das, Mr. Upp and
other designated key personnel, which provide for the following payments in
case of termination without cause if our Company undergoes a change in control:
. 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; and
. in the case of Mr. Upp, and other designated key personnel, six
months' then-current base salary and fifty percent (50%) of the
highest annual bonus paid to each such person over the previous five
years.
If either Dr. Das or Mr. Upp is entitled to payments under both agreements,
he will receive only the maximum amount payable to him under one of the
agreements. We have no long-term employment contracts with any of our
employees.
VOLATILITY OF STOCK PRICE
The market for securities of high technology companies, including our
Company, has been highly volatile. The market sale price of our common stock
has fluctuated between $34 3/8 and $3 5/8 from June 19, 1995 to December 15,
1998, and the last sale price was $28 1/2 on December 15, 1998. It is likely
that the price of the common stock will continue to fluctuate widely in the
future. Factors affecting the trading price of our common stock include:
. responses to quarter-to-quarter variations in operating results;
. announcements of technological innovations or new products by us or
our competitors;
. general conditions in the telecommunications and data communications
equipment markets; and
. changes in earnings estimates by analysts.
DILUTION
Investors in this offering will incur immediate and substantial dilution in
the net tangible book value per share of our common stock.
YEAR 2000
Many currently installed computer systems and software products are dependent
upon internal calendars coded to accept only two digit entries in the date code
field. These date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. Computer systems and
software used by many companies may need to be upgraded to comply with such
"Year 2000" requirements.
None of our current products utilize internal calendars that are dependent
upon the input of a specific date. As a result, all of our current products are
inherently Year 2000 compliant. Moreover, based on assessments made to date, we
do not anticipate material disruptions to our operations as a result of Year
2000 issues.
However, if certain critical vendors, service providers or business partners,
such as foundries, public utilities providing electricity, water or telephone
service, financial institutions with whom we maintain accounts or key suppliers
of our parts and materials, fail to provide needed services to us, or to our
key outside suppliers or customers, customer orders could decline or our
operations could shut down for as long as the failure or failures persist. At
present, we have not developed contingency plans, but we will determine whether
to develop any such plans as we complete our assessment of Year 2000 issues.
Accordingly, we cannot be certain that Year 2000 issues will not adversely
affect our business, results of operations and financial results.
12
<PAGE>
RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS
We may pursue acquisitions that could provide new technologies, products or
service offerings. Future acquisitions by us may involve the following:
. use of significant amounts of cash;
. potentially dilutive issuances of equity securities; or
. incurrence of debt or amortization expenses related to goodwill and
other intangible assets.
In addition, acquisitions involve numerous risks, including:
. difficulties in the assimilation of the operations, technologies,
product and personnel of the acquired company;
. the diversion of management's attention from other business concerns;
. risks of entering markets in which we have no or limited prior
experience; and
. the potential loss of key employees of the acquired company.
We have engaged in discussions in the past with third parties concerning
potential acquisitions of product lines, technologies and businesses. However,
we currently have no commitments or agreements with respect to any such
acquisition. In the event that such an acquisition does occur, we cannot be
certain that our business, operating results and financial condition will not
be materially adversely affected.
ANTI-TAKEOVER EFFECT OF DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
Delaware corporate law contains, and our certificate of incorporation and by-
laws contain, certain provisions that could have the effect of delaying,
deferring or preventing a change in control of our Company. These provisions
could limit the price that certain investors might be willing to pay in the
future for shares of our common stock. Certain of these provisions:
. authorize the issuance of "blank check" preferred stock (preferred
stock which our board of directors can create and issue without prior
stockholder approval) with rights senior to those of common stock;
. prohibit stockholder action by written consent; and
. establish advance notice requirements for submitting nominations for
election to the board of directors and for proposing matters that can
be acted upon by stockholders at a meeting.
13
<PAGE>
CERTAIN INFORMATION
TranSwitch was incorporated in Delaware on April 26, 1988. Our executive
offices are located at 3 Enterprise Drive, Shelton, Connecticut, and our
telephone number is (203) 929-8810. Our web site is located at
www.transwitch.com. Information contained on our web site is not part of this
prospectus.
USE OF PROCEEDS
The net proceeds to TranSwitch from the sale of 1,700,000 shares of common
stock offered by TranSwitch hereby at an assumed public offering price of
$28.50 and after deducting underwriting discounts and commissions and estimated
offering expenses, are estimated to be approximately $45.5 million
(approximately $52.3 million if the underwriters' over-allotment option is
exercised in full).
TranSwitch intends to use the proceeds of this offering primarily for general
corporate purposes, including working capital and purchases of capital
equipment. TranSwitch may also use a portion of the net proceeds for
acquisitions of complementary businesses, products or technologies, although we
currently have no commitments or agreements for any such acquisitions. Pending
such uses, TranSwitch expects to invest the net proceeds in short-term,
interest-bearing, investment grade securities.
14
<PAGE>
PRICE RANGE OF COMMON STOCK
TranSwitch's common stock is traded on the Nasdaq National Market under the
symbol "TXCC." The following table sets forth, for the period indicated, the
range of high and low bid prices for TranSwitch's common stock on the Nasdaq
National Market.
<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
------------------
HIGH LOW
------- -------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1996:
First Quarter......................................... $ 13 5/8 $ 7 7/8
Second Quarter........................................ 21 3/8 4 3/8
Third Quarter......................................... 13 5 1/2
Fourth Quarter........................................ 6 7/8 3 5/8
YEAR ENDED DECEMBER 31, 1997:
First Quarter......................................... $ 7 3/8 $ 4 5/8
Second Quarter........................................ 9 3/4 4
Third Quarter......................................... 12 1/8 8 1/8
Fourth Quarter........................................ 14 1/8 6 3/4
YEAR ENDED DECEMBER 31, 1998:
First Quarter......................................... $ 12 3/8 $ 7 1/2
Second Quarter........................................ 15 1/8 10 3/4
Third Quarter......................................... 19 7/8 12 3/4
Fourth Quarter (through December 15, 1998)............ 34 1/8 10 7/8
</TABLE>
As of December 9, 1998, there were approximately 166 holders of record of the
common stock. On December 15, 1998, the last sale price reported on the Nasdaq
National Market for the common stock was $28.50 per share.
15
<PAGE>
CAPITALIZATION
The following table reflects the actual capitalization of TranSwitch at
September 30, 1998 and as adjusted to reflect the receipt of the estimated
proceeds from the sale of 1,700,000 shares of common stock at an assumed public
offering price of $28.50 per share and after deducting underwriting discounts
and estimated offering expenses.
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Stockholders' equity:
Preferred stock, $0.01 par value, 1,000,000 shares
authorized; none issued and outstanding.............. $ -- $ --
Common stock, $0.001 par value, 25,000,000 shares
authorized; 14,315,104 shares outstanding;
16,015,104 shares outstanding, as adjusted(1)........ 14 16
Additional paid-in capital............................. 61,959 107,428
Accumulated (deficit).................................. (26,459) (26,459)
-------- -------
Total stockholders' equity.......................... 35,514 80,985
-------- -------
Total capitalization................................ $ 35,514 $80,985
======== =======
</TABLE>
- --------
(1) Excludes 2,481,898 shares of common stock issuable upon exercise of stock
options outstanding as of September 30, 1998 at a weighted average exercise
price of $7.65 per share.
16
<PAGE>
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.
The net tangible book value of TranSwitch as of September 30, 1998 was $34.5
million or $2.41 per share of common stock. After giving effect to our sale of
1,700,000 shares of common stock in this offering, assuming a public offering
price of $28.50 per share and after deduction of underwriting discounts and
commissions and estimated offering expenses, the pro forma net tangible book
value of the common stock as of September 30, 1998 would have been
approximately $80.0 million, or $5.00 per share. This represents an immediate
increase in net tangible book value of $2.59 per share to existing stockholders
and an immediate dilution in net tangible book value of $23.50 per share to new
investors purchasing shares at the public offering price.
The following table illustrates the dilution per share as described above:
<TABLE>
<S> <C> <C>
Assumed public offering price..................................... $28.50
Net tangible book value before the offering..................... $2.41
Increase attributable to new investors.......................... $2.59
-----
Pro forma net tangible book value after the offering.............. $ 5.00
------
Dilution to new investors......................................... $23.50
======
</TABLE>
We have reserved 2,481,898 shares of common stock for issuance upon the
exercise of stock options outstanding as of September 30, 1998, at a weighted
average exercise price of $7.65 per share. The issuance of shares upon exercise
of these options is not reflected in the preceding table. If all these
outstanding options were exercised in full, the dilution per share to new
investors would be $24.01.
DIVIDEND POLICY
We intend to retain any future earnings to finance the growth and development
of our business, and we do not plan to pay any cash dividends in the
foreseeable future. In addition, our working capital credit line with Silicon
Valley Bank prohibits our payment of cash dividends without the bank's consent.
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this prospectus. The consolidated statements
of operations data for the years ended December 31, 1995, 1996 and 1997 and the
consolidated balance sheet data at December 31, 1996 and 1997 presented below
are derived from, and are qualified in their entirety by reference to, the
consolidated financial statements of TranSwitch, which have been audited by
KPMG Peat Marwick LLP, independent certified public accountants, and together
with their report thereon are included elsewhere in this prospectus. The
consolidated statements of operations data for the years ended December 31,
1993 and 1994 and the consolidated balance sheet data at December 31, 1993,
1994 and 1995 are derived from TranSwitch's audited consolidated financial
statements not included herein. The consolidated statements of operations data
for the nine months ended September 30, 1997 and 1998 and the consolidated
balance sheet data at September 30, 1998 are derived from TranSwitch's
unaudited consolidated financial statements that are included elsewhere in this
prospectus and include, in the opinion of management, all adjustments,
consisting only of normal recurring adjustments necessary for a fair
presentation of the information set forth therein. The results of operations
for the nine months ended September 30, 1998 are not necessarily indicative of
results expected for the full year of 1998 or future results.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------- ------------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- -------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues.......................................... $12,018 $12,101 $17,466 $ 19,650 $27,084 $ 18,750 $ 30,477
Total cost of revenues.................................. 6,012 5,916 7,395 13,806 11,254 8,005 11,619
------- ------- ------- -------- ------- -------- --------
Gross profit............................................ 6,006 6,185 10,071 5,844 15,830 10,745 18,858
------- ------- ------- -------- ------- -------- --------
Operating expenses:
Research and development.............................. 4,075 5,551 6,660 8,928 9,194 6,841 7,967
Marketing and sales................................... 1,757 3,348 4,329 5,454 6,681 4,970 6,163
General and administrative............................ 1,276 1,357 1,472 2,229 2,288 1,608 1,825
------- ------- ------- -------- ------- -------- --------
Total operating expenses........................... 7,108 10,256 12,461 16,611 18,163 13,419 15,955
------- ------- ------- -------- ------- -------- --------
Operating income (loss)................................. (1,102) (4,071) (2,390) (10,767) (2,333) (2,674) 2,903
Interest income, net.................................... 8 134 617 690 460 368 763
------- ------- ------- -------- ------- -------- --------
Income (loss) before provision for income taxes......... (1,094) (3,937) (1,773) (10,077) (1,873) (2,306) 3,666
------- ------- ------- -------- ------- -------- --------
Provision for income taxes.............................. -- -- -- -- -- -- 164
------- ------- ------- -------- ------- -------- --------
Net income (loss)....................................... $(1,094) $(3,937) $(1,773) $(10,077) $(1,873) $ (2,306) $ 3,502
======= ======= ======= ======== ======= ======== ========
Basic earnings (loss) per share (1)..................... -- $ (0.48) $ (0.18) $ (0.86) $ (0.15) $ (0.19) $ 0.26
======= ======= ======= ======== ======= ======== ========
Weighted average shares outstanding..................... -- 8,178 10,062 11,751 12,152 12,103 13,701
------- ------- ------- -------- ------- -------- --------
Diluted earnings (loss) per share ...................... -- $ (0.48) $ (0.18) $ (0.86) $ (0.15) $ (0.19) $ 0.24
======= ======= ======= ======== ======= ======== ========
Weighted average shares and share equivalents outstanding.. -- 8,178 10,062 11,751 12,152 12,103 14,579
------- ------- ------- -------- ------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, 1998
----------------------------------------- ----------------------
1993 1994 1995 1996 1997 ACTUAL AS ADJUSTED(2)
------- ------- ------- ------- ------- ------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Cash, cash equivalents
and short-term
investments............ $ 6,702 $ 3,352 $17,250 $12,688 $21,618 $24,331 $69,802
Working capital......... 7,634 3,656 21,811 14,650 25,648 29,330 74,801
Total assets............ 10,994 8,969 32,670 23,311 36,589 43,283 88,754
Notes payable to banks,
less current portion... -- 469 -- -- -- -- --
Mandatorily redeemable
convertible preferred
stock.................. 20,211 20,252 -- -- -- -- --
Convertible preferred
stock.................. -- -- -- -- 14,357 -- --
Total stockholders'
equity (deficit)....... (11,445) (15,324) 26,706 17,299 30,161 35,514 80,985
</TABLE>
- -------
(1) Net loss per share amount for 1993 not meaningful.
(2) Adjusted to reflect the sale of 1,700,000 shares of common stock by the
Company at an assumed public offering price of $28.50 per share and after
deducting the underwriting discounts and estimated offering expenses.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve risks
and uncertainties. When used in this prospectus, the words "intend,"
"anticipate," "believe," "estimate," "plan" and "expect" and similar
expressions as they relate to us are included to identify forward-looking
statements. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this
prospectus.
OVERVIEW
TranSwitch Corporation commenced its operations in April 1988. Since
incorporation, TranSwitch has designed, sourced and marketed high-speed VLSI
semiconductor devices for public and private network applications worldwide.
TranSwitch shipped its first product in 1990 and has increased its volume of
shipments over the last eight years. TranSwitch's product development efforts
have been focused on devices that meet the needs of public and private network
telecommunications and data communications equipment providers that serve the
telecommunications public network, Internet and corporate wide-area network
markets, and are compliant with established standards in these markets,
including SONET/SDH, asynchronous and ATM.
The Company derives its revenues from product sales principally to domestic
and international telecommunications and data communications equipment OEMs and
to distributors. Revenues are recognized on product shipment. Agreements with
certain distributors provide price protection and return and allowance rights.
In certain cases, the Company works with network equipment OEMs during their
system design phase with the goal of having TranSwitch products designed into
the OEM's products. The Company's sales cycle often extends over more than one
year because of the long lead times between the OEM's design to the start of
volume shipments. The Company incurs product research and development expenses
well before the generation of substantial revenues from product sales to OEMs.
A significant portion of the Company's total revenues has been, and is
anticipated to be, derived from foreign sales. All foreign sales are currently
denominated in U.S. dollars. The Company's cost of revenues consists primarily
of the purchase cost of finished VLSI devices produced by third party
semiconductor manufacturers. The Company intends to continue to outsource all
of its VLSI device fabrication requirements.
TranSwitch has not been profitable, on a yearly basis, since its inception.
As of September 30, 1998, TranSwitch had an accumulated deficit of $26.5
million. TranSwitch's operating results are subject to quarterly and annual
fluctuations as a result of several factors that could materially and adversely
affect profitability. These factors include, among others:
. the timing and cancellations of the Company's customers' orders;
. market acceptance of the Company's products and those of its
customers;
. the level of orders received which can be shipped in a quarter;
. the timing and provision of pricing protections and returns from the
Company's distributors;
. availability of foundry capacity and raw materials;
. fluctuations in manufacturing yield;
. changes in product mix;
. TranSwitch's ability to introduce new products and technologies on a
timely basis;
. the introduction of products and technologies by the Company's
competitors;
. the timing of the Company's investments in research and development;
. whether TranSwitch's customers buy from a distributor or directly from
the Company;
. competitive pressure on selling prices; and
. general economic conditions.
19
<PAGE>
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>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- -------------------
1995 1996 1997 1997 1998
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Total revenues............. 100.0 % 100.0 % 100.0 % 100.0 % 100.0%
Total cost of revenues..... 42.3 70.3 41.6 42.7 38.1
------- ------- ------- -------- --------
Gross profit............... 57.7 29.7 58.4 57.3 61.9
------- ------- ------- -------- --------
Operating expenses
Research and
development............ 38.1 45.4 33.9 36.5 26.2
Marketing and sales...... 24.8 27.8 24.7 26.5 20.2
General and
administrative......... 8.4 11.3 8.4 8.6 6.0
------- ------- ------- -------- --------
Total operating
expenses............ 71.3 84.5 67.0 71.6 52.4
------- ------- ------- -------- --------
Operating income (loss).... (13.6) (54.8) (8.6) (14.3) 9.5
Interest income, net....... 3.5 3.5 1.7 2.0 2.5
------- ------- ------- -------- --------
Income (loss) before
provision for income
taxes.................... (10.1) (51.3) (6.9) (12.3) 12.0
Provision for income
taxes.................... -- -- -- -- 0.5
------- ------- ------- -------- --------
Net income (loss).......... (10.1)% (51.3)% (6.9)% (12.3)% 11.5%
======= ======= ======= ======== ========
</TABLE>
Nine Month Periods Ended September 30, 1998 and 1997
Revenues. Total revenues for the nine months ended September 30, 1998 were
$30.5 million, an increase of 62.0% over the $18.8 million for the nine months
ended September 30, 1997. The increase in revenue in the nine-month period is
primarily attributable to the increase in sales of the SONET/SDH and ATM
product lines.
Foreign sales, primarily consisting of sales to customers in Europe, the
Middle East and the Far East, constituted 48% and 27% of the total revenues for
the nine-month periods ended September 30, 1998 and 1997, respectively.
TranSwitch anticipates that foreign sales will continue to represent a
significant portion of total revenues, particularly as TranSwitch opens direct
sales offices in foreign countries. TranSwitch maintains a sales support office
in Europe and one in the Far East. A significant portion of TranSwitch'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. In particular, sales to 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
TranSwitch's customers in that region to delay or reduce their orders.
Gross profit. Gross profit is derived from product sales. Cost of products
sold includes the cost 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 TranSwitch, product
royalty fees and the amortization of product licenses. Gross profit for the
nine months ended September 30, 1998 was $18.9 million, compared to $10.7
million for the same period in 1997. Gross margin for the nine months ended
September 30, 1998 was 61.9%, compared to 57.3% for the same period in 1997.
The increase in gross profit and margin is principally the result of improved
costs from TranSwitch's vendors achieved as TranSwitch purchased higher volumes
of products.
20
<PAGE>
Research and development. In the nine-month period ended September 30, 1998,
research and development expenses were 26.2% of total revenues, as compared to
36.5% for the same period in 1997; spending in the nine months ended September
30, 1998 was $8.0 million, representing a 16.5% increase over the $6.8 million
for the comparable period in 1997. The increases in period-over-period expense
were the result of TranSwitch's continued investment in research and
development activities. The decreases as a percentage of total revenues in the
nine-month period ended September 30, 1998 were attributable to the growth in
revenues from the comparable period in 1997. TranSwitch believes that the
continued introduction of new products is essential to its competitiveness and
is committed to continued investment in research and development. TranSwitch
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 the nine-month period ended September 30, 1998,
marketing and sales expenses were 20.2% of total revenues, compared to 26.5%
for the same period in 1997. Total spending increased 24.0% to $6.2 million for
the nine-month period ended September 30, 1998 as compared to $5.0 million in
the comparable period in 1997. The increases in spending were primarily the
result of the increase in marketing and sales personnel and expansion of
TranSwitch's distribution network as part of TranSwitch's continued investment
in its marketing and sales infrastructure. The decreases as a percentage of
total revenues in the nine-month period ended September 30, 1998 were
attributable to the growth in revenues from the comparable period in 1997.
TranSwitch 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. The total spending for the nine-month period
ended September 30, 1998 increased 13.5% to $1.8 million, as compared to $1.6
million for the comparable period in 1997, and as a percentage of total
revenues, total spending decreased to 6.0% for the nine months ended September
30, 1998, as compared to the 8.6% for the comparable period in 1997. The
increases in period-over-period expense were the results of TranSwitch's
continued investment in the general and administrative area. The decreases as a
percentage of total revenues in the nine-month period ended September 30, 1998
were attributable to the growth in revenues from the comparable period in 1997.
Interest income, net of interest expense. For the nine-month period ending
September 30, 1998, interest income, net of interest expense was $763,000 as
compared to $368,000 for the same period in 1997. The increase in interest
income, net of interest expense was primarily the result of the increase in
cash balances between the two periods.
Income taxes. TranSwitch's effective tax rate was 4.5% in the first nine
months of 1998, which reflects the anticipated federal alternative minimum
taxes and states taxes estimated to be payable.
Years Ended December 31, 1997, 1996 and 1995
Total revenues. In 1997, TranSwitch reported revenues of $27.1 million, an
increase of 38.0% over 1996. The increase was primarily in product revenues as
this was TranSwitch's focus. TranSwitch did not derive any revenue in 1997
attributable to product license and royalty fees. In December 1995, TranSwitch
repurchased from Texas Instruments its license agreement (the "TI License")
which was the sole source of license and royalty fees in 1995. In 1996,
TranSwitch reported revenues of $19.7 million, an increase of 12.5% over 1995.
This increase was primarily due to the continued increase in product revenues
which grew to 97.9% of total revenues in 1996.
In 1997, Insight Electronics, Inc. (a distributor selling to various end
users, none of which comprise more than 10% of TranSwitch'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. No other customer
accounted for more than 10% of TranSwitch's total revenues during these
periods.
21
<PAGE>
Foreign sales, primarily consisting of sales to customers in Europe, the
Middle East and the Far East, constituted 33%, 46% and 38% of total revenues in
1997, 1996 and 1995, respectively.
Product revenues, net. In 1997, product revenues grew 40.1% to $26.9 million
from $19.2 million in 1996. This growth was driven by a broad strength across
all of TranSwitch's product lines. 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. 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 TranSwitch introduced new ATM
VLSI devices.
Gross profit. Gross margin in 1997 increased to 58.4%. The increase was due
to the lack of the TI License expense recognized in 1996 and the growth in
total volumes. Gross margin in 1996 decreased to 29.7% of total revenues from
57.7% in 1995 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.
In 1997, gross profit increased to $15.8 million, a function of the increase
in overall volume and the lack of the TI License expense recognized in 1996. In
1996, gross profit decreased to $5.8 million from $10.1 million in 1995, as
TranSwitch recognized $3.1 million of the cost of repurchasing the TI License
in cost of sales. In the fourth quarter of 1996, TranSwitch 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 included in the cost of sales was the write down of
approximately $600,000 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.
Research and development. In 1997, research and development expenditures were
$9.2 million, or 33.9% of total revenues, an increase of 3.3% over 1996. In
1996, research and development expenditures were $8.9 million, or 45.4% of
total revenues, an increase of 34.1% 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 1996.
Marketing and sales. In 1997, marketing and sales expense increased 22.5% to
$6.7 million or 24.7% of total revenues compared to 1996. The increase is the
result of the increase in variable commissions on the increased volume as well
as an increase in staff in this area. In 1996, marketing and sales expense
increased 26.0% to $5.5 million or 27.8% of total revenues, from $4.3 million,
or 24.8% of total revenues in 1995. During 1996, TranSwitch added new staff in
this area, opened new sales offices in San Jose, California and Taipei, Taiwan,
and expanded its sales representative coverage.
General and administrative. In 1997, general and administrative expenses
increased 2.6% over 1996 to $2.3 million, or 8.4% of total revenues. In 1996,
general and administrative expenses increased 51.4% to $2.2 million, or 11.3%
of total revenues, from $1.5 million or 8.4% of total revenues in 1995.
Included in the 1997 and 1996 expense is $225,000 and $195,000, respectively,
of non-cash expense related to the recognition of compensation expense under
SFAS No. 123 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 TranSwitch's being a public company for the full year in
1996 versus 1995, in which TranSwitch was a public company for approximately
six months.
22
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited consolidated quarterly
statements of operations data for each of the seven quarters in the period
ended September 30, 1998. In the opinion of management, this information has
been prepared on the same basis as the audited consolidated financial
statements appearing elsewhere in this prospectus and includes all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of this information in accordance with generally accepted
accounting principles. Such quarterly results are not necessarily indicative of
future results of operations and should be read in conjunction with the audited
consolidated financial statements of TranSwitch and the notes thereto included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1997 1997 1997 1997 1998 1998 1998
-------- -------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues.......... $ 5,056 $ 6,256 $7,438 $8,334 $8,606 $9,607 $12,264
Total cost of revenues.. 2,374 2,803 2,828 3,249 3,354 3,728 4,537
------- ------- ------ ------ ------ ------ -------
Gross profit............ 2,682 3,453 4,610 5,085 5,252 5,879 7,727
------- ------- ------ ------ ------ ------ -------
Operating expenses
Research and
development......... 2,398 2,216 2,227 2,353 2,543 2,537 2,887
Marketing and sales... 1,501 1,673 1,796 1,711 1,818 1,925 2,420
General and
administrative...... 518 567 523 680 564 589 672
------- ------- ------ ------ ------ ------ -------
Total operating
expenses......... 4,417 4,456 4,546 4,744 4,925 5,051 5,979
Operating income
(loss)................ (1,735) (1,003) 64 341 327 828 1,748
Interest income, net.... 143 111 114 92 234 264 265
Income (loss) before
provision for income
taxes................. (1,592) (892) 178 433 561 1,092 2,013
Provision for income
taxes ................ -- -- -- -- -- 72 92
------- ------- ------ ------ ------ ------ -------
Net income (loss)....... $(1,592) $ (892) $ 178 $ 433 $ 561 $1,020 $ 1,921
======= ======= ====== ====== ====== ====== =======
</TABLE>
The following table sets forth certain unaudited consolidated quarterly
statements of operations data expressed as a percentage of total revenues for
each of the seven quarters in the period ended September 30, 1998.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1997 1997 1997 1997 1998 1998 1998
-------- -------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues.......... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Total cost of revenues.. 47.0 44.8 38.0 39.0 39.0 38.8 37.0
----- ----- ----- ----- ----- ----- -----
Gross profit............ 53.0 55.2 62.0 61.0 61.0 61.2 63.0
----- ----- ----- ----- ----- ----- -----
Operating expenses
Research and
development......... 47.4 35.4 29.9 28.2 29.5 26.4 23.5
Marketing and sales... 29.7 26.7 24.2 20.5 21.1 20.0 19.7
General and
administrative...... 10.2 9.1 7.0 8.2 6.6 6.2 5.5
----- ----- ----- ----- ----- ----- -----
Total operating
expenses......... 87.3 71.2 61.1 56.9 57.2 52.6 48.7
Operating income
(loss)................ (34.3) (16.0) 0.9 4.1 3.8 8.6 14.3
Interest income, net.... 2.8 1.8 1.5 1.1 2.7 2.7 2.2
Income (loss) before
provision for income
taxes................. (31.5) (14.2) 2.4 5.2 6.5 11.3 16.5
Provision for income
taxes ................ -- -- -- -- -- 0.7 0.8
----- ----- ----- ----- ----- ----- -----
Net income (loss)....... (31.5)% (14.2)% 2.4% 5.2% 6.5% 10.6% 15.7%
===== ===== ===== ===== ===== ===== =====
</TABLE>
TranSwitch's operating results have in the past and may in the future
fluctuate on a quarterly and annual basis as a result of various factors. These
factors include, among others: the timing and cancellations of the Company's
customers' orders; market acceptance of the Company's products and those of its
customers; the level of orders received which can be shipped in a quarter; the
timing and provision of pricing protections and returns from the Company's
distributors; availability of foundry capacity and raw materials; fluctuations
in manufacturing yields; changes in product mix; TranSwitch's ability to
introduce new products and technologies on a timely basis; the introduction of
products and technologies by the Company's competitors; the timing of
23
<PAGE>
the Company's investments in research and development; whether TranSwitch's
customers buy from a distributor or directly from the Company; competitive
pressure on selling prices; and general economic conditions.
Total revenues for the first three quarters of 1998 increased steadily as a
result of increased sales of all three of TranSwitch's product lines.
TranSwitch's gross profit as a percentage of total revenues increased in each
quarter of 1998, primarily as a result of lower unit costs. Over the past seven
quarters, TranSwitch has generally increased its investment in marketing and
sales and research and development. These expenses fluctuated as a percentage
of total revenues as TranSwitch's total revenues increased from period to
period.
LIQUIDITY AND CAPITAL
TranSwitch has financed its operations and met its capital requirements since
it was incorporated in 1988 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 October 1997, TranSwitch
received net cash proceeds of $13.7 million in connection with a private
placement of its Series A Convertible Preferred Stock. All such shares had been
converted into shares of common stock as of September 30, 1998.
In the first nine months of 1998, TranSwitch generated $4.5 million of cash
from its operating activities, the result of net income of $3.5 million and
non-cash items of $1.8 million, offset by a net increase in working capital of
$0.8 million. Capital expenditures during the nine-month period ended September
30, 1998 totaled $2.6 million, including purchases of computer equipment,
tooling, software and product licenses.
TranSwitch's principal sources of liquidity as of September 30, 1998
consisted of cash and cash equivalents and short term investments of
approximately $24.3 million. In addition, in the quarter ended September 30,
1998, TranSwitch renewed its financing agreement with Silicon Valley Bank
whereby TranSwitch has a total credit facility of $10.0 million, consisting of
a $2.0 million line of credit for capital equipment and a $8.0 million line of
credit for working capital purposes. As of September 30, 1998, TranSwitch had
no outstanding balances under these lines of credit. Pursuant to the working
capital and equipment financing agreements with Silicon Valley Bank, TranSwitch
is restricted from further pledging its assets or granting additional security
interests in such assets. TranSwitch believes its existing cash, cash flow from
operations, if any, cash from the proceeds of this offering and cash available
under its lines of credit will be sufficient to satisfy TranSwitch's working
capital and capital expenditure requirements for at least the next 12 months.
YEAR 2000
Many currently installed computer systems and software products are dependent
upon internal calendars coded to accept only two digit entries in the date code
field. These date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and software used by many companies may need to be upgraded to comply
with such "Year 2000" requirements.
None of TranSwitch's current products utilize internal calendars that are
dependent upon the input of a specific date. As a result, all TranSwitch's
current products are inherently Year 2000 compliant.
In the fourth quarter of 1997, TranSwitch established a Year 2000 committee
(the "Committee"), chaired by the Senior Vice President and Chief Financial
Officer, to assess the effects of the Year 2000 issue on operations and to
remediate such effects as necessary. The Committee focuses on the Year 2000
readiness of both internal systems and key outside suppliers, financial
institutions and other business partners.
24
<PAGE>
To assess TranSwitch's internal readiness, the Committee has examined and
tested the Company's current hardware and software to identify systems with
inherent Year 2000 problems. No hardware performing critical functions has been
found to have such problems. Although isolated hardware performing non-critical
functions has been found to have Year 2000 problems, these problems were not
judged likely to have a material impact on operations. As a result, such non-
critical hardware will not be replaced.
Moreover, the Committee has obtained certificates from its software vendors
to the effect that all of TranSwitch's key software systems, including its MRP,
order entry and customer service systems, are free of Year 2000 problems. The
Committee has tested certain key software systems independently for Year 2000
functionality as well.
To assess the Year 2000 readiness of TranSwitch's key outside suppliers,
financial institutions and other business partners, the Committee has requested
a certification from each that it has resolved any Year 2000 issues that might
have a material impact on operations. To date, approximately half of such
parties have so certified.
Currently, the Committee estimates that total expenditures to assess and
remedy Year 2000 issue will be less than $50,000, plus staff time. All
expenditures will be expensed when they occur and are not expected to have a
material impact on results of operations. The Committee does not believe that
other information technology projects will be delayed or otherwise materially
affected by our Year 2000 efforts.
Based on the Committee's assessment to date, TranSwitch believes that it will
not experience any material disruption in its operations as a result of Year
2000 issues. However, if certain critical vendors, service providers and
business partners, such as public utilities providing electricity, water or
telephone service, financial institutions with which the Company maintains
accounts, or key suppliers of parts and materials to the Company, fail to
provide needed services to the Company or to its key outside suppliers or
customers, customer orders could decline or the Company's operations could shut
down for as long as the failure or failures persist. At present, the Committee
has not developed contingency plans, but the Committee will determine whether
to develop any such plans as its assessment is completed. Accordingly, the
Company cannot be certain that Year 2000 issues will not have a material
adverse effect on TranSwitch's business, results of operation or financial
results.
25
<PAGE>
BUSINESS
The following description of the Company's business should be read in
conjunction with the information included elsewhere in this prospectus. The
description contains certain forward-looking statements that involve risks and
uncertainties. When used in this prospectus, the words "intend," "anticipate,"
"believe," "estimate," "plan" and "expect" and similar expressions as they
related to us are included to identify forward-looking statements. The
Company's actual results could differ materially from the results discussed in
the forward-looking statements as a result of certain of the risk factors set
forth elsewhere in this prospectus.
INTRODUCTION
TranSwitch Corporation designs, develops, markets and supports highly
integrated digital and mixed-signal (analog and digital) semiconductor
solutions for the telecommunications and data communications markets. The
Company's products are Very Large Scale Integrated (VLSI) semiconductor devices
that provide core functionality for communications network equipment. The
Company's VLSI solutions are programmable to provide high levels of
functionality for high-speed broadband communication networks. These products
are incorporated into OEMs' networking equipment. TranSwitch's VLSI devices are
compliant with SONET/SDH (Synchronous Optical Network/Synchronous Digital
Hierarchy), asynchronous and ATM (Asynchronous Transfer Mode) standards. The
Company's mixed-signal and digital design capability, together with its
telecommunications systems expertise, enables it to determine and implement
optimal combinations of design elements for enhanced 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, reduced system size and cost, and greater
reliability relative to discrete solutions.
TranSwitch's principal customers are OEMs which serve three fast-growing
market segments:
. the worldwide public network infrastructure that supports voice and
data communications;
. the Internet infrastructure that supports the World Wide Web and other
data services; and
. corporate wide area networks (WANs) that support voice and data
exchange within medium-sized and large enterprises.
The Company has sold its VLSI devices to more than 400 customers worldwide.
The Company's customers include Alcatel, Ascend Communications, Cisco, ECI
Telecom, Ericsson, IBM, Lucent, Newbridge Networks, Nortel, Siemens, and
Tellabs. The Company sells its products through a direct sales force and a
worldwide network of independent distributors and sales representatives located
in the United States and 14 other countries.
INDUSTRY BACKGROUND
Due to deregulation and the resulting competition in the worldwide
telecommunications industry, service providers are required to be more
responsive to customer needs and offer new and enhanced communications services
at lower cost. Simultaneously, the bandwidth requirements of public networks
such as those used by local and long distance carriers, as well as specialized
networks such as those used by Internet service providers are increasing due to
a variety of factors, including:
. the growth in the World Wide Web;
. the proliferation of wireless, e-mail and facsimile communications;
. the growth in size of WANs and LANs, and the increase in data and
other traffic generated from these networks;
26
<PAGE>
. the need for higher speed communication between wide area networks
(WANs) and local area networks (LANs);
. the increase in demand for remote network access; and
. the emergence of new applications such as video conferencing.
Network service providers, including established and emerging competitive
local and long distance carriers, as well as Internet Service Providers, are
facing significant challenges to meet the demand for increased network capacity
and speed, as well as for new bandwidth-intensive services. Network
architectures and equipment must be upgraded to provide increased bandwidth and
data-oriented switching capability for high-speed data transmission services.
Similarly, the demand for new high bandwidth applications is placing an
increased burden on many private WANs and LANs, where current system
architectures are often inadequate. Suppliers of equipment to network service
providers of private WAN and LAN markets must provide equipment solutions that
enable enhanced network access, ease administrative burdens of current system
architectures and integrate data with voice, video and imaging applications.
Much of the public network's infrastructure was originally designed to
optimize voice communications utilizing copper wire as the primary transmission
medium. This copper wire-based infrastructure is not well-suited for high-speed
data transmission, due to bandwidth limitations and high maintenance and
administration costs. As a result, infrastructure improvements to public
networks have included a significant increase in the deployment of fiber optic
technology to replace conventional copper wire. Optical fiber offers
substantially greater capacity than copper wire and is less error-prone and, as
a result, has become the transmission medium of choice for both incumbent and
emerging public network service providers. Existing copper wire-based network
protocols for the transmission of information, based on asynchronous standards,
limit the simultaneous transmission of voice and data. Additionally, network
equipment based on asynchronous standards have only limited interoperability,
because of ad hoc vendor-specific extensions. These standards are also
inadequate for accommodating additional bandwidth required for maintenance and
administration signals, resulting in higher network operating costs.
As a result of these limitations, the SONET standard in the United States and
the equivalent SDH standard in the rest of the world have emerged as the next
generation standards for high-speed transmission of voice and data through
optical fiber. The SONET/SDH standards facilitate high data integrity and
improved performance in terms of network reliability, reduce maintenance and
other operations costs by standardizing interoperability among different
vendors' equipment and allow remote maintenance and administration. The
adoption of the SONET/SDH standards and the increased bandwidth provided by the
use of optical fiber have enabled the deployment of a global, interoperable
public transmission network for voice and data communications.
SONET/SDH standards relate to the physical medium, optical fiber, and require
a higher level protocol to handle not only data traffic, but also applications
such as voice, images and video services. Asynchronous transfer mode (ATM) is a
higher level standard complementary to asynchronous and SONET/SDH standards
that enables public networks, Internet and WAN and LAN systems designers to
provide a mix of services to network users. ATM allows network service
providers to reduce the impact of bandwidth constraints and to provide mixed
high-speed and high-volume data communications, voice, video and imaging
services. This enables the network service providers to generate more revenue
as they can now carry and bill for a wide variety of transmission services.
In order to deploy new infrastructures and transmission protocols, network
service providers are demanding improved time to market of cost-effective,
differentiated products from network equipment vendors. The complexity of the
equipment, increasing cost pressures and the need for high reliability and
standards compliance mandate the use of very large scale integrated (VLSI)
semiconductor devices incorporating a high degree of functionality. Network
equipment vendors recognize that, similar to the trend experienced in the
computer industry, the functionality incorporated into integrated circuits is
contributing an increasing share of the added value in a network system.
27
<PAGE>
The design of integrated circuits contained in SONET/SDH, asynchronous and
ATM equipment requires specialized expertise in mixed-signal semiconductor
device design and implementation, in-depth knowledge of telecommunications and
data communications standards, and systems engineering expertise. Expertise in
mixed-signal device design is relatively uncommon, and, as a result, equipment
vendors needing these capabilities often seek independent semiconductor
vendors. However, many semiconductor vendors lack the telecommunications
industry knowledge and experience, as well as familiarity with the standards,
to be able to contribute significant value to the equipment vendors' systems
designs. Consequently, equipment vendors require an integrated circuit vendor
that understands their markets and the applicable standards, and is able to
provide a broad range of cost-effective semiconductor devices.
THE TRANSWITCH SOLUTION
TranSwitch provides network equipment OEMs with complete solutions including
high-speed, mixed-signal VLSI devices, microcode programs for configurable
devices, reference design models and multi-level product and applications
support. TranSwitch's VLSI devices are compliant with SONET/SDH, asynchronous
and ATM 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 or application-specific
integrated circuit solutions, while reducing system size and cost.
TranSwitch calls its VLSI devices Connectivity Engines because of their
ability to power the development of new-generation communication networks which
must be capable of addressing both physical and logical connectivity. The
Company is now developing a new class of programmable flexible network building
blocks, which will be multiple-purpose Connectivity Engines. These devices
include a fast, powerful, on-chip computer core, that can be programmed to
provide different functionality and performance characteristics to match the
needs of particular applications in communications networks.
STRATEGY
TranSwitch's goal is to be the leading supplier of innovative, complete VLSI
solutions to telecommunications and data communications OEMs worldwide. The key
elements of TranSwitch's business strategy include the following:
Provide Complete Solutions Within Target Markets
TranSwitch offers network equipment OEMs chip sets that represent complete
solutions for SONET/SDH, asynchronous and ATM applications. In addition to
providing its families of VLSI devices, the Company offers OEM customers the
following:
. software programs for its configurable devices;
. product reference design models for both hardware and software
applications;
. evaluation boards and reference software;
. OEM product design support;
. multi-tier applications support; and
. product technical and design documentation.
The Company's "chip-set" approach allows OEMs to optimally configure their
products while maintaining product compatibility over multiple generations.
This approach allows equipment vendors to
28
<PAGE>
selectively upgrade their products with next-generation higher functionality
VLSI devices. TranSwitch has extended this approach to provide seamless
integration of SONET/SDH, asynchronous and ATM applications.
Continue to Promote the Deployment of Programmable Devices
The Company intends to continue to develop and promote customer-programmable,
system-level building blocks the Company has defined as Connectivity Engines.
By providing core functionality in the form of dense, high-speed, programmable
packages, the Company believes these new devices offer greater power,
flexibility and functionality at a lower cost than the single-function, hard-
wired devices they are designed to replace. The Company believes that
Connectivity Engines represent a new and more versatile approach to
interconnecting communications systems and that these new devices have the
potential to play a significant role as product-building platforms in the
development of new generations of equipment by networking vendors.
Seek Early Market Penetration Through Customer Sponsorship
TranSwitch seeks to develop close sponsoring relationships with strategic
OEMs during product development in order to secure early adoption of its
solutions. TranSwitch believes that OEMs recognize the value of their early
involvement through sponsorship of the Company's products, as they can design
their system products in parallel with the Company's development, thereby
accelerating their time to market. In addition, TranSwitch believes that its
sponsoring relationships with leading OEMs help the Company obtain early design
wins and help reduce risks of market acceptance for its new products.
Focus on Mixed-Signal Applications
The Company seeks to identify applications requiring its mixed-signal VLSI
device design capabilities. By leveraging both its industry knowledge and the
special design skills required for mixed-signal devices, the Company believes
that it is able to identify and implement optimal combinations of design
elements for desired analog and digital functionality targeted toward the
specific needs of network equipment OEMs. TranSwitch believes that its
experience and expertise provides its customers accelerated time to market,
better performance and lower costs than combinations of separate digital and
analog solutions.
Partner With Selected Foundries
The Company works with selected third-party foundries to obtain semiconductor
devices. This approach allows the Company to avoid substantial capital
spending, obtain competitive pricing and technologies, and retain the ability
to migrate its products to new process technologies to reduce costs and
optimize performance. TranSwitch's design methodology enables the production of
its devices at multiple foundries using well-established and proven processes.
TranSwitch engages foundries that are ISO 9000 certified for quality and uses
only semiconductor processes and packages that are qualified by vendors under
industry-standard requirements.
PRODUCTS AND APPLICATIONS
TranSwitch supplies high-speed, broadband VLSI semiconductor devices to
systems vendors who serve three fast-growing market segments: the worldwide
public network infrastructure that supports both voice and data communications,
the Internet infrastructure that supports the World Wide Web and other data
services and corporate WANs. The Company's core competencies as a systems-on-a-
chip innovation leader include:
. an in-depth understanding of SONET/SDH, asynchronous and ATM
standards;
. the ability to design complex mixed-signal high-speed VLSI devices;
and
. the capability to verify the design against customers' requirements
and industry standards through analysis, simulation and certification.
29
<PAGE>
The Company's three product lines consist of SONET/SDH, asynchronous and ATM
products. 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. Network equipment vendors can mix and
match TranSwitch's VLSI devices to optimally configure a specific system. The
Company's product lines can be combined to provide a cost-effective solution
with increased functional integration and features, while providing seamless
integration of SONET/SDH, asynchronous and ATM/Internet Protocol applications.
The prices for the Company's products typically range from approximately $20
to $300, depending on volume, complexity and functionality.
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 Asia. The
Company's mappers, which bridge the interconnections between SONET/SDH
equipment and asynchronous equipment, allow DS-series and E-series transmission
lines to be connected with SONET/SDH lines. In this way, these mappers
transparently transport asynchronous signals across the SONET/SDH network.
The Company's SONET/SDH products include:
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION KEY APPLICATIONS
- ------- --------------------------------------- ------------------------------------
<S> <C> <C>
SYN155C.. STS-3/STS-3C Synchronizer SONET/SDH Multiplexer/Cross Connects
SOT-
1/SOT-
1E..... STS-1 Overhead Terminator SONET Multiplexer/Cross Connects
SOT-3.... STM-1/STS-3/STS-3c Overhead Terminator SONET/SDH Multiplexer/Cross Connects
ADMA-E1.. Two Channel E1 Mapper-Desynchronizer SONET Multiplexer/Cross Connects
ADMA-T1.. Two Channel DS-1 Mapper-Desynchronizer SONET Multiplexer/Cross Connects
L3M...... DS-3/E-3 Mapper Desynchronizer SONET/SDH Multiplexer/Cross Connects
L4M...... E-4 Mapper-Desynchronizer SDH Multiplexer/Cross Connects
QT1M..... Four Channel DS-1 Mapper-Desychronizer SONET Multiplexer/Cross Connects
QE1M..... Four Channel E1 Mapper-Desynchronizer SONET Multiplexer/Cross Connects
DS1MX7... Seven Channel DS-1 Async & Sync
Mapper & Desynchronizer SONET Multiplexer/Cross Connects/CPE
PHAST-1.. STS-1 Overhead Terminator (low power) SONET Multiplexer/Cross Connects
</TABLE>
TranSwitch's current SONET/SDH products are used to build add/drop
multiplexers, digital cross connects and other telecommunications and data
communications equipment. This equipment is configured for use in both domestic
and international fiber-based public networks. The Company's SONET/SDH products
also have applications in customer premise equipment, such as routers and hubs
and in central offices, adding integrated fiber optic transmission capability
to telephone switches.
Asynchronous Products
TranSwitch's asynchronous products provide high-bandwidth connections and are
used to configure transmission equipment for use in the public network. This
equipment is used to increase the capacity of the copper-based public network.
TranSwitch's asynchronous VLSI solutions also enable customer premise equipment
like hubs and routers used in WANs and LANs to access the public network for
voice and data communications with similar products in other locations.
TranSwitch's asynchronous products provide high levels of integration, as
well as cost, power and performance advantages relative to discrete and
competing integrated circuit solutions. The Company's asynchronous VLSI
products include devices that provide solutions for DS-1 through DS-3 and E-1
through E-3 transmission lines. This product line includes multiplexers, which
are devices that combine multiple low-speed lines to form a higher speed line,
and demultiplexers, which perform the reverse function. In addition, the
30
<PAGE>
Company offers framers, which are devices that identify the starting points of
defined bit streams and enable systems to recognize the remaining bits.
The Company's asynchronous products include:
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION KEY APPLICATIONS
- ------- ---------------------------------- -----------------------------------
<S> <C> <C>
ART/ARTE........ Advanced Receiver/Transmitter DS-3/STS-1 Multiplexer/DACS/CPE
DS3LIM-SN....... Line Interface Module DS-3/STS-1 Multiplexer/DACS/CPE
E3LIM........... Line Interface Module E-3 Multiplexer/DACS/CPE
MRT............. Multi-Rate Line Interface European Multiplexer/DACS/CPE
E123MUX......... E1/E2/E3 Multiplexer/Demultiplexer E-3 Multiplexer/DACS/CPE
M13E............ DS1/DS3 Multiplexer/Demultiplexer DS-3 Multiplexer/DACS/CPE
DS3F............ DS3 Framer DS-3 Multiplexer/CEP
E2/E3F.......... E2/E3 Framer European Multiplexer/CPE
JTF2F........... JT2 Framer Japanese Multiplexer/CPE
HDLC............ High-Speed Data Link Controller High-Speed CPE
XBERT........... Bit Error Rate Generator/Analyzer Test Equipment
QDS1F/QT1FPlus.. Quad T1 Framer T1 Multiplexer/DACS/CPE
QE1F/QEIFPlus... Quad E1 Framer DS-1 Multiplexer/DACS/CPE
T1FX8........... 8-channel DS1 Framer Remote Access Server/T1 Multiplexer
</TABLE>
ATM Products
TranSwitch's ATM family of products targets the core elements of ATM-based
multi-service access multiplexer systems. The Company's ATM products also
include VLSI semiconductor devices for line interfacing and service adaptation
functions.
The Company's ATM products include:
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION KEY APPLICATIONS
- ------- ------------------------------ ---------------------------------------
<S> <C> <C>
CDB..... Cell Delineation Block ATM Multiplexer/Hubs/Adaptor Cards
SARA-
S/R... AAL3/4/5 SAR Controllers ATM/Hubs/Adaptor Cards
COBRA... AAL1 SAR Controller ATM Multiplexer
CUBIT... CellBus Switch ATM Switch/Multiplexer/Hubs
CUBIT-
PRO... CellBus Switch Multi-Server Access Switch/Concentrator
SALI-
25C... 6-Channel 25-mbit/s Interfaces ATM Hub/Workgroup Switch
SARA-
Lite.. AAL0/5 SAR with STS-3C Framer ATM Server/Hub/Router
</TABLE>
TranSwitch's CellBus is a system architecture for implementing ATM access
multiplexers and ATM switching systems. The Company's first two products
incorporating CellBus, CUBIT and CUBIT-Pro, provide single-chip ATM switching
capability in access equipment. These products have been designed into many
system vendors' solutions since late 1995, thus establishing CellBus as a
significant technology in the global broadband network access market.
New Products
The Company expects to introduce a number of new products in 1999, extending
its product functionality to provide enhanced programmability and seamless
integration of relevant standards. The PHAST series of products will have a
significantly higher level of functionality and integration of peripheral
devices. These products are designed for traditional telephone traffic, which
is carried via asynchronous transmission infrastructure, and data traffic,
which is carried as ATM cells or frame relay/Internet Protocol packets. The
31
<PAGE>
PHAST series of products are developed for telecommunications equipment
vendors, but are equally attractive to high-speed data systems and
communications systems vendors. TranSwitch's PHAST series of products enables
OEM systems vendors to build hybrid voice/data transport systems with a wide
range of transmission rates.
The Company's new asynchronous Connectivity Engine products, such as the
McHDLC, will provide greater flexibility and further improve the throughput and
performance of data communications systems. OEM systems vendors can use these
new products to migrate external software functions into the Company's embedded
RISC (Reduced Instruction Set Computer) processor. This migration is designed
to result in reduced system size and power consumption, and increased speed of
execution.
TranSwitch is further enhancing CellBus capabilities in its new product,
ASPEN. ASPEN has three embedded specialized RISC processors, which can be
configured by downloading different software to function as cell engines,
packet engines or high-speed copper access controllers. Thus, using an ASPEN
device, OEM system vendors can develop multi-service broadband access platforms
that can deliver a wide variety of cell- and packet-based services in public
networks.
TECHNOLOGY
The Company believes that one of its core competencies is the
telecommunications and data communications knowledge and expertise of its key
executives and that of its systems engineering organization. The systems
engineering group possesses substantial telecommunications and data
communications design experience, as well as extensive knowledge of relevant
standards. This includes not only a thorough understanding of the actual
written standards, 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 its participation in the standards development 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 for communications
applications, 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 communications industry. These blocks have been
designed using standard VLSI-oriented programming languages such as VHDL and M
(a C-like language) to create new devices that meet expanding customer
requirements. Availability of these blocks and ability to access higher density
manufacturing processes allow the Company to develop a device to execute
multiple functions that were previously available only from a combination of
discrete devices.
TranSwitch has also developed proprietary toolsets called "Test Benches,"
which facilitate on-time development of products and help assure that the
products meet customer and standards requirements. These Test Benches consist
of behavior models of all applicable functions in a high level design
environment. These Test Benches also include test signal generators and
analyzers such as models of SONET/SDH signals. Systems engineers use Test
Benches to test new architectural concepts, while VLSI designers use Test
Benches to ensure that the device conforms to product specifications. The
Company believes that the availablility of Test Benches provides it with a
competitive advantage.
The Company has invested significant resources in developing an architecture
which allows increased software 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.
The Company has also developed expertise and hardware/software tools to
certify products against customer and standards requirements. While the Test
Bench is used to test the software model of the VLSI
32
<PAGE>
device, these certification tools are used to verify operation of actual device
prototypes. The Company shares its certification board--the platform used to
certify a particular device--with sponsoring costumers, thereby accelerating
their time to market. The Company's certification approach and tools have been
recognized by customers as a key benefit.
MARKETING, SALES AND CUSTOMER SUPPORT
Marketing
The Company's marketing strategy focuses on key customer sponsorships to
promote early adoption of the Company's VLSI devices in the products of system
vendors who are market leaders. Through the Company's customer sponsorship
program, customers provide direct feedback on product specifications and
applications while participating in product testing in parallel with the
Company's certification process. This approach accelerates customers' time to
market while enabling the Company to achieve early design wins for its products
and derive non-recurring engineering expense support and volume commitments for
specific products from these sponsors.
As a distinct aspect of the Company's marketing strategy, the Company
organizes and sponsors technical seminars. These seminars address topical
industry issues, and the Company involves key customers and market leaders in
the discussions. The Company believes that these seminars provide timely
feedback on technology trends and help position the Company as an industry
leader. In addition, these seminars give these customers early product
information and foster a close working relationship between the key customers
and the Company.
The Company has established a number of additional marketing programs. The
Company participates at key industry conferences with exhibits and product
seminars. TranSwitch focuses on a strong public relations program including
press interviews, articles in industry trade publications, and its quarterly
publication The Communicator.
Sales
TranSwitch's sales strategy focuses on worldwide suppliers of high-speed
communications and communications-oriented equipment. These customers are
easily identifiable and include telecommunications, Internet, data
communications and customer premise equipment vendors. The Company has
established a direct sales force and a worldwide network of independent
distributors and sales representatives. These independent entities are selected
for their ability to provide effective field sales, marketing communications
and technical support to the Company's customers.
TranSwitch has established foreign distributors and sales representative
relationships in Australia, Benelux, Canada, China, France, Germany, Great
Britain, Israel, Italy, Japan, Korea, Spain, Sweden, Switzerland and Taiwan.
The Company also sells its products through domestic distributors and a network
of domestic sales representatives. The Company has regional sales and technical
support capabilities in Boston, Massachusetts; San Jose, California;
Morristown, New Jersey; Atlanta, Georgia; Brussels, Belgium and Taipei, Taiwan,
as well as its headquarters facility in Shelton, Connecticut.
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. These field sales engineers and independent distributors and
representatives support the rest of the customers.
Customer Support
From its inception, TranSwitch has sought to differentiate itself through
strong and dedicated customer support. The Company's customer support group has
extensive telecommunications and data communications
33
<PAGE>
knowledge and systems design experience. This group provides sales support,
customer application support, and responses to customer and product inquiries.
In addition to its headquarter's technical support capability, the Company has
established several field applications support offices in strategic U.S.
locations and in Europe and the Pacific Rim.
The Company established a customer support laboratory in early 1993 to
provide superior support while reducing the Company's costs associated with
problem resolution. The laboratory develops a test configuration for every
major product, which permits customers to detect and replicate system problems.
The Company believes that it differentiates itself by the breadth and depth of
its customer support capability.
CUSTOMERS
Since shipping its first product in 1990, the Company has sold its products
and services to over 400 customers. The Company's customers include: public
network systems suppliers that incorporate the Company's products into
telecommunications systems; WAN and LAN equipment suppliers; Internet-oriented
OEMs; communications test and performance measurement equipment suppliers; and
government, university and private laboratories that use the Company's products
in advanced public network and WAN/LAN development projects.
Systems applications of public network equipment include switching systems,
multiplexers, demultiplexers, digital access cross connect, channel banks,
remote terminals, and digital loop carriers. WAN and LAN applications comprise
systems and equipment such as multiplexers, demultiplexers, hubs, routers, and
switching systems. Internet-oriented systems include remote access servers and
backbone switchers and routers. Test and performance measurement equipment
includes signal generators, network analyzers, and network simulators.
Government, university and laboratories apply the Company's products in a wide
variety of high-speed broadband communications projects.
The following lists certain of the Company's customers. Many of these
customers purchase several of the Company's products from various product
lines.
<TABLE>
<S> <C>
ADC Telecommunications, Inc. Interphase Technology Corporation
Alcatel Network Systems, Inc. Lucent Technologies Inc.
Ascend Communications, Inc. NEC Corporation
Cisco Systems, Inc. Newbridge Networks Corporation
ECI Telecom Ltd. Northern Telecom Ltd.
Ericsson Telecom AB Samsung Electronics Co., Ltd.
Hewlett-Packard Company Siemens Corporation
Hitachi, Ltd. Tadiran Telecommunications Ltd.
IBM Corporation Tellabs Operations, Inc.
</TABLE>
The Company has no long-term volume purchase commitments from any of its
major customers. The Company's ability to maintain or increase its sales in the
future will depend upon its ability to obtain orders from existing and new
customers and maintain relationships with and provide support to existing and
new customers, as well as the financial condition and success of its customers.
Foreign sales represented 38%, 46%, 33% and 48% of total revenues during
1995, 1996 and 1997 and the nine months ended September 30, 1998, respectively.
34
<PAGE>
The following table sets forth, for the periods indicated, the percentage of
the Company's total revenues derived from its significant customers listed
below:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- -----------------
CUSTOMER 1995 1996 1997 1998
-------- ------- ------- ------- -----------------
<S> <C> <C> <C> <C>
Columbia Technology(1)......... * * * 18%
Insight Electronics, Inc.(1)... 16% 16% 41% 22%
Tellabs Operations, Inc.(2).... 17% 14% 16% 20%
ECI Telecom Ltd................ * 22% * *
</TABLE>
- --------
* Below 10% of the Company's total revenues
(1) Columbia Technology and Insight Electronics are distributors of our
products to various end-users, none of which comprised more than 10% of the
Company's total revenues during the periods mentioned.
(2) The Company's sales to Tellabs during 1995, 1996 and 1997 were made through
Reptron Electronics, Inc., Tellabs' designated distributor. In the nine-
month period ended September 30, 1998, sales to Tellabs were made through
Reptron and Arrow Electronics, Inc., also Tellabs' designated distributor.
Sales to Tellabs through Arrow during this period represented 14% of the
Company's total revenues.
RESEARCH AND DEVELOPMENT
The Company believes that the continued introduction of new products in its
target markets is essential to its growth. As of September 30, 1998, the
Company had 69 full time employees engaged in its research and development
efforts. The Company believes that its research and development staffing will
only moderately increase in 1999. The Company employs designers who have the
necessary engineering and systems qualifications and are experienced in
software, mixed-signal, high-speed digital, telecommunications and data
communications technologies.
All developments are carried out using ISO 9001 certified design process and
the design tools/environment are continuously enhanced for improvement in
design, fabrication and verification of its products. The Company invests in
establishing and enhancing its design process, tools, methodology and
proprietary Test Benches. From time to time, the Company acquires products from
third parties to enhance its product lines. The Company's internal research and
development organization thoroughly reviews the external development processes
and the design of these products as part of its quality assurance process.
PATENTS AND LICENSES
The Company has 24 patents issued and 10 patent applications pending in the
U.S. Of the 24 issued patents, one is co-owned by ECI Telecom Ltd. and one is
co-owned by Siemens Telecommunications Systems Ltd. The Company has four
patents issued and 16 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 and four
patents pending in the People's Republic of China. The Company has 16 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 four patents issued and four
patents pending in Israel. Further, the Company has one patent application
pending under the Patent Cooperation Treaty (PCT) with the possibility of
filing in the EPO, Canada, Japan, China, Mexico, Norway and Israel. None of the
Company's domestic and foreign patents that have issued will expire in the near
future unless the Company chooses not to pay renewal fees. The Company's oldest
patent is not scheduled to expire for more than ten years.
The Company cannot guarantee that its patents will not be challenged or
circumvented by its competitors, nor can the Company be sure that pending
patent applications will ultimately issue as patents. Under current law, patent
applications in the United States are maintained in secrecy until patents are
issued, and the right to a patent in the United States is attributable to the
first to invent, not the first to file a patent application. In the process of
obtaining foreign patents, patent applications are published approximately 18
months after their priority (U.S.) filing date, and the right to a patent is
determined by the first to file an application. The
35
<PAGE>
Company cannot be sure that its product or technologies do not infringe patents
that may be granted in the future pursuant to pending patent applications or
that its products do not infringe any patents or proprietary rights of third
parties. From time to time, the Company receives communications from third
parties alleging patent infringement. In the event that any relevant claims of
third-party patents are upheld as valid and enforceable, the Company could be
prevented from selling its products or could be required to obtain licenses
from the owners of such patents or be required to redesign its products to
avoid infringement. The Company cannot assure that such licenses would be
available or, if available, would be on terms acceptable to the Company or that
the Company would be successful in any attempts to redesign its products or
processes to avoid infringement. The Company's failure to obtain these licenses
or to redesign its products would have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company also has been granted registration of 10 trade or service marks
in the U.S., and it has 7 more U.S. applications for trademarks awaiting
approval. The Company has also been granted three trademark registrations under
the European Trademark (ECT) procedure.
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,
the Company cannot assure 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 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 bases. The Company
cannot assure 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.
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.
36
<PAGE>
Effective June 25, 1997, the Company was registered by TUV Rheinland of North
America, Inc. as complying with the requirements of ISO 9001.
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, three of which
are located in the U.S. and the fourth in Taiwan, to process its wafers: Texas
Instruments Incorporated (TI), Symbios Logic Inc. and LSI Logic Corporation in
the U.S. and Taiwan Semiconductor Manufacturing Company Limited (TSMC) in
Taiwan. Foundries are required to have qualified and reliable processes. 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 through 1999, and in return the Company has agreed to purchase
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. Reduced
yields have at times adversely affected the Company's operating results.
COMPETITION
The semiconductor industry is intensely competitive and is characterized by
the following:
. price erosion;
. rapid technological change;
. shortage in fabrication capacity;
. heightened international competition in many markets; and
. unforeseen manufacturing yield problems.
The communications and data communications industries, which are the primary
target markets for TranSwitch, are also intensely competitive because of
deregulation and heightened international competition.
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 IBM
Corporation, Lucent Technologies, 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 and SONET/SDH areas
are AMCC Corporation, Crystal Semiconductor, Inc., Dallas Semiconductor Corp.,
EXAR Corporation, Lucent Technologies, National Semiconductor Corporation, PMC
Sierra Corporation, Texas Instruments, Inc., Triquint Semiconductor Inc.,
Vitesse Semiconductor Corp. and VLSI Technology, Inc. In addition, there are a
number
37
<PAGE>
of ASIC vendors, including AMI Industries, Inc., LSI Logic Corp. and
STMicroelectronics, Inc., who compete with the Company by supplying customer-
specific products to OEMs. In the ATM area, the principal competitors include
all the vendors mentioned above and, in addition, AMD Corporation, IDT and MMC
Networks, Inc. Numerous other domestic and international vendors have announced
plans for entering this market.
TranSwitch believes that the principal bases of competition include:
. product definition;
. product design;
. test capabilities;
. reliability;
. price;
. functionality;
. time-to-market; and
. reputation.
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 system
architecture skills, and its proprietary design and development tools,
including its proprietary simulation and testing software and its library of
analog and digital blocks and cells.
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 our products by effective utilization of intellectual
property laws;
. product quality;
. reliability;
. price;
. efficiency of production;
. the pace at which customers incorporate our integrated circuits into
their products;
. success of competitors' products; and
. general economic conditions.
BACKLOG
As of September 30, 1998, the Company's backlog was approximately $12.5
million, as compared to $8.4 million as of September 30, 1997. 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.
38
<PAGE>
EMPLOYEES
At September 30, 1998, the Company employed approximately 135 full time
employees, as follows: 69 in research and development; 38 in marketing and
sales; 19 in operations; and 9 in administration. The Company's future success
depends upon its ability to attract, motivate and retain technical, marketing,
sales and management personnel who are in great demand in the
telecommunications industry. The Company is not party to any collective
bargaining agreements, and the Company believes that its employee relations are
good.
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 four story
office building. Product development and all final inspection and shipping,
marketing and administration activities are located at this facility.
Approximately 90% of the existing space is fully utilized and the Company
expects to lease additional space in 1999. The lease is due to expire in
November, 2007. The Company also leases approximately 1,200 square feet in
Research Triangle Park, North Carolina where additional product development
efforts take place. In September 1997, the Company leased approximately 3,200
square feet in Stoneham, Massachusetts for product development and sales
support. The Company leases a 1,400 square foot sales and support facility in
San Jose, 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 in Taipei, Taiwan for product development and sales
support, and in 1998, the Company opened a 2,500 square-foot facility in New
Delhi, India for product development.
39
<PAGE>
MANAGEMENT
The current directors and executive officers of TranSwitch are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Executive Officers and Directors
Santanu Das..................... 53 President, Chief Executive Officer and
Chairman of the Board of Directors
Michael F. Stauff............... 48 Senior Vice President, Chief Financial
Officer and Treasurer
Terrence S. Rogers.............. 43 Vice President, Worldwide Sales
Alfred R. Boschulte............. 56 Director
Steward S. Flaschen(1)(2)....... 71 Director
Erik H. van der Kaay(1)......... 58 Director
Charles Lee(1)(2)............... 58 Director
Ljubomir Micic(2)............... 67 Director
Albert E. Paladino(1)........... 65 Director
</TABLE>
- --------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
EXECUTIVE OFFICERS AND DIRECTORS
Santanu Das, a founder of TranSwitch, has been President, Chief Executive
Officer and a director of TranSwitch since its inception in 1988 and its
Chairman since May 1997. Prior to joining TranSwitch, Dr. Das held various
positions, including President, with Spectrum Digital Corporation, where he
worked from 1986 through August of 1988. Prior to joining Spectrum Digital
Corporation, he held various positions, including Director, Applied Technology
Division of ITT Corporation's Advanced Technology Center. Dr. Das holds a Ph.D.
from Washington University, St. Louis and an undergraduate degree from Jadavpur
University, Calcutta, India.
Michael F. Stauff is Senior Vice President, Chief Financial Officer and
Treasurer of TranSwitch. Prior to joining TranSwitch in November 1994, Mr.
Stauff was the Vice President, Treasurer and Chief Financial Officer of I.M.
Holdings, an international manufacturer of marine electronic and hardware
products, since 1985. He holds a B.S.B.A. and an M.B.A. from Northeastern
University.
Terrence S. Rogers joined TranSwitch as Vice President, Worldwide Sales, in
February 1998 from Nippon Steel Semiconductor USA, a semiconductor company,
where he was Vice President, Marketing and Sales, from May 1996 through
February 1998. Prior to Nippon Steel, Mr. Rogers served as Senior Marketing
Manager at Siemens Microelectronics, Inc., a microelectronics company, from
August 1995 to May 1996; Strategic Accounts Manager at Hyundai Electronics
America, an electronics company, from May 1993 to August 1995; and as Strategic
Account and Regional Sales Manager at OKI Semiconductor, an integrated circuit
manufacturing company, from 1986 through May 1993. He holds a B.S.E.E. and a
B.A. in Psychology from the University of Notre Dame and an M.B.A. in Marketing
from the University of Arizona.
Alfred R. Boschulte became a director of TranSwitch in December 1998. Mr.
Boschulte has over 30 years of experience in the telecommunications industry,
and has served as Chairman and Chief Executive Officer of Independent Wireless
One, Inc., a new PCS service provider, since September 1998 and President and
Chief Executive Officer of SFB Consulting, Inc., a telecommunications
consulting business, since January 1998. From January 1996 through December
1997, he served as Managing Director of Exelcomindo, a national cellular
service in Indonesia. From December 1994 through December 1995, Mr. Boschulte
served as President of Tomcom, L.P., a wireless services company, and from
November 1990 through December 1994, he served as President and Chairman of
Nynex Mobile Communications, a cellular telecommunications company.
Steward S. Flaschen, a founder of TranSwitch, has been a director of
TranSwitch since its inception and served as Chairman of the Board from 1988
through May 1997. Dr. Flaschen has served as President of
40
<PAGE>
Flaschen and Davies, a consulting firm, since 1986; as Chairman of the Board of
Directors of Telco Systems, an electronics manufacturing company, since 1986;
and as a member of the Board of Directors of Sipex Corporation, a semiconductor
company, since 1996. In addition, he has been an Independent General Partner of
Merrill Lynch Capital Fund VP II, a venture capital investment fund, since
1986.
Erik H. van der Kaay became a director of TranSwitch in September 1997 and is
also a member of the Board of Directors of RF Micro Devices, Inc., a
manufacturer of RF components for wireless communications, and SSE Telecom,
Inc., a manufacturer of satellite earth station components and systems. Since
April 1998, he has been President and Chief Executive Officer of Datum, Inc.,
which manufactures time and frequency products used in telecommunications and
other fields. Mr. van der Kaay was Executive Vice President of Allen Telecom,
Inc., a telecommunications company, from March 1997 through April 1998 and
served as President of the Antennae Specialist Division of Allen Telecom from
June 1990 until March 1997. Prior to joining Allen Telecom, he was President
and Chief Executive Officer of Millitech Corporation, a manufacturer of
RF broadband wireless equipment.
Charles Lee became a director of TranSwitch in August 1989. He has 30 years
of experience in telecommunications and specializes in the emerging growth
markets of China and the Far East. Since 1990, Dr. Lee has been Chairman of
Charles Lee Enterprise, a telecommunications business development and
consulting firm, and has been a director of BroadBand Technologies, Inc., a
telephone components manufacturer, since 1988. From 1985 through 1997, Dr. Lee
was a General Partner of Abacus Ventures, a telecom specialty venture capital
investment partnership. He holds two M.S. degrees and a Ph.D. from the
University of Minnesota.
Ljubomir Micic has been a director of TranSwitch since June 1994. Since 1990,
he has been the Chief Executive Officer of VEN-NET-A, a German consulting
company. Prior to his retirement from ITT Corporation in 1990, he was a Vice
President of ITT Corporation and Chairman of its Semiconductor Division.
Albert E. Paladino has been a director of TranSwitch since its inception in
1988. He has served as the Chairman of Millitech Corporation, since 1992. Dr.
Paladino has also served on the Board of Directors of RF Micro Devices, Inc.,
since 1992 and as a partner of Advanced Technology Ventures, a venture capital
investment partnership, since 1981. Before joining Millitech, he held senior
positions with Raytheon Company, GTE Laboratories, the National Institute of
Standards and Technology and the Congressional Office of Technology Assessment.
41
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth as of December 9, 1998, certain information
regarding the ownership of shares of common stock of TranSwitch, and as
adjusted to reflect the sale of the common stock being offered hereby (assumes
no exercise of the underwriters' over-allotment option) by (i) each director of
TranSwitch, (ii) TranSwitch's Chief Executive Officer and the four other most
highly compensated officers of TranSwitch whose total salary and bonus for 1997
exceeded $100,000 and (iii) all directors and executive officers as a group. To
the knowledge of TranSwitch, no person beneficially owned more than 5% of the
outstanding common stock as of December 9, 1998. Unless otherwise indicated
below, each person listed below maintains a business address at c/o TranSwitch
Corporation, Three Enterprise Drive, Shelton, Connecticut 06484 and has sole
voting and investing power with respect to all shares of common stock owned by
them.
<TABLE>
<CAPTION>
PERCENT OF CLASS(2)
-------------------
SHARES
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) OFFERING OFFERING
- ------------------------------------ ------------ --------- ---------
<S> <C> <C> <C> <C> <C>
Santanu Das(3)........................ 145,250 * *
Steward S. Flaschen(4)................ 139,971 * *
Michael F. Stauff(5).................. 62,415 * *
Jitender Vij(6)....................... 48,418 * *
Francisco A. Middleton(7)............. 24,623 * *
Charles Lee(8)........................ 53,804 * *
Albert E. Paladino ................... 17,000 * *
Terrence S. Rogers(9)................. 30,750 * *
Ljubomir Micic(10) ................... 22,500 * *
Erik H. van der Kaay(11).............. 12,134 * *
Alfred R. Boschulte(12)............... 4,167 * *
All directors and executive officers 561,032 3.8% 3.4%
as a group (9 persons)(13)..........
</TABLE>
- --------
* Less than 1% of the outstanding common stock.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of common stock subject
to options currently exercisable or exercisable within 60 days of December
9, 1998 ("Presently Exercisable Securities"), are deemed outstanding for
computing the percentage of the person or entity holding such securities,
but are not outstanding for computing the percentage of any other person or
entity. Except as indicated by footnote, and subject to community property
laws where applicable, the persons named in the table above have sole
voting and investment power with respect to all shares of common stock
shown as beneficially owned by them.
(2) Percentage of beneficial ownership is based on 14,629,371 shares of common
stock outstanding as of December 9, 1998 and 16,329,371 shares of common
stock outstanding after this offering.
(3) Includes 20,000 shares owned and 115,250 shares issuable upon exercise of
Presently Exercisable Securities held by Dr. Das.
(4) Includes 55,683 shares owned by the Joyce D. Flaschen Revocable Investment
Trust of which Joyce D. Flaschen is the trustee and 67,188 shares owned by
the Steward S. Flaschen Revocable Investment Trust of which Dr. Flaschen is
trustee. Dr. Flaschen disclaims beneficial ownership of the shares held by
the Joyce D. Flaschen Revocable Investment Trust. Also includes 17,100
shares issuable upon exercise of Presently Exercisable Securities.
(5) Consists of 27,344 shares owned and 35,071 shares issuable upon exercise of
Presently Exercisable Securities.
(6) Includes 14,495 shares owned and 33,923 shares issuable upon exercise of
Presently Exercisable Securities held by Mr. Vij. Also includes 8,000
shares owned by children of Mr. Vij. Mr. Vij disclaims beneficial ownership
of the shares owned by his children.
(7) Consists of 12,000 shares owned and 23,423 shares issuable upon exercise of
Presently Exercisable Securities.
(8) Consists of 8,804 shares owned and 45,000 shares issuable upon exercise of
Presently Exercisable Securities.
(9) Consists of 12,000 shares owned and 18,750 shares issuable upon exercise of
Presently Exercisable Securities.
(10) Consists of 22,500 shares issuable upon exercise of Presently Exercisable
Securities.
(11) Consists of 3,800 shares owned and 8,334 shares issuable upon exercise of
Presently Exercisable Securities.
(12) Consists of 4,167 shares issuable upon exercise of Presently Exercisable
Securities.
(13) Includes 323,518 shares issuable upon exercise of Presently Exercisable
Securities.
42
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 25,000,000 shares of
common stock, $.001 par value per share, and 1,000,000 shares of preferred
stock, $.01 par value per share.
COMMON STOCK
As of December 9, 1998, there were 14,629,371 shares of common stock
outstanding that were held of record by approximately 166 shareholders.
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of common stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors out of
funds legally available therefor, subject to any preferential dividend rights
of outstanding preferred stock. Upon the liquidation, dissolution or winding up
of TranSwitch, the holders of common stock are entitled to receive ratably the
net assets of TranSwitch available after the payment of all debts and other
liabilities and subject to the prior rights of any outstanding preferred stock.
Holders of the common stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of common stock are, and the shares
offered by TranSwitch in this offering will be, when issued and paid for, fully
paid and nonassessable. The rights, preferences and privileges of holders of
common stock are subject to, and may be adversely affected by, the rights of
the holders of shares of any series of preferred stock which TranSwitch may
designate and issue in the future. Upon the closing of this offering, there
will be no shares of preferred stock outstanding.
PREFERRED STOCK
The Board of Directors is authorized, subject to certain limitations
prescribed by law, without further stockholder approval, to issue from time to
time up to an aggregate of 1,000,000 shares of preferred stock in one or more
series and to fix or alter the designations, preferences, rights and any
qualifications, limitations or restrictions of the shares of each such series
thereof, including the dividend rights, dividend rates, conversion rights,
voting rights, terms of redemption (including sinking fund provisions),
redemption price or prices, liquidation preferences and the number of shares
constituting any series or designations of such series. The issuance of
preferred stock may have the effect of delaying, deferring or preventing a
change of control of TranSwitch. TranSwitch has no present plans to issue any
shares of preferred stock.
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS; ANTI-TAKEOVER EFFECTS
TranSwitch is subject to the provisions of Section 203 of the Delaware
General Corporation Law (the "DGCL"). In general, Section 203 prohibits a
publicly-held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless
the interested stockholder attained such status with the approval of the Board
of Directors or unless the business combination is approved in a prescribed
manner. A "business combination" includes mergers, asset sales and other
transactions resulting in a financial benefit to the interested stockholder.
Subject to certain exceptions, an "interested stockholder" is a person who,
together with affiliates and associates, owns, or within three years did own,
15% or more of a corporation's voting stock.
TranSwitch's Amended and Restated Certificate of Incorporation (the
"Charter") permits the Board of Directors, when considering a tender offer or
merger or acquisition proposal, to take into account factors in addition to the
price offered, including the long-term interests of the stockholders and the
social, legal and economic effects on our customers, employees and suppliers.
TranSwitch's by-laws provide that nominations for the Board of Directors or
other business to be brought before an annual meeting must be delivered to the
Company not less than 120 days nor more than 150 days before the one-year
anniversary of the date the most recent proxy statement was delivered. In
addition, the Charter and By-laws prohibit removal of a director without cause
unless stockholders holding two-thirds of eligible shares vote to do so.
43
<PAGE>
The foregoing provisions could have the effect of making it more difficult
for a third party to acquire, or of discouraging a third party from acquiring,
control of TranSwitch.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is State Street Bank
and Trust Company, Boston, Massachusetts.
44
<PAGE>
UNDERWRITING
The underwriters named below, acting through their representatives,
BancBoston Robertson Stephens Inc., NationsBanc Montgomery Securities LLC and
Advest, Inc. (the "Representatives"), have severally agreed with TranSwitch
subject to the terms and conditions of the Underwriting Agreement, to purchase
from TranSwitch the number of shares of common stock set forth opposite their
respective names below. The underwriters are committed to purchase and pay for
all such shares if any are purchased.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
<S> <C>
BancBoston Robertson Stephens Inc...........................
NationsBanc Montgomery Securities LLC.......................
Advest, Inc.................................................
---------
Total.................................................. 1,700,000
=========
</TABLE>
The Representatives have advised TranSwitch that the underwriters propose to
offer the shares of common stock to the public at the public offering price set
forth on the cover page of this prospectus and to certain dealers at such price
less a concession of not more than $ per share, of which $ may be
reallowed to other dealers. After the public offering, the public offering
price, concession and reallowance to dealers may be reduced by the
Representatives. No such reduction shall change the amount of proceeds to be
received by TranSwitch as set forth on the cover page of this prospectus.
Over-Allotment Option. TranSwitch has granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to 255,000 additional shares of common stock at the same price per
share as TranSwitch will receive for the 1,700,000 shares that the underwriters
have agreed to purchase. To the extent that the underwriters exercise such
option, each of the underwriters will have a firm commitment to purchase
approximately the same percentage of such additional shares that the number of
shares of common stock to be purchased by it shown in the above tables
represents as a percentage of the 1,700,000 shares offered hereby. If
purchased, such additional shares will be sold by the underwriters on the same
terms as those on which the 1,700,000 shares are being sold.
Indemnity. The Underwriting Agreement contains covenants of indemnity between
the underwriters and TranSwitch against certain civil liabilities, including
liabilities under the Securities Act of 1933 and liability arising from
breaches of representations and warranties contained in the Underwriting
Agreement.
Lock-up Agreements. The directors and certain officers of TranSwitch have
agreed that until 90 days after the date of this prospectus (the "Lock-Up
Period") they will not offer to sell, contract to sell, or otherwise sell,
dispose of, loan, pledge or grant any option to purchase any shares of common
stock, or any securities convertible into, or exchangeable for, or any rights
to purchase or acquire, shares of common stock, now owned or hereafter acquired
directly by such holders or with respect to which they have the power of
disposition, without the prior written consent of BancBoston Robertson Stephens
Inc., which may, in its sole discretion and at any time or from time to time,
without notice, release all or any portion of the shares subject to the lock-up
agreements.
Future Sales. TranSwitch has agreed that, during the Lock-Up Period, it will
not, without the prior written consent of BancBoston Robertson Stephens Inc.,
issue, sell, contract to sell or otherwise dispose of any shares of common
stock, any options or warrants to purchase any shares of common stock or any
securities convertible into, exercisable for or exchangeable for shares of
common stock other than the issuance of common stock upon the exercise of
outstanding options and TranSwitch's grant of options under existing stock
option plans.
The underwriters do not intend to confirm sales to accounts over which they
exercise discretionary authority.
45
<PAGE>
Stabilization. The Representatives have advised TranSwitch that, pursuant to
Regulation M under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") certain persons participating in the offering may engage in
transactions, including stabilizing bids, syndicate covering transactions or
the imposition of penalty bids which may have the effect of stabilizing or
maintaining the market price of the common stock at a level about that which
might otherwise prevail in the open market. A "stabilizing bid" is a bid for or
the purchase of the common stock on behalf of the underwriters for the purpose
of fixing or maintaining the price of the common stock. A "syndicate covering
transaction" is the bid for or the purchase of the common stock on behalf of
the underwriters to reduce a short position incurred by the underwriters in
connection with the offering. A "penalty bid" is an arrangement permitting the
Representatives to reclaim the selling concession otherwise accruing to an
underwriter or syndicate member in connection with the offering if the common
stock originally sold by such underwriter or syndicate member is purchased by
Representatives in a syndicate covering transaction and has therefore not been
effectively placed by such underwriter or syndicate member. The Representatives
have advised TranSwitch that such transactions may be effected on the Nasdaq
National Market or otherwise and, if commenced, may be discontinued at any
time.
Passive Market Making. In connection with this offering, certain underwriters
and selling group members (if any) who are qualified market makers on the
Nasdaq National Market may engage in passive market making transactions in the
common stock on the Nasdaq National Market in accordance with Rule 103 of
Regulation M under the Exchange Act, during the business day prior to the
pricing of the offering, before the commencement of offers or sales of the
common stock. Passive market makers must comply with applicable volume and
price limitations and must be identified as such. In general, a passive market
maker must display its bid at a price not in excess of the highest independent
bid for such security; if all independent bids are lowered below the passive
market maker's bid, however, such bid must then be lowered when certain
purchase limits are exceeded.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed upon
for the Company by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts.
Richard J. Testa, a partner of the firm, beneficially owns 19,138 shares of
common stock of the Company. Certain legal matters will be passed upon for the
underwriters by Hale and Dorr LLP, Boston, Massachusetts.
EXPERTS
The consolidated financial statements and schedule of TranSwitch Corporation
and Subsidiary as of December 31, 1996 and 1997, and for each of the years in
the three-year period ended December 31, 1997, have been included and
incorporated by reference herein and in the registration statement, of which
this prospectus is a part, in reliance upon the reports of KPMG Peat Marwick
LLP, independent certified public accountants, appearing elsewhere and
incorporated by reference herein, and upon authority of said firm as experts in
accounting and auditing.
46
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
TranSwitch files annual, quarterly and special reports, proxy statements and
other information with the SEC. You may read and copy any document we file at
the SEC's public reference room at 450 Fifth Street, N.W., Washington, D.C.
20549. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference room. Our SEC filings are also available to the public from
the SEC's Website at "http://www.sec.gov."
The SEC allows TranSwitch to "incorporate by reference" the information we
file with them, which means that we can disclose important information to you
by referring you to those documents. The information incorporated by reference
is considered to be part of this prospectus, and information that we file later
with the SEC will automatically update and supersede this information.
TranSwitch incorporates by reference the documents listed below and any future
filings we will make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of
the Exchange Act (File No. 0-25996):
1. Annual Report on Form 10-K for the year ended December 31, 1997;
2. TranSwitch's Proxy Statement, filed on April 20, 1998, for the 1998
Annual Meeting of Shareholders;
3. Quarterly Reports on Form 10-Q for the quarters ended March 31, 1998,
June 30, 1998 and September 30, 1998;
4. TranSwitch's Current Report on Form 8-K dated February 13, 1998; and
5. The "Description of Capital Stock" contained in TranSwitch's
Registration Statement No. 00025996 on Form 8-A, dated April 28, 1995.
You may request a copy of these filings, at no cost, by writing or
telephoning our Chief Financial Officer at the following address:
TranSwitch Corporation
3 Enterprise Drive
Shelton, Connecticut 06484
(203) 929-8810
This prospectus is part of a registration statement we filed with the SEC.
You should rely only on the information or representations provided in this
prospectus. We have authorized no one to provide you with different
information. We are not making an offer of these securities in any state where
the offer is not permitted. You should not assume that the information in this
prospectus is accurate as of any date other than the date on the front of the
document.
47
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors............................................ F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997 and
(unaudited) as of September 30, 1998.................................... F-3
Consolidated Statements of Operations for each of the years in the three-
year period ended December 31, 1997 and (unaudited) for the nine months
ended September 30, 1997 and 1998....................................... F-4
Consolidated Statements of Stockholders' Equity for each of the years in
the three-year period ended December 31, 1997 and (unaudited) for the
nine months ended September 30, 1998.................................... F-5
Consolidated Statements of Cash Flows for each of the years in the three-
year period ended December 31, 1997 and (unaudited) for the nine months
ended September 30, 1997 and 1998....................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
TranSwitch Corporation:
We have audited the accompanying consolidated balance sheets of TranSwitch
Corporation and subsidiary as of December 31, 1996 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1997. 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 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
Stamford, Connecticut
February 4, 1998
F-2
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------ -------------
1996 1997 1998
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................. $ 3,911 $ 20,508 $ 20,892
Short-term investments..................... 8,777 1,110 3,439
Accounts receivable, less allowance for
doubtful accounts of $140 in 1996 and
$218 in 1997............................. 2,893 4,528 5,732
Inventories, net........................... 3,524 4,812 6,166
Prepaid expenses and other current assets.... 305 815 870
-------- -------- --------
Total current assets......................... 19,410 31,773 37,099
Property and equipment, net.................. 2,647 3,816 4,928
Product licenses, net........................ 1,254 1,000 976
Other assets................................. -- -- 280
-------- -------- --------
Total assets................................. $ 23,311 $ 36,589 $ 43,283
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................... $ 1,805 $ 1,350 $ 3,440
Accrued expenses........................... 724 1,235 1,002
Accrued compensation....................... 535 993 1,039
Warranty reserve........................... 286 532 719
Sales allowance reserve.................... 356 649 854
Royalty payable............................ 209 299 50
Product license fee payable, current
portion.................................. 845 1,067 665
-------- -------- --------
Total current liabilities.................... 4,760 6,125 7,769
-------- -------- --------
Product license fee payable, less current
portion.................................... 1,252 303 --
Commitments and contingencies (Note 13)
Stockholders' equity:
Preferred Stock, $.01 par value; authorized
1,000,000 shares:
Convertible Preferred Stock, issued and
outstanding; none at December 31, 1996;
14,500 shares at December 31, 1997;
none at September 30, 1998............. -- 14,357 --
Common Stock $.001 par value; authorized
25,000,000 shares; issued and outstanding
11,912,486 shares in 1996; 12,318,271
shares in 1997; 14,315,104 shares at
September 30, 1998....................... 12 12 14
Additional paid-in capital................. 45,375 45,753 61,959
Accumulated deficit........................ (28,088) (29,961) (26,459)
-------- -------- --------
Total stockholders' equity................... 17,299 30,161 35,514
-------- -------- --------
Total liabilities and stockholders' equity... $ 23,311 $ 36,589 $ 43,283
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- ------------------
1995 1996 1997 1997 1998
------- -------- ------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Product revenues, net........ $16,464 $ 19,236 $26,930 $ 18,596 $ 30,477
Research and development
contracts.................. 877 414 154 154 --
License and royalty fees..... 125 -- -- -- --
------- -------- ------- -------- --------
Total revenues............. 17,466 19,650 27,084 18,750 30,477
------- -------- ------- -------- --------
Cost of revenues:
Cost of products sold........ 6,913 10,615 11,254 8,005 11,619
Write-down of product
license.................... -- 3,128 -- -- --
Cost of research and
development contracts...... 482 63 -- -- --
------- -------- ------- -------- --------
Total cost of revenues..... 7,395 13,806 11,254 8,005 11,619
------- -------- ------- -------- --------
Gross profit................... 10,071 5,844 15,830 10,745 18,858
------- -------- ------- -------- --------
Operating expenses:
Research and development..... 6,660 8,928 9,194 6,841 7,967
Marketing and sales.......... 4,329 5,454 6,681 4,970 6,163
General and administrative... 1,472 2,229 2,288 1,608 1,825
------- -------- ------- -------- --------
Total operating expenses... 12,461 16,611 18,163 13,419 15,955
------- -------- ------- -------- --------
Operating income (loss)........ (2,390) (10,767) (2,333) (2,674) 2,903
------- -------- ------- -------- --------
Interest income (expense):
Interest income.............. 664 819 641 373 830
Interest expense............. (47) (129) (181) (5) (67)
------- -------- ------- -------- --------
Interest income, net....... 617 690 460 368 763
------- -------- ------- -------- --------
Income (loss) before income
taxes........................ (1,773) (10,077) (1,873) (2,306) 3,666
------- -------- ------- -------- --------
Provision for income taxes..... -- -- -- -- 164
------- -------- ------- -------- --------
Net income (loss).............. $(1,773) $(10,077) $(1,873) $ (2,306) $ 3,502
======= ======== ======= ======== ========
Basic earnings (loss) per
share........................ $ (.18) $ (.86) $ (.15) $ (.19) $ .26
======= ======== ======= ======== ========
Diluted earnings (loss) per
share........................ $ (.18) $ (.86) $ (.15) $ (.19) $ .24
======= ======== ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK CONVERTIBLE ADDITIONAL
----------------- PREFERRED PAID-IN ACCUMULATED
SHARES AMOUNT STOCK CAPITAL DEFICIT TOTAL
---------- ------ ----------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
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
Shares of common stock
issued upon exercise
of stock options and
warrants............ 405,785 -- -- 699 -- 699
Issuance of
convertible
preferred stock, net
of issuance costs... -- -- 12,886 770 -- 13,656
Deemed dividend on
convertible
preferred stock..... -- -- 1,471 (1,471) -- --
Compensation related
to issuance of stock
options............. -- -- -- 380 -- 380
Net loss.............. -- -- -- -- (1,873) (1,873)
---------- --- -------- ------- -------- --------
Balance at December 31,
1997.................. 12,318,271 12 14,357 45,753 (29,961) 30,161
Shares of common stock
issued upon exercise
of stock options
(unaudited)......... 418,058 -- -- 1,592 -- 1,592
Deemed dividend on
convertible
preferred stock
(unaudited)......... -- -- 143 (143) -- --
Issuance cost for
convertible
preferred stock
(unaudited)......... -- -- -- (75) -- (75)
Shares of common stock
issued upon
conversion of
preferred stock
(unaudited)......... 1,578,775 2 (14,500) 14,498 -- --
Compensation related
to issuance of stock
options
(unaudited)......... -- -- -- 334 -- 334
Net income
(unaudited)......... -- -- -- -- 3,502 3,502
---------- --- -------- ------- -------- --------
Balance at September 30,
1998 (unaudited)...... 14,315,104 $14 $ -- $61,959 $(26,459) $ 35,514
========== === ======== ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- ------------------
1995 1996 1997 1997 1998
------- -------- ------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)............. $(1,773) $(10,077) $(1,873) $ (2,306) $ 3,502
------- -------- ------- -------- --------
Adjustments required to
reconcile net income (loss)
to cash flows from operating
activities:
Depreciation and
amortization............... 802 2,195 1,807 1,019 1,464
Write-down of product
license.................... -- 3,128 -- -- --
Stock compensation expense... 100 351 380 248 334
Changes in assets and
liabilities:
Decrease (increase) in
accounts receivable....... (3,084) 2,487 (1,635) (1,261) (1,204)
(Increase) in inventories... (1,440) (753) (1,288) (1,511) (1,354)
Decrease (increase) in
prepaids and other current
assets.................... (250) 194 (510) (484) (335)
Increase (decrease) in
accounts payable.......... 742 (216) (455) 1,225 2,090
Increase (decrease) in
accrued expenses and other
liabilities............... 13 516 1,598 1,411 (45)
------- -------- ------- -------- --------
Total adjustments.......... (3,117) 7,902 (103) 647 950
------- -------- ------- -------- --------
Net cash provided by (used
in) operating
activities............... (4,890) (2,175) (1,976) (1,659) 4,452
------- -------- ------- -------- --------
Cash flows from investing
activities:
Purchase of product licenses.. (2,176) (445) (3) (3) (300)
Proceeds from the sale of
property and equipment...... 3 -- -- -- --
Capital expenditures.......... (1,309) (1,892) (2,719) (1,475) (2,252)
Purchases of short-term
investments................. (5,620) (24,057) (8,615) (7,505) (4,424)
Proceeds from sale of short-
term investments............ 2,000 18,900 16,282 13,283 2,096
------- -------- ------- -------- --------
Net cash provided by (used
in) investing
activities............... (7,102) (7,494) 4,945 4,300 (4,880)
------- -------- ------- -------- --------
Cash flows from financing
activities:
Payments on borrowings........ (1,191) -- -- -- --
Payments on product license
obligations................. -- (369) (727) (691) (705)
Proceeds from the exercise of
stock options and warrants.. 289 319 699 473 1,592
Proceeds from the issuance of
common stock, net........... 23,172 -- -- -- --
Proceeds from the issuance of
convertible preferred stock,
net of issuance costs....... -- -- 13,656 -- --
Issuance cost for convertible
preferred stock............. -- -- -- -- (75)
------- -------- ------- -------- --------
Net cash provided by (used
in) financing
activities............... 22,270 (50) 13,628 (218) 812
------- -------- ------- -------- --------
Increase (decrease) in cash and
cash equivalents............. 10,278 (9,719) 16,597 2,423 384
Cash and cash equivalents at
beginning of period.......... 3,352 13,630 3,911 3,911 20,508
------- -------- ------- -------- --------
Cash and cash equivalents at
end of period................ $13,630 $ 3,911 $20,508 $ 6,334 $ 20,892
======= ======== ======= ======== ========
Supplemental disclosure of cash
flows information:
Cash paid for interest........ $ 47 $ 129 $ 181 $ 5 $ 68
Supplemental schedule of non-
cash financing activities:
Obligations for purchase of
product licenses............ $ 2,399 $ 134 $ -- $ -- $ --
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
TranSwitch Corporation (the "Company") was incorporated in Delaware on April
26, 1988. On January 28, 1994, the Company formed TranSwitch Europe N.V./S.A.,
a wholly-owned subsidiary located in Brussels, Belgium. In 1998, the Company
formed TranSwitch India Private Limited, a wholly-owned subsidiary located in
New Delhi, India. The Company designs, develops, markets and supports highly
integrated digital and mixed-signal (analog and digital) semiconductor
solutions for the telecommunications and data communications markets.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All intercompany accounts and transactions have
been eliminated in consolidation.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year's presentation.
Cash Equivalents
Cash equivalents of $2,989, $18,668, and $15,658 at December 31, 1996 and
1997, and September 30, 1998 (unaudited), respectively, consist of certificates
of deposit, U.S. Treasury Bills, commercial paper and U.S. Agency notes. For
purposes of the statements of cash flows, the Company considers all
certificates of deposit, U.S. Treasury Bills, commercial paper and U.S. Agency
notes with original maturities of three months or less to be cash equivalents.
Investment Securities
The Company adopted Statement of Financial Accounting Standards (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 half-year convention
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 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.
Subsequent to its acquisition, the Company continually evaluates whether
events and circumstances have occurred that indicate the remaining estimated
useful life of a product license may warrant revision or that the
F-7
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
remaining balance of a product license may not be recoverable. When factors
indicate that a product license should be evaluated for possible impairment,
the Company uses an estimate of the related product licenses' undiscounted
future cash flows over the remaining life of the asset in measuring whether the
product license is recoverable. Any impairment is measured against discounted
cash flows.
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 with 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 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.
F-8
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Earnings per Share
Basic earnings per share are based upon the weighted average common shares
outstanding during the period. Diluted earnings per share assume exercise of
in-the-money stock options outstanding and full conversion of convertible
preferred stock into common stock at the beginning of the year or the date of
issuance, unless they are antidilutive.
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
Effective December 1997, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 128--"Earnings per Share." SFAS No. 128
simplifies the calculation of earnings per share (EPS), replaces primary EPS
with basic EPS and replaces fully diluted EPS with diluted EPS.
Basic EPS is computed by dividing income available to common stockholders by
the weighted average number of common shares outstanding during the period. The
computation of diluted EPS is similar to the computation of basic EPS except
that it gives effect to all potentially dilutive instruments that were
outstanding during the period. In prior years, the Company has computed EPS
without consideration to potentially dilutive instruments due to the losses
incurred by the Company. Accordingly, the adoption of this standard has not
resulted in a change to the Company's previously reported EPS amounts.
Effective January 1, 1998, the Company adopted SFAS No. 130--"Reporting
Comprehensive Income." This Statement requires that companies disclose
comprehensive income, which includes net income, foreign currency translation
adjustments, minimum pension liability adjustments and unrealized gains and
losses on marketable securities classified as available for sale. For the
Company, comprehensive income is the same as net income (loss).
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires companies to
recognize all derivatives as assets or liabilities measured at their fair
market value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. This Statement is effective for
fiscal years beginning after June 15, 1999. The Company expects to adopt this
accounting standard beginning January 1, 2000. The Company does not expect the
adoption of this statement to have a material impact on its financial position
or results of operations.
Interim Results (Unaudited)
The accompanying Consolidated Balance Sheet at September 30, 1998, the
Consolidated Statements of Operations and Consolidated Statements of Cash Flows
for the nine months ended September 30, 1997 and 1998, and the Consolidated
Statement of Stockholders' Equity for the nine months ended September 30, 1998
are unaudited. In the opinion of management, these statements have been
prepared on the same basis as the audited consolidated financial statements and
include all adjustments, consisting only of normal recurring adjustments,
necessary for the fair statement of the results of interim periods. The results
for the nine months ended September 30, 1998 are not necessarily indicative of
the results to be expected for the entire year. The data disclosed in these
notes to the consolidated financial statements for these periods are unaudited.
F-9
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(2) SHORT-TERM INVESTMENTS
Short-term investments, classified as available-for-sale, consist of the
following at December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
---------------------------- ----------------------------
AMORTIZED UNREALIZED FAIR AMORTIZED UNREALIZED FAIR
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 1997)..... $3,774 $ -- $3,774 $1,110 $ -- $1,110
Corporate bonds......... 1,004 -- 1,004 -- -- --
U.S. Treasury Bill...... 3,999 -- 3,999 -- -- --
------ ------ ------ ------ ------ ------
Total................. $8,777 $ -- $8,777 $1,110 $ -- $1,110
====== ====== ====== ====== ====== ======
</TABLE>
Gross realized gains and losses on sales of securities in 1996 and 1997 were
immaterial.
(3) FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of our financial instruments at December 31, 1996
and 1997 follow:
<TABLE>
<CAPTION>
1996 1997
--------------- ----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------ -------- -------
<S> <C> <C> <C> <C>
Cash and cash equivalents.................. $3,911 $3,911 $20,508 $20,508
Short-term investments..................... 8,777 8,777 1,110 1,110
Accounts receivable, net................... 2,893 2,893 4,528 4,528
</TABLE>
The carrying amounts for cash and accounts receivables, net, approximate fair
value because of 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 interest 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:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------- -------------
1996 1997 1998
------ ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials.................................... $ 600 $1,086 $1,191
Work in process.................................. 1,500 1,654 1,137
Finished goods................................... 1,424 2,072 3,838
------ ------ ------
Total.......................................... $3,524 $4,812 $6,166
====== ====== ======
</TABLE>
F-10
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(5) PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consist of:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31, SEPTEMBER 30,
USEFUL ---------------- -------------
LIVES 1996 1997 1998
---------- ------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Purchased computer software..... 3 years $ 2,756 $ 4,220 $ 4,406
Equipment....................... 3-7 years 2,356 3,171 3,782
Semiconductor tooling........... 3 years 771 879 879
Furniture....................... 3-7 years 351 967 1,110
Leasehold improvements.......... Lease term 158 186 196
Construction in progress........ 418 106 1,628
------- ------- -------
6,810 9,529 12,001
Less accumulated depreciation
and amortization.............. (4,163) (5,713) (7,073)
------- ------- -------
Property and equipment, net..... $ 2,647 $ 3,816 $ 4,928
======= ======= =======
</TABLE>
(6) PRODUCT LICENSES, NET
Product licenses, net, amounted to $1,254, $1,000 and $976 at December 31,
1996 and 1997 and September 30, 1998 (unaudited), respectively.
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
$4,875 representing an upfront payment of $2,125 in cash and the discounted
present value of future minimum payments. The Company recorded the repurchased
license (TI license) in its consolidated balance sheet under the caption
product licenses and is amortizing the asset over a five year period based upon
the estimated related incremental product sales. Interest expense is being
accrued over the three year minimum payment period.
In the fourth quarter of 1996, the TI License was written down to its net
realizable value as the forecasted incremental revenues attributable to the TI
license were significantly less than originally anticipated.
The Company purchased other product licenses during the fiscal years ended
1996 and 1997 and during the first nine months of 1998 for $314, $3, and $300,
respectively, which are being amortized over a three year period.
Amortization of product licenses amounted to $0, $705, $257 and $324 in
fiscal years ended 1995, 1996 and 1997 and the nine months ended September 30,
1998 (unaudited), respectively.
F-11
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(7) INCOME TAXES
The tax effect of temporary differences that give rise to deferred tax assets
and deferred tax liabilities at December 31, 1996 and 1997 are presented below:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Inventory obsolescence............................... $ 497 $ 532
Vacation accrual..................................... 79 137
Warranty reserve..................................... 119 221
Sales allowance reserve.............................. 148 270
Product license...................................... 267 --
Net operating losses................................. 10,637 12,244
Research and development credit...................... 1,739 1,860
Other................................................ 59 90
-------- --------
Total gross deferred tax assets........................ 13,545 15,354
Less valuation allowance............................... (13,384) (14,867)
Net deferred tax assets................................ 161 487
Deferred tax liabilities:
Property and equipment............................... (161) (487)
-------- --------
Total deferred taxes, net of valuation allowance.... $ -- $ --
======== ========
</TABLE>
The net change in the total valuation allowance for the year ended December
31, 1997 was an increase of $1,483. Due to the Company's prior operating
losses, there is uncertainty surrounding whether the Company will ultimately
realize its deferred tax assets. Accordingly, these assets have been fully
reserved. Of the total valuation allowance of $14,867, subsequently recognized
tax benefits, if any, in the amount of $1,611 will be applied directly to
contributed capital.
The difference between the statutory federal income tax rate and the
Company's effective tax rate for the years ended December 31, 1995, 1996 and
1997 is principally due to net operating losses.
At December 31, 1997, the Company had available, for federal income tax
purposes, net operating loss carryforwards of approximately $29,440 and
research and development tax credit carryforwards of approximately $1,860
expiring in varying amounts from 2003 through 2012. Certain transactions
involving beneficial ownership of the Company have occurred which resulted in a
stock ownership change for purposes of Section 382 of the Internal Revenue Code
of 1986, as amended. Consequently, approximately $24,000 of the Company's net
operating loss carryforward and $1,410 of the Company's research and
development tax credit carryforward are subject to these limitations.
(8) CONVERTIBLE PREFERRED STOCK
The Company has authorized 1,000,000 shares of preferred stock with a par
value of $.01. On October 10, 1997, the Company issued 14,500 shares of Series
A Convertible Preferred Stock (Series A Stock) for net proceeds, after issuance
costs, of $13,656. The Company allocated $1,614 of the net proceeds to
additional paid-in capital, representing the calculated value of a preferential
conversion feature on the date of issuance. This amount is being accreted
ratably to the Series A Stock as a deemed dividend through the earliest
conversion date (90 days from issuance).
F-12
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Each share of Series A Stock is convertible into shares of Common Stock at
any time at the option of the holder, subject to certain limitations, at the
lesser of (i) $10.58 per share or (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. 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. No Series A Stock may
be converted until the earlier of (i) January 8, 1998 or (ii) the date upon
which a registration statement filed with the Securities and Exchange
Commission to register additional shares of Common Stock is declared effective.
As of December 31, 1997, the Series A Stock was not yet eligible for
conversion into Common Stock. Effective January 8, 1998, the Series A Stock was
eligible for conversion into Common Stock.
In the nine months ended September 30, 1998, all outstanding shares of Series
A Stock were converted into 1,578,775 shares of Common Stock.
(9) STOCKHOLDERS' EQUITY
Common Stock
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.
Stock-Based Compensation
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 shares of Common Stock 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 (the 1995 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"). At December 31, 1997,
2,469,019 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 options, 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.
F-13
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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 of the Company, except five percent or more stockholders,
may contribute to the plan, 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.
Non-Employee 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 on the anniversary date of each individual board
member joining the Board of Directors. Upon joining the Company's Board,
Directors are granted 12,500 shares, one-third of which vest immediately, one-
third after the first year, and the remaining one-third after the second year.
Annually thereafter, Directors are granted 7,500 shares which vest fully after
one year.
The Director Plan is 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.
Stock Option Information
Information regarding the Company's stock options are set forth as follows:
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE
OF SHARES OPTION PRICE
--------- ----------------
<S> <C> <C>
Outstanding at December 31, 1994.................. 1,190,912 $ 0.51
Granted......................................... 556,225 10.34
Exercised....................................... (390,055) 0.43
Canceled........................................ (50,373) 2.00
--------- ------
Outstanding at December 31, 1995.................. 1,306,709 3.86
Granted......................................... 1,524,630 7.63
Exercised....................................... (296,954) 0.58
Canceled........................................ (778,968) 10.17
--------- ------
Outstanding at December 31, 1996.................. 1,755,417 4.81
Granted......................................... 1,277,300 7.26
Exercised....................................... (382,584) 1.48
Canceled........................................ (592,117) 8.38
--------- ------
Outstanding at December 31, 1997.................. 2,058,016 5.72
Granted (unaudited)............................. 965,300 11.83
Exercised (unaudited)........................... (404,007) 4.07
Canceled (unaudited)............................ (137,411) 7.05
--------- ------
Outstanding at September 30, 1998 (unaudited)..... 2,481,898 $ 7.65
========= ======
</TABLE>
F-14
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Options outstanding and exercisable at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- -----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
-------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.40 to 1.20 283,020 1.05 $0.73 248,928 $0.71
4.13 to 6.38 1,214,746 8.39 5.22 439,879 5.35
6.50 to 10.81 443,250 9.53 8.80 61,605 7.41
10.88 to 12.63 117,000 9.01 11.27 94,000 11.12
- --------------- --------- ---- ----- ------- -----
$ 0.40 to 12.63 2,058,016 7.66 $5.72 844,412 $4.77
=============== ========= ==== ===== ======= =====
</TABLE>
Stock options expire five or ten years from the date of grant and are
generally exercisable ratably over four years from the date of grant.
In connection with stock options granted in January 1995 through March 31,
1995, the Company recorded deferred compensation expense of $618 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. The Company is recording compensation expense over the applicable
vesting periods (primarily four years). For the years ended December 31, 1995,
1996 and 1997 and the nine months ended September 30, 1998 (unaudited), the
Company recorded compensation expense of $100, $156, $155, and $116,
respectively, for these options.
The Company does 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 pro forma net loss and loss per share would be as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------- -------- -------
<S> <C> <C> <C>
Net loss--as reported........................... $(1,773) $(10,077) $(1,873)
Net loss--pro forma............................. (2,189) (12,599) (2,054)
Basic loss per share--as reported............... (0.18) (0.86) (0.15)
Basic loss per share--pro forma................. (0.22) (1.07) (0.17)
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are not
necessarily indicative of future amounts because it does not take into
consideration pro forma compensation expense related to grants made prior to
1995. Diluted loss per share amounts are not presented as they are the same as
basic.
As reflected in the pro forma amounts in the preceding table, the average
fair value of each option granted in 1995, 1996 and 1997 was $4.70, $3.00 and
$6.73, 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>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate.................................... 5.5% 6.0% 5.7%
Expected life in years..................................... 6.0 6.0 4.0
Expected volatility........................................ 52.0% 52.0% 66.0%
Expected dividend yield.................................... -- -- --
</TABLE>
F-15
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
For the years ended December 31, 1996 and 1997 and the nine months ended
September 30, 1998 (unaudited), the Company recognized additional compensation
expense of $195, $225 and $218, respectively, as required by SFAS No. 123
relating to stock options granted to non-employees.
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
------------------------------- -------------------------------
PRICE PER EXPIRATION PRICE PER EXPIRATION
NUMBER SHARE DATE NUMBER SHARE DATE
-------- --------- ----------- ------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
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 -- -- --
Exercised............. (8,038) -- 12/96-11/98 -- -- --
-------- --------- ----------- ------- ----------- ----------
Outstanding at December
31, 1997.............. 2,393 $.40-1.00 12/96-11/98 -- -- --
Expired............... (2,393) -- 9/98 -- -- --
-------- --------- ----------- ------- ----------- ----------
Outstanding at September
30, 1998 (unaudited).. -- -- -- -- -- --
======== ========= =========== ======= =========== ==========
</TABLE>
(10) EARNINGS PER SHARE
The basic earnings (loss) per share for the years ended December 31, 1995,
1996 and 1997 and for the nine months ended September 30, 1997 and 1998
(unaudited) follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- ------------------
1995 1996 1997 1997 1998
------- -------- ------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income (loss)........... $(1,773) $(10,077) $(1,873) $ (2,306) $ 3,502
Average common shares
outstanding (in
thousands)................ 10,062 11,751 12,152 12,103 13,701
Basic earnings (loss) per
share..................... $ (.18) $ (.86) $ (.15) $ (.19) $ .26
</TABLE>
Diluted loss per share amounts are not presented for the years ended December
31, 1995, 1996, and 1997, or for the nine months ended September 30, 1997
(unaudited) as they are the same as basic.
F-16
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The weighted average shares of dilutive securities that would have been used
to calculate diluted EPS had their effect not been anti-dilutive for the years
ended December 31, 1995, 1996, and 1997, and for the nine months ended
September 30, 1997 (unaudited) are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- -----------------
1995 1996 1997 1997
------- ------- --------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Options......................... 541,490 281,460 634,867 681,811
Warrants........................ 52,691 5,153 1,954 1,388
Convertible Preferred Stock..... -- -- 380,697 --
------- ------- --------- -------
Total......................... 594,181 286,613 1,017,518 683,199
======= ======= ========= =======
</TABLE>
Diluted earnings per share for the nine month period ended September 30, 1998
(unaudited) follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
1998
-----------------
(UNAUDITED)
<S> <C>
Net income............................................. $3,502
------
Average common shares outstanding for the period (in
thousands)........................................... 13,701
Stock options and warrants, net of assumed treasury
share repurchases (in thousands).................... 878
------
Adjusted average shares outstanding for the period (in
thousands)........................................... 14,579
------
Diluted earnings per share............................. $ 0.24
</TABLE>
(11) 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. In 1997, 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. The Company's contribution
expense amounted to $156 and $188 for 1996 and 1997, respectively.
(12) CONCENTRATION OF SALES
The following table summarizes the percentage of total revenue attributable
to the Company's significant customers:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------- -----------------
CUSTOMER 1995 1996 1997 1998
- -------- ------- ------- ------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Columbia Technologies*.......... ** ** ** 18%
Insight Electronics, Inc.*...... 16% 16% 41% 22%
Tellabs Operations, Inc.***..... 17% 14% 16% 20%
ECI Telecom, LTD. .............. ** 22% ** **
</TABLE>
F-17
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------
* Insight Electronics, Inc. and Columbia Technologies are distributors to
various end-users, none of which comprised more than 10% of the Company's
total revenue during the respective periods.
**Revenue was less than 10% of the Company's total revenue in these years.
*** The Company's sales to Tellabs during 1995, 1996 and 1997 were made through
Reptron Electronics, Inc., Tellabs' designated distributor. In the nine-
month period ended September 30, 1998, sales to Tellabs were made through
Reptron and Arrow Electronics, Inc., also Tellabs' designated distributor.
Sales to Tellabs through Arrow during this period represented 14% of the
Company's total revenues.
Foreign sales represented 38%, 46%, 33% and 48% of total revenue for fiscal
years 1995, 1996 and 1997 and for the nine month period ended September 30,
1998 (unaudited), respectively.
Revenues from customers located outside the United States were as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------- -----------------
1995 1996 1997 1998
------- ------- ------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Europe................................ $ 3,084 $ 2,100 $3,902 $ 2,797
Middle East........................... -- 4,232 517 3,925
Far East.............................. 1,798 1,976 2,885 7,344
Canada and other...................... 1,626 592 1,721 482
------- ------- ------- -------
Total............................... $ 6,508 $ 8,900 $ 9,025 $14,548
======= ======= ======= =======
</TABLE>
(13) COMMITMENTS AND CONTINGENCIES
Line of Credit
In June 1997, the Company entered into a new line of credit agreement with
Silicon Valley Bank whereby the Company has access to up to $6,000 for working
capital purposes, bearing interest at prime + 3/4% due on July 10, 1998, and
$2,000 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.
At December 31, 1997 and September 30, 1998 (unaudited), no amounts were
outstanding under this agreement.
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 that 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 $829, $1,266 and $1,110 in 1995, 1996
and 1997, respectively, under these agreements; these amounts are included in
cost of products sold in the consolidated statements of operations.
F-18
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Lease Agreements
Total rental expense under all operating lease agreements aggregated $586,
$446 and $745 during 1995, 1996 and 1997, respectively. Future minimum
operating lease commitments that have remaining, non-cancelable lease terms in
excess of one year at December 31, 1997 follow:
<TABLE>
<S> <C>
1998............................................................... $ 548
1999............................................................... 546
2000............................................................... 466
2001............................................................... 396
2002............................................................... 393
Thereafter......................................................... 1,865
------
$4,214
======
</TABLE>
Foundry Purchase Commitments
In April 1996, the Company entered into a foundry agreement with Taiwan
Semiconductor Manufacturing Co., Ltd. (TSMC) which includes future minimum
purchase commitments as follows:
<TABLE>
<S> <C>
1998..................................................................... $476
1999..................................................................... 128
----
$604
====
</TABLE>
F-19
<PAGE>
Diagrammatic graphics entitled "TranSwitch End Market Focus," showing
stylized block diagrams of applications in the public network (SONET/SDH Add
Drop Multiplexer) and in a data access network (Multi Service Access Platform)
using TranSwitch products.
<PAGE>
A magnified photograph of a TranSwitch integrated circuit, together with the
TranSwitch logo.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an estimate of the expenses expected to be
incurred in connection with the issuance and distribution of the securities
being registered, other than underwriting compensation:
<TABLE>
<S> <C>
Registration Fee--Securities and Exchange Commission............... $ 16,101
Nasdaq National Market additional listing fee...................... 17,500
NASD filing fee.................................................... 6,292
Blue Sky fees and expenses......................................... 10,000
Printing and engraving expenses.................................... 100,000
Accounting fees and expenses....................................... 50,000
Legal fees and expenses............................................ 100,000
Transfer Agent fees and expenses................................... 10,000
Miscellaneous...................................................... 65,107
--------
TOTAL............................................................ $375,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law ("DGCL") permits
TranSwitch to indemnify directors, officers, employees and agents of TranSwitch
against actual and reasonable expenses (including attorneys' fees) incurred by
them in connection with any action, suit or proceeding brought against them by
reason of their status or service as a director, officer, employee or agent by
or on behalf of TranSwitch and against expenses (including attorneys' fees),
judgments, fines and settlements actually and reasonably incurred by him or her
in connection with any such action, suit or proceeding, if (i) he or she acted
in good faith and in a manner he or she reasonably believed to be in or not
opposed to the best interests of TranSwitch and (ii) in the case of a criminal
proceeding, he or she had no reasonable cause to believe his or her conduct was
unlawful. Except as ordered by a court, no indemnification shall be made in
connection with any proceeding brought by or in the right of the corporation
where the person involved is adjudged to be liable to TranSwitch.
Article TEN of TranSwitch's Amended and Restated Certificate of Incorporation
contains provisions that eliminate a director's personal liability for monetary
damages resulting from a breach of fiduciary duty, except in certain
circumstances involving certain wrongful acts, such as the breach of a
director's duty of loyalty or acts or omissions which involve intentional
misconduct or a knowing violation of law. These provisions do not limit or
eliminate the rights of TranSwitch or any stockholder to seek non-monetary
relief, such as an injunction or rescission, in the event of a breach of a
director's fiduciary duty. These provisions will not alter a director's
liability under Federal securities laws. TranSwitch's Charter also contains
provisions indemnifying the directors and officers of TranSwitch to the fullest
extent permitted by the DGCL.
TranSwitch maintains directors and officers liability insurance for the
benefit of its directors and certain of its officers.
TranSwitch's Amended and Restated By-laws contain no provisions relating to
the indemnification of officers and directors.
II-1
<PAGE>
ITEM 16. EXHIBITS.
The following exhibits, required by Item 601 of Regulation S-K, are filed as
a part of this Registration Statement. Exhibit numbers, where applicable, in
the left column correspond to those of Item 601 of Regulation S-K.
<TABLE>
<CAPTION>
EXHIBIT NO. ITEM AND REFERENCE
----------- ------------------
<C> <S>
1 --Form of Underwriting Agreement (filed herewith)
--Legal Opinion of Testa, Hurwitz & Thibeault, LLP (filed
5 herewith)
23 --Consent of KPMG Peat Marwick LLP (filed herewith)
24 --Power of Attorney (contained on Signature Page)
</TABLE>
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in this
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereto.
(b) Insofar as indemnification for liabilities under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registration pursuant to the foregoing provisions, or otherwise, the Registrant
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 Registration of expenses
incurred or paid by a director, officer or controlling person of the registrant
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 Registrant 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 Act and will be governed by the final
adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as a part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereto.
II-2
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT ON FORM S-3 TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO
DULY AUTHORIZED IN THE CITY OF SHELTON, STATE OF CONNECTICUT ON DECEMBER 16,
1998.
TranSwitch Corporation
/s/ Michael F. Stauff
By: _____________________________
MICHAEL F. STAUFF
SENIOR VICE PRESIDENT, CHIEF
FINANCIAL
OFFICER & TREASURER
POWER OF ATTORNEY
Each person whose signature appears below on this Registration Statement
hereby constitutes and appoints Dr. Santanu Das and Michael F. Stauff and each
of them, with full power to act without the other, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities (until
revoked in writing) to sign any and all amendments (including post-effective
amendments and amendments thereto) to this Registration Statement on Form S-3
of TranSwitch Corporation, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary fully to all intents and purposes as he might or could
do in person thereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT ON FORM S-3 HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF
OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
NAME CAPACITY DATE
---- -------- ----
<S> <C> <C>
/s/ Dr. Santanu Das President, Chief Executive December 16, 1998
______________________________________ Officer and Chairman of
DR. SANTANU DAS the Board of Directors
/s/ Michael F. Stauff Senior Vice President, December 16, 1998
______________________________________ Chief Financial Officer
MICHAEL F. STAUFF and Treasurer
/s/ Alfred R. Boschulte Director December 16, 1998
______________________________________
ALFRED R. BOSCHULTE
/s/ Dr. Steward S. Flaschen Director December 16, 1998
______________________________________
DR. STEWARD S. FLASCHEN
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
NAME CAPACITY DATE
---- -------- ----
<S> <C> <C>
/s/ Dr. Charles Lee Director December 16, 1998
______________________________________
DR. CHARLES LEE
/s/ Dr. Ljubomir Micic Director December 16, 1998
______________________________________
DR. LJUBOMIR MICIC
/s/ Dr. Albert E. Paladino Director December 16, 1998
______________________________________
DR. ALBERT E. PALADINO
/s/ Erik van der Kaay Director December 16, 1998
______________________________________
ERIK VAN DER KAAY
</TABLE>
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
1 --Form of Underwriting Agreement (filed herewith)
5 --Legal Opinion of Testa, Hurwitz & Thibeault, LLP (filed herewith)
23 --Consent of KPMG Peat Marwick LLP (filed herewith)
24 --Power of Attorney (contained on Signature Page)
</TABLE>
<PAGE>
DRAFT
-----
SUBJECT TO REVISION
-------------------
1,700,000 SHARES/1/
TRANSWITCH CORPORATION
COMMON STOCK
UNDERWRITING AGREEMENT
----------------------
____________, 1999
BANCBOSTON ROBERTSON STEPHENS INC.
NATIONSBANC MONTGOMERY SECURITIES LLC
ADVEST, INC.
As Representatives of the several Underwriters
c/o BancBoston Robertson Stephens Inc.
555 California Street
Suite 2600
San Francisco, California 94104
Ladies/Gentlemen:
TranSwitch Corporation, a Delaware corporation (the "Company"), addresses
you as the Representatives of each of the persons, firms and corporations listed
in Schedule A hereto (herein collectively called the "Underwriters") and hereby
confirms its agreement with the several Underwriters as follows:
1. Description of Shares. The Company proposes to issue and sell
---------------------
1,700,000 shares of its authorized and unissued Common Stock, $.001 par value
per share (the "Firm Shares"), to the several Underwriters. The Company also
proposes to grant to the Underwriters an option to purchase up to 255,000
additional shares of the Company's Common Stock, $.001 par value per share (the
"Option Shares"), as provided in Section 7 hereof. As used in this Agreement,
the term "Shares" shall include the Firm Shares and the Option Shares. All
shares of Common Stock, $.001 par value per share, of the Company to be
outstanding after giving effect to the sales contemplated hereby, including the
Shares, are hereinafter referred to as "Common Stock."
2. Representations, Warranties and Agreements of the Company.
---------------------------------------------------------
The Company represents and warrants to and agrees with each Underwriter
that:
(a) A registration statement on Form S-3 (File No. 33-_____) with
respect to the Shares, including a prospectus subject to completion, has been
prepared by the Company in conformity with the requirements of the Securities
Act of 1933, as amended (the "Act"), and the applicable rules and regulations
(the "Rules and Regulations") of the Securities and Exchange Commission (the
"Commission") under the Act and has been filed with the Commission; such
amendments to such registration statement, such amended prospectuses subject to
completion and such abbreviated registration statements pursuant to Rule 462(b)
of the Rules and Regulations as may have been required prior to the date hereof
have been similarly prepared and filed with the Commission; and the Company will
file such additional amendments to such registration statement, such amended
prospectuses subject to completion and
- ----------------
/1/ Plus an option to purchase up to 255,000 additional shares from the Company
to cover over-allotments.
<PAGE>
such abbreviated registration statements as may hereafter be required. Copies of
such registration statement and amendments, of each related prospectus subject
to completion (the "Preliminary Prospectuses"), including all documents
incorporated by reference therein, and of any abbreviated registration statement
pursuant to Rule 462(b) of the Rules and Regulations have been delivered to you.
The Company and the transactions contemplated by this Agreement meet the
requirements for using Form S-3 under the Act.
If the registration statement relating to the Shares has been declared
effective under the Act by the Commission, the Company will prepare and promptly
file with the Commission the information omitted from the registration statement
pursuant to Rule 430A(a) or, if BancBoston Robertson Stephens Inc., on behalf of
the several Underwriters, shall agree to the utilization of Rule 434 of the
Rules and Regulations, the information required to be included in any term sheet
filed pursuant to Rule 434(b) or (c), as applicable, of the Rules and
Regulations pursuant to subparagraph (1), (4) or (7) of Rule 424(b) of the Rules
and Regulations or as part of a post-effective amendment to the registration
statement (including a final form of prospectus). If the registration statement
relating to the Shares has not been declared effective under the Act by the
Commission, the Company will prepare and promptly file an amendment to the
registration statement, including a final form of prospectus, or, if BancBoston
Robertson Stephens Inc., on behalf of the several Underwriters, shall agree to
the utilization of Rule 434 of the Rules and Regulations, the information
required to be included in any term sheet filed pursuant to Rule 434(b) or (c),
as applicable, of the Rules and Regulations. The term "Registration Statement"
as used in this Agreement shall mean such registration statement, including
financial statements, schedules and exhibits, in the form in which it became or
becomes, as the case may be, effective (including, if the Company omitted
information from the registration statement pursuant to Rule 430A(a) or files a
term sheet pursuant to Rule 434 of the Rules and Regulations, the information
deemed to be a part of the registration statement at the time it became
effective pursuant to Rule 430A(b) or Rule 434(d) of the Rules and Regulations)
and, in the event of any amendment thereto or the filing of any abbreviated
registration statement pursuant to Rule 462(b) of the Rules and Regulations
relating thereto after the effective date of such registration statement, shall
also mean (from and after the effectiveness of such amendment or the filing of
such abbreviated registration statement) such registration statement as so
amended, together with any such abbreviated registration statement. The term
"Prospectus" as used in this Agreement shall mean the prospectus relating to the
Shares as included in such Registration Statement at the time it becomes
effective (including, if the Company omitted information from the Registration
Statement pursuant to Rule 430A(a) of the Rules and Regulations, the information
deemed to be a part of the Registration Statement at the time it became
effective pursuant to Rule 430A(b) of the Rules and Regulations); provided,
--------
however, that if in reliance on Rule 434 of the Rules and Regulations and with
- -------
the consent of BancBoston Robertson Stephens Inc., on behalf of the several
Underwriters, the Company shall have provided to the Underwriters a term sheet
pursuant to Rule 434(b) or (c), as applicable, prior to the time that a
confirmation is sent or given for purposes of Section 2(10)(a) of the Act, the
term "Prospectus" shall mean the "prospectus subject to completion" (as defined
in Rule 434(g) of the Rules and Regulations) last provided to the Underwriters
by the Company and circulated by the Underwriters to all prospective purchasers
of the Shares (including the information deemed to be a part of the Registration
Statement at the time it became effective pursuant to Rule 434(d) of the Rules
and Regulations). Notwithstanding the foregoing, if any revised prospectus
shall be provided to the Underwriters by the Company for use in connection with
the offering of the Shares that differs from the prospectus referred to in the
immediately preceding sentence (whether or not such revised prospectus is
required to be filed with the Commission pursuant to Rule 424(b) of the Rules
and Regulations), the term "Prospectus" shall refer to such revised prospectus
from and after the time it is first provided to the Underwriters for such use.
If in reliance on Rule 434 of the Rules and Regulations and with the consent of
BancBoston Robertson Stephens Inc., on behalf of the several Underwriters, the
Company shall have provided to the Underwriters a term sheet pursuant to Rule
434(b) or (c), as applicable, prior to the time that a confirmation is sent or
given for purposes of Section 2(10)(a) of the Act, the Prospectus and the term
sheet, together, will not be materially different from the prospectus in the
Registration Statement. Any reference to the Registration Statement or the
Prospectus shall be deemed to refer to and include the documents incorporated by
reference therein pursuant to Item 12 of Form S-3 under the Act, as of the date
of the Registration Statement or the Prospectus, as the case may be, and any
reference to any amendment or supplement to the Registration Statement or the
Prospectus shall be deemed to refer to and include any documents filed after
such date under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), which, upon filing, are incorporated by reference therein, as required by
paragraph (b) of Item 12 of Form S-3. As used in this Agreement, the term
"Incorporated Documents"
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<PAGE>
means the documents which at the time are incorporated by reference in the
Registration Statement, the Prospectus or any amendment or supplement thereto.
(b) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus or instituted proceedings for that
purpose, and each such Preliminary Prospectus has conformed in all material
respects to the requirements of the Act and the Rules and Regulations and, as of
its date, has not included any untrue statement of a material fact or omitted to
state a material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading; and at the time
the Registration Statement became or becomes, as the case may be, effective and
at all times subsequent thereto up to and on the Closing Date (hereinafter
defined) and on any later date on which Option Shares are to be purchased, (i)
the Registration Statement and the Prospectus, and any amendments or supplements
thereto, contained and will contain all material information required to be
included therein by the Act and the Rules and Regulations and will in all
material respects conform to the requirements of the Act and the Rules and
Regulations, (ii) the Registration Statement, and any amendments or supplements
thereto, did not and will not include any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein not misleading, and (iii) the Prospectus, and any
amendments or supplements thereto, did not and will not include any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that none of the representations and
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warranties contained in this subparagraph (b) shall apply to information
contained in or omitted from the Registration Statement or Prospectus, or any
amendment or supplement thereto, in reliance upon, and in conformity with,
written information relating to any Underwriter furnished to the Company by such
Underwriter specifically for use in the preparation thereof.
The Incorporated Documents heretofore filed, when they were filed (or,
if any amendment with respect to any such document was filed, when such
amendment was filed), conformed in all material respects with the requirements
of the Exchange Act and the rules and regulations of the Commission thereunder;
any further Incorporated Documents so filed will, when they are filed, conform
in all material respects with the requirements of the Exchange Act and the rules
and regulations of the Commission thereunder; no such document when it was filed
(or, if an amendment with respect to any such document was filed, when such
amendment was filed), contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading; and no such further amendment will
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading.
(c) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation with full power and authority
(corporate and other) to own, lease and operate its properties and conduct its
business as described in the Prospectus; the Company owns all of the outstanding
capital stock of its subsidiaries free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest; each of the Company and its
subsidiaries is duly qualified to do business as a foreign corporation and is in
good standing in each jurisdiction in which the ownership or leasing of its
properties or the conduct of its business requires such qualification, except
where the failure to be so qualified or be in good standing would not have a
material adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its subsidiaries
considered as one enterprise; no proceeding has been instituted in any such
jurisdiction, revoking, limiting or curtailing, or seeking to revoke, limit or
curtail, such power and authority or qualification; each of the Company and its
subsidiaries is in possession of and operating in compliance with all
authorizations, licenses, certificates, consents, orders and permits from state,
federal and other regulatory authorities which are material to the conduct of
its business, all of which are valid and in full force and effect; neither the
Company nor any of its subsidiaries is in violation of its respective charter or
bylaws or in default in the performance or observance of any material
obligation, agreement, covenant or condition contained in any material bond,
debenture, note or other evidence of indebtedness, or in any material lease,
contract, indenture, mortgage, deed of trust, loan agreement, joint venture or
other agreement or instrument to which the Company or any of its subsidiaries is
a party or by which it or any of its subsidiaries or their respective properties
may be bound; and
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<PAGE>
neither the Company nor any of its subsidiaries is in material violation of any
law, order, rule, regulation, writ, injunction, judgment or decree of any court,
government or governmental agency or body, domestic or foreign, having
jurisdiction over the Company or any of its subsidiaries or over their
respective properties of which it has knowledge. The Company does not own or
control, directly or indirectly, any corporation, association or other entity
other than TranSwitch Europe N.V./S.A. and TranSwitch India Private Limited,
neither of which is a "significant subsidiary" (as such term is defined in
Rule 1-02 of Regulation S-X).
(d) The Company has full legal right, power and authority to enter
into this Agreement and perform the transactions contemplated hereby. This
Agreement has been duly authorized, executed and delivered by the Company and is
a valid and binding agreement on the part of the Company, enforceable in
accordance with its terms, except as rights to indemnification hereunder may be
limited by applicable law and except as the enforcement hereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting creditors' rights generally or by general
equitable principles; the performance of this Agreement and the consummation of
the transactions herein contemplated will not result in a material breach or
violation of any of the terms and provisions of, or constitute a default under,
(i) any bond, debenture, note or other evidence of indebtedness, or under any
lease, contract, indenture, mortgage, deed of trust, loan agreement, joint
venture or other agreement or instrument to which the Company or any of its
subsidiaries is a party or by which it or any of its subsidiaries or their
respective properties may be bound, (ii) the charter or bylaws of the Company or
any of its subsidiaries, or (iii) any law, order, rule, regulation, writ,
injunction, judgment or decree of any court, government or governmental agency
or body, domestic or foreign, having jurisdiction over the Company or any of its
subsidiaries or over their respective properties. No consent, approval,
authorization or order of or qualification with any court, government or
governmental agency or body, domestic or foreign, having jurisdiction over the
Company or any of its subsidiaries or over their respective properties is
required for the execution and delivery of this Agreement and the consummation
by the Company or any of its subsidiaries of the transactions herein
contemplated, except such as may be required under the Act, the Exchange Act, or
under state or other securities or Blue Sky laws, all of which requirements have
been satisfied in all material respects.
(e) There is not any pending or, to the best of the Company's
knowledge, threatened action, suit, claim or proceeding against the Company, any
of its subsidiaries or any of their respective officers or any of their
respective properties, assets or rights before any court, government or
governmental agency or body, domestic or foreign, having jurisdiction over the
Company or any of its subsidiaries or over their respective officers or
properties or otherwise which (i) might result in any material adverse change in
the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries considered as one
enterprise or might materially and adversely affect their properties, assets or
rights, (ii) might prevent consummation of the transactions contemplated hereby
or (iii) is required to be disclosed in the Registration Statement or Prospectus
and is not so disclosed; and there are no agreements, contracts, leases or
documents of the Company or any of its subsidiaries of a character required to
be described or referred to in the Registration Statement or Prospectus or any
Incorporated Document or to be filed as an exhibit to the Registration Statement
or any Incorporated Document by the Act or the Rules and Regulations or by the
Exchange Act or the rules and regulations of the Commission thereunder which
have not been accurately described in all material respects in the Registration
Statement or Prospectus or any Incorporated Document or filed as exhibits to the
Registration Statement or any Incorporated Document.
(f) All outstanding shares of capital stock of the Company have been
duly authorized and validly issued and are fully paid and nonassessable, have
been issued in compliance with all federal and state securities laws, were not
issued in violation of or subject to any preemptive rights or other rights to
subscribe for or purchase securities, and the authorized and outstanding capital
stock of the Company is as set forth in the Prospectus under the caption
"Capitalization" and conforms in all material respects to the statements
relating thereto contained in the Registration Statement and the Prospectus and
any Incorporated Document (and such statements correctly state the substance of
the instruments defining the capitalization of the Company); the Firm Shares and
the Option Shares to be purchased from the Company hereunder have been duly
authorized for issuance and sale to the Underwriters pursuant to this Agreement
and, when issued and delivered by the Company against payment therefor in
accordance with the terms of this Agreement, will be duly and validly issued and
fully paid and nonassessable, and will be sold
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<PAGE>
free and clear of any pledge, lien, security interest, encumbrance, claim or
equitable interest; and no preemptive right, co-sale right, registration right,
right of first refusal or other similar right of shareholders exists with
respect to any of the Firm Shares or Option Shares to be purchased from the
Company hereunder or the issuance and sale thereof other than those that have
been expressly waived prior to the date hereof and those that will automatically
expire upon and will not apply to the consummation of the transactions
contemplated on the Closing Date. No further approval or authorization of any
shareholder, the Board of Directors of the Company or others is required for the
issuance and sale or transfer of the Shares except as may be required under the
Act, the Exchange Act or under state or other securities or Blue Sky law. All
issued and outstanding shares of capital stock of each subsidiary of the Company
have been duly authorized and validly issued and are fully paid and
nonassessable, and were not issued in violation of or subject to any preemptive
right, or other rights to subscribe for or purchase shares and are owned by the
Company free and clear of any pledge, lien, security interest, encumbrance,
claim or equitable interest. Except as disclosed in the Prospectus and the
financial statements of the Company, and the related notes thereto, included or
incorporated by reference in the Prospectus, neither the Company nor any
subsidiary has outstanding any options to purchase, or any preemptive rights or
other rights to subscribe for or to purchase, any securities or obligations
convertible into, or any contracts or commitments to issue or sell, shares of
its capital stock or any such options, rights, convertible securities or
obligations. The description of the Company's stock option, stock bonus and
other stock plans or arrangements, and the options or other rights granted and
exercised thereunder, set forth or incorporated by reference in the Prospectus
accurately and fairly presents the information required to be shown with respect
to such plans, arrangements, options and rights.
(g) KPMG Peat Marwick LLP, which has examined the consolidated
financial statements of the Company, together with the related schedules and
notes, as of December 31, 1997 and 1996 and for each of the years in the three
(3) years ended December 31, 1997 filed with the Commission as a part of or
incorporated by reference into the Registration Statement, which are included or
incorporated by reference in the Prospectus, are independent accountants within
the meaning of the Act and the Rules and Regulations; the audited consolidated
financial statements of the Company, together with the related schedules and
notes, and the unaudited consolidated financial information, forming part of the
Registration Statement and Prospectus, fairly present the financial position and
the results of operations of the Company and its subsidiaries at the respective
dates and for the respective periods to which they apply; and all audited
consolidated financial statements of the Company, together with the related
schedules and notes, and the unaudited consolidated financial information, filed
with the Commission as part of or incorporated by reference into the
Registration Statement, have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods involved
except as may be otherwise stated therein. The selected and summary financial
and statistical data included or incorporated by reference in the Registration
Statement present fairly the information shown therein and have been compiled on
a basis consistent with the audited financial statements presented therein. No
other financial statements or schedules are required to be included or
incorporated by reference in the Registration Statement.
(h) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, there has not been (i) any
material adverse change in the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its subsidiaries
considered as one enterprise, (ii) any transaction that is material to the
Company and its subsidiaries considered as one enterprise, except transactions
entered into in the ordinary course of business, (iii) any obligation, direct or
contingent, that is material to the Company and its subsidiaries considered as
one enterprise, incurred by the Company or its subsidiaries, except obligations
incurred in the ordinary course of business, (iv) any change in the capital
stock or outstanding indebtedness of the Company or any of its subsidiaries that
is material to the Company and its subsidiaries considered as one enterprise,
(v) any dividend or distribution of any kind declared, paid or made on the
capital stock of the Company or any of its subsidiaries, or (vi) any loss or
damage (whether or not insured) to the property of the Company or any of its
subsidiaries which has been sustained or will have been sustained which has a
material adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its subsidiaries
considered as one enterprise.
-5-
<PAGE>
(i) Except as set forth in the Registration Statement and Prospectus
and any Incorporated Document, (i) each of the Company and its subsidiaries has
good and marketable title to all properties and assets described in the
Registration Statement and Prospectus and any Incorporated Document as owned by
it, free and clear of any pledge, lien, security interest, encumbrance, claim or
equitable interest, other than such as would not have a material adverse effect
on the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries considered as one
enterprise, (ii) the agreements to which the Company or any of its subsidiaries
is a party described in the Registration Statement and Prospectus and any
Incorporated Document are valid agreements, enforceable by the Company and its
subsidiaries (as applicable), except as the enforcement thereof may be limited
by applicable bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting creditors' rights generally or by general
equitable principles and, to the best of the Company's knowledge, the other
contracting party or parties thereto are not in material breach or material
default under any of such agreements, and (iii) each of the Company and its
subsidiaries has valid and enforceable leases for all properties described in
the Registration Statement and Prospectus and any Incorporated Document as
leased by it, except as the enforcement thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles. Except as set forth in the Registration Statement and Prospectus
and any Incorporated Document, the Company owns or leases all such properties as
are necessary to its operations as now conducted or as proposed to be conducted.
(j) The Company and its subsidiaries have timely filed all necessary
federal, state and foreign income and franchise tax returns and have paid all
taxes shown thereon as due, and there is no tax deficiency that has been or, to
the best of the Company's knowledge, might be asserted against the Company or
any of its subsidiaries that might have a material adverse effect on the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company and its subsidiaries considered as one enterprise; and
all tax liabilities are adequately provided for on the books of the Company and
its subsidiaries.
(k) The Company and its subsidiaries maintain insurance with insurers
of recognized financial responsibility of the types and in the amounts generally
deemed adequate for their respective businesses and consistent with insurance
coverage maintained by similar companies in similar businesses, including, but
not limited to, insurance covering real and personal property owned or leased by
the Company or its subsidiaries against theft, damage, destruction, acts of
vandalism and all other risks customarily insured against, all of which
insurance is in full force and effect; neither the Company nor any such
subsidiary has been refused any insurance coverage sought or applied for; and
neither the Company nor any such subsidiary has any reason to believe that it
will not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not materially and
adversely affect the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its subsidiaries considered as
one enterprise.
(l) To the best of Company's knowledge, no labor disturbance by the
employees of the Company or any of its subsidiaries exists or is imminent; and
the Company is not aware of any existing or imminent labor disturbance by the
employees of any of its principal suppliers, subassemblers, value added
resellers, subcontractors, original equipment manufacturers, authorized dealers
or international distributors that might be expected to result in a material
adverse change in the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its subsidiaries considered as
one enterprise. No collective bargaining agreement exists with any of the
Company's employees and, to the best of the Company's knowledge, no such
agreement is imminent.
(m) Each of the Company and its subsidiaries owns or possesses
adequate rights to use all patents, patent rights, inventions, trade secrets,
know-how, trademarks, service marks, trade names and copyrights which are
necessary to conduct its businesses as described in the Registration Statement
and Prospectus and any Incorporated Document; the expiration of any patents,
patent rights, trade secrets, trademarks, service marks, trade names or
copyrights would not have a material adverse effect on the condition (financial
or otherwise), earnings, operations, business or business prospects of the
Company and its subsidiaries considered as one enterprise; the Company has not
received any notice of, and has no knowledge of, any infringement of or conflict
with asserted rights
-6-
<PAGE>
of the Company by others with respect to any patent, patent rights, inventions,
trade secrets, know-how, trademarks, service marks, trade names or copyrights;
and the Company has not received any notice of, and has no knowledge of, any
infringement of or conflict with asserted rights of others with respect to any
patent, patent rights, inventions, trade secrets, know-how, trademarks, service
marks, trade names or copyrights which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, might have a material
adverse effect on the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its subsidiaries considered as
one enterprise.
(n) The Common Stock is registered pursuant to Section 12(g) of the
Exchange Act and is listed on The Nasdaq National Market, and the Company has
taken no action designed to, or likely to have the effect of, terminating the
registration of the Common Stock under the Exchange Act or delisting the Common
Stock from The Nasdaq National Market, nor has the Company received any
notification that the Commission or the National Association of Securities
Dealers, Inc. ("NASD") is contemplating terminating such registration or
listing.
(o) There are no issues related to the Company's, or any of its
subsidiaries', preparedness for the Year 2000 that (i) are of a character
required to be described or referred to in the Registration Statement or
Prospectus or any Incorporated Document by the Act or the Rules and Regulations
or by the Exchange Act or the rules and regulations of the Commission thereunder
which have not been accurately described in the Registration Statement or
Prospectus or any Incorporated Document or (ii) might reasonably be expected to
result in any material adverse change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company and its
subsidiaries considered as one enterprise or that might materially affect their
properties, assets or rights. All internal computer systems and each
Constituent Component (as defined below) of those systems and all computer-
related products and each Constituent Component (as defined below) of those
products of the Company and each of its Subsidiaries fully comply with the Year
2000 Qualification Requirements. "Year 2000 Qualification Requirements" means
that the internal computer systems and each Constituent Component (as defined
below) of those systems and all computer-related products and each Constituent
Component (as defined below) of those products of the Company and each of its
Subsidiaries (i) have been reviewed to confirm that they store, process
(including sorting and performing mathematical operations, calculations and
computations), input and output data containing date and information correctly
regardless of whether the date contains dates and times before, on or after
January 1, 2000, (ii) have been designated to ensure date and time entry
recognition, calculations that accommodate same century and multi-century
formulas and date values, leap year recognition and calculations, and date data
interface values that reflect the century, (iii) accurately manage and
manipulate data involving dates and times, including single century formulas and
multi-century formulas, and will not cause an abnormal ending scenario within
the application or generate incorrect values or invalid results involving such
dates, (iv) accurately process any date rollover, and (v) accept and respond to
two-digit year date input in a manner that resolves any ambiguities as to the
century. "Constituent Component" means all software (including operating
systems, programs, packages and utilities), firmware, hardware, networking
components, and peripherals provided as part of the configuration.
(p) The Company has been advised concerning the Investment Company
Act of 1940, as amended (the "1940 Act"), and the rules and regulations
thereunder, and has in the past conducted, and intends in the future to conduct,
its affairs in such a manner as to ensure that it will not become an "investment
company" or a company "controlled" by an "investment company" within the meaning
of the 1940 Act and such rules and regulations.
(q) The Company has not distributed and will not distribute prior to
the later of (i) the Closing Date, or any date on which Option Shares are to be
purchased, as the case may be, and (ii) completion of the distribution of the
Shares, any offering material in connection with the offering and sale of the
Shares other than any Preliminary Prospectuses, the Prospectus, the Registration
Statement and other materials, if any, permitted by the Act.
(r) Neither the Company nor any of its subsidiaries has at any time
during the last five (5) years (i) made any unlawful contribution to any
candidate for foreign office or failed to disclose fully any contribution in
violation of law, or (ii) made any payment to any federal or state governmental
officer or official, or other person
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<PAGE>
charged with similar public or quasi-public duties, other than payments required
or permitted by the laws of the United States or any jurisdiction thereof.
(s) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might reasonably be expected to cause
or result in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Shares.
(t) Each officer and director of the Company and each beneficial
owner of ____ or more shares of Common Stock has agreed in writing that such
person will not, for a period of 90 days from the date that the Registration
Statement is declared effective by the Commission (the "Lock-up Period"), offer
to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant
any rights with respect to (collectively, a "Disposition") any shares of Common
Stock, any options or warrants to purchase any shares of Common Stock or any
securities convertible into or exchangeable for shares of Common Stock
(collectively, "Securities") now owned or hereafter acquired directly by such
person or with respect to which such person has or hereafter acquires the power
of disposition, otherwise than (i) as a bona fide gift or gifts, provided the
donee or donees thereof agree in writing to be bound by this restriction, (ii)
as a distribution to partners or shareholders of such person, provided that the
distributees thereof agree in writing to be bound by the terms of this
restriction, (iii) to any trust, the beneficiaries of which are exclusively such
person or the immediate family of such person, provided that the trustee of the
trust agrees to be bound by the terms of this restriction and provided further
that any such transfer shall not involve a disposition for value (for purposes
of the foregoing, "immediate family" shall mean any relationship by blood,
marriage or adoption, not more remote than first cousin) or (iv) with the prior
written consent of BancBoston Robertson Stephens Inc. The foregoing restriction
has been expressly agreed to preclude the holder of the Securities from engaging
in any hedging or other transaction which is designed to or reasonably expected
to lead to or result in a Disposition of Securities during the Lock-up Period,
even if such Securities would be disposed of by someone other than such holder.
Such prohibited hedging or other transactions would include, without limitation,
any short sale (whether or not against the box) or any purchase, sale or grant
of any right (including, without limitation, any put or call option) with
respect to any Securities or with respect to any security (other than a broad-
based market basket or index) that includes, relates to or derives any
significant part of its value from Securities. Furthermore, such person has also
agreed and consented to the entry of stop transfer instructions with the
Company's transfer agent against the transfer of the Securities held by such
person except in compliance with this restriction. The Company has provided to
counsel for the Underwriters a complete and accurate list of all securityholders
of the Company and the number and type of securities held by each
securityholder. The Company has provided to counsel for the Underwriters true,
accurate and complete copies of all of the agreements pursuant to which its
officers, directors and shareholders have agreed to such or similar restrictions
(the "Lock-up Agreements") presently in effect or effected hereby. The Company
hereby represents and warrants that it will not release any of its officers,
directors or other shareholders from any Lock-up Agreements currently existing
or hereafter effected without the prior written consent of BancBoston Robertson
Stephens Inc.
(u) Except as set forth in the Registration Statement and Prospectus
and any Incorporated Document, (i) the Company is in compliance with all rules,
laws and regulations relating to the use, treatment, storage and disposal of
toxic substances and protection of health or the environment ("Environmental
Laws") which are applicable to its business, (ii) the Company has received no
notice from any governmental authority or third party of an asserted claim under
Environmental Laws, which claim is required to be disclosed in the Registration
Statement and the Prospectus and any Incorporated Document, (iii) the Company
will not be required to make future material capital expenditures to comply with
Environmental Laws and (iv) no property which is owned, leased or occupied by
the Company has been designated as a Superfund site pursuant to the
Comprehensive Response, Compensation, and Liability Act of 1980, as amended (42
U.S.C. (S) 9601, et seq.), or otherwise designated as a contaminated site under
-- ----
applicable state or local law.
(v) The Company and each of its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurances that
(i) transactions are executed in accordance with management's general or
specific authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets, (iii) access to
assets
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<PAGE>
is permitted only in accordance with management's general or specific
authorization, and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(w) There are no outstanding loans, advances (except normal advances
for business expenses in the ordinary course of business) or guarantees of
indebtedness by the Company to or for the benefit of any of the officers or
directors of the Company or any of the members of the families of any of them,
except as disclosed in the Registration Statement and the Prospectus and any
Incorporated Document.
(x) The Company has complied with all provisions of Section 517.075,
Florida Statutes relating to doing business with the Government of Cuba or with
any person or affiliate located in Cuba.
3. Purchase, Sale and Delivery of Shares. On the basis of the
-------------------------------------
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company agrees to sell to the
Underwriters, and each Underwriter agrees, severally and not jointly, to
purchase from the Company, at a purchase price of $_____ per share, the
respective number of Firm Shares as hereinafter set forth. The obligation of
each Underwriter to the Company shall be to purchase from the Company that
number of Firm Shares which is set forth opposite the name of such Underwriter
in Schedule A hereto (subject to adjustment as provided in Section 10).
Delivery of definitive certificates for the Firm Shares to be
purchased by the Underwriters pursuant to this Section 3 shall be made against
payment of the purchase price therefor by the several Underwriters by certified
or official bank check or checks drawn in next-day funds, payable to the order
of the Company (and the Company agrees not to deposit any such check in the bank
on which it is drawn, and not to take any other action with the purpose or
effect of receiving immediately available funds, until the business day
following the date of its delivery to the Company, and, in the event of any
breach of the foregoing, the Company shall reimburse the Underwriters for the
interest lost and any other expenses borne by them by reason of such breach), at
the offices of Testa, Hurwitz & Thibeault, LLP, High Street Tower, 125 High
Street, Boston, Massachusetts 02110 (or at such other place as may be agreed
upon among the Representatives and the Company), at 7:00 A.M., San Francisco
time (a) on the third (3rd) full business day following the first day that
Shares are traded, (b) if this Agreement is executed and delivered after 1:30
P.M., San Francisco time, the fourth (4th) full business day following the day
that this Agreement is executed and delivered or (c) at such other time and date
not later than seven (7) full business days following the first day that Shares
are traded as the Representatives and the Company may determine (or at such time
and date to which payment and delivery shall have been postponed pursuant to
Section 10 hereof), such time and date of payment and delivery being herein
called the "Closing Date;" provided, however, that if the Company has not made
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available to the Representatives copies of the Prospectus within the time
provided in Section 4(d) hereof, the Representatives may, in their sole
discretion, postpone the Closing Date until no later than two (2) full business
days following delivery of copies of the Prospectus to the Representatives. The
certificates for the Firm Shares to be so delivered will be made available to
you at such office or such other location including, without limitation, in New
York City, as you may reasonably request for checking at least one (1) full
business day prior to the Closing Date and will be in such names and
denominations as you may request, such request to be made at least two (2) full
business days prior to the Closing Date. If the Representatives so elect,
delivery of the Firm Shares may be made by credit through full fast transfer to
the accounts at The Depository Trust Company designated by the Representatives.
It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks shall not have been received by you prior to the Closing
Date for the Firm Shares to be purchased by such Underwriter or Underwriters.
Any such payment by you shall not relieve any such Underwriter or Underwriters
of any of its or their obligations hereunder.
After the Registration Statement becomes effective, the several
Underwriters intend to make an initial public offering (as such term is
described in Section 11 hereof) of the Firm Shares at an initial public offering
price
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of $_____ per share. After the initial public offering, the several Underwriters
may, in their discretion, vary the public offering price.
The information set forth in the last paragraph on the front cover
page (insofar as such information relates to the Underwriters) and under the
second, seventh, eighth and ninth paragraphs under the caption "Underwriting" in
any Preliminary Prospectus and in the Prospectus constitutes the only
information furnished by the Underwriters to the Company for inclusion in any
Preliminary Prospectus, the Prospectus or the Registration Statement or any
Incorporated Document, and you, on behalf of the respective Underwriters,
represent and warrant to the Company that the statements made therein do not
include any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
4. Further Agreements of the Company. The Company agrees with the
---------------------------------
several Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement and any amendment thereof, if not effective at the time and date that
this Agreement is executed and delivered by the parties hereto, to become
effective as promptly as possible; the Company will use its best efforts to
cause any abbreviated registration statement pursuant to Rule 462(b) of the
Rules and Regulations as may be required subsequent to the date the Registration
Statement is declared effective to become effective as promptly as possible; the
Company will notify you, promptly after it shall receive notice thereof, of the
time when the Registration Statement, any subsequent amendment to the
Registration Statement or any abbreviated registration statement has become
effective or any supplement to the Prospectus has been filed; if the Company
omitted information from the Registration Statement at the time it was
originally declared effective in reliance upon Rule 430A(a) of the Rules and
Regulations, the Company will provide evidence satisfactory to you that the
Prospectus contains such information and has been filed, within the time period
prescribed, with the Commission pursuant to subparagraph (1) or (4) of Rule
424(b) of the Rules and Regulations or as part of a post-effective amendment to
such Registration Statement as originally declared effective which is declared
effective by the Commission; if the Company files a term sheet pursuant to Rule
434 of the Rules and Regulations, the Company will provide evidence satisfactory
to you that the Prospectus and term sheet meeting the requirements of Rule
434(b) or (c), as applicable, of the Rules and Regulations, have been filed,
within the time period prescribed, with the Commission pursuant to subparagraph
(7) of Rule 424(b) of the Rules and Regulations; if for any reason the filing of
the final form of Prospectus is required under Rule 424(b)(3) of the Rules and
Regulations, it will provide evidence satisfactory to you that the Prospectus
contains such information and has been filed with the Commission within the time
period prescribed; it will notify you promptly of any request by the Commission
for the amending or supplementing of the Registration Statement or the
Prospectus or for additional information; promptly upon your request, it will
prepare and file with the Commission any amendments or supplements to the
Registration Statement or Prospectus which, in the opinion of counsel for the
several Underwriters ("Underwriters' Counsel"), may be necessary or advisable in
connection with the distribution of the Shares by the Underwriters; it will
promptly prepare and file with the Commission, and promptly notify you of the
filing of, any amendments or supplements to the Registration Statement or
Prospectus which may be necessary to correct any statements or omissions, if, at
any time when a prospectus relating to the Shares is required to be delivered
under the Act, any event shall have occurred as a result of which the Prospectus
or any other prospectus relating to the Shares as then in effect would include
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; in case any Underwriter is required
to deliver a prospectus nine (9) months or more after the effective date of the
Registration Statement in connection with the sale of the Shares, it will
prepare promptly upon request, but at the expense of such Underwriter, such
amendment or amendments to the Registration Statement and such prospectus or
prospectuses as may be necessary to permit compliance with the requirements of
Section 10(a)(3) of the Act; and it will file no amendment or supplement to the
Registration Statement or Prospectus or the Incorporated Documents, or, prior to
the end of the period of time in which a prospectus relating to the Shares is
required to be delivered under the Act, file any document which upon filing
becomes an Incorporated Document, which shall not previously have been submitted
to you a reasonable time prior to the proposed filing thereof or to which you
shall reasonably object in writing, subject, however, to compliance with
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the Act and the Rules and Regulations, the Exchange Act and the rules and
regulations of the Commission thereunder and the provisions of this Agreement.
(b) The Company will advise you, promptly after it shall receive
notice or obtain knowledge, of the issuance of any stop order by the Commission
suspending the effectiveness of the Registration Statement or of the initiation
or threat of any proceeding for that purpose; and it will promptly use its best
efforts to prevent the issuance of any stop order or to obtain its withdrawal at
the earliest possible moment if such stop order should be issued.
(c) The Company will use its best efforts to qualify the Shares for
offering and sale under the securities laws of such jurisdictions as you may
designate and to continue such qualifications in effect for so long as may be
required for purposes of the distribution of the Shares, except that the Company
shall not be required in connection therewith or as a condition thereof to
qualify as a foreign corporation or to execute a general consent to service of
process in any jurisdiction in which it is not otherwise required to be so
qualified or to so execute a general consent to service of process. In each
jurisdiction in which the Shares shall have been qualified as above provided,
the Company will make and file such statements and reports in each year as are
or may be required by the laws of such jurisdiction.
(d) The Company will furnish to you, as soon as available, and, in
the case of the Prospectus and any term sheet or abbreviated term sheet under
Rule 434, in no event later than the first (1st) full business day following the
first day that Shares are traded, copies of the Registration Statement (three of
which will be signed and which will include all exhibits), each Preliminary
Prospectus, the Prospectus and any amendments or supplements to such documents,
including any prospectus prepared to permit compliance with Section 10(a)(3) of
the Act, and the Incorporated Documents (three of which will include all
exhibits,) all in such quantities as you may from time to time reasonably
request. Notwithstanding the foregoing, if BancBoston Robertson Stephens Inc.,
on behalf of the several Underwriters, shall agree to the utilization of Rule
434 of the Rules and Regulations, the Company shall provide to you copies of a
Preliminary Prospectus updated in all respects through the date specified by you
in such quantities as you may from time to time reasonably request.
(e) The Company will make generally available to its securityholders
as soon as practicable, but in any event not later than the forty-fifth (45th)
day following the end of the fiscal quarter first occurring after the first
anniversary of the effective date of the Registration Statement, an earnings
statement (which will be in reasonable detail but need not be audited) complying
with the provisions of Section 11(a) of the Act and covering a twelve (12) month
period beginning after the effective date of the Registration Statement.
(f) During a period of five (5) years after the date hereof, the
Company will furnish to its shareholders as soon as practicable after the end of
each respective period, annual reports (including financial statements audited
by independent certified public accountants) and unaudited quarterly reports of
operations for each of the first three quarters of the fiscal year, and will
furnish to you and the other several Underwriters hereunder, upon request (i)
concurrently with furnishing such reports to its shareholders, statements of
operations of the Company for each of the first three (3) quarters in the form
furnished to the Company's shareholders, (ii) concurrently with furnishing to
its shareholders, a balance sheet of the Company as of the end of such fiscal
year, together with statements of operations, of shareholders' equity, and of
cash flows of the Company for such fiscal year, accompanied by a copy of the
certificate or report thereon of independent certified public accountants, (iii)
as soon as they are available, copies of all reports (financial or other) mailed
to shareholders, (iv) as soon as they are available, copies of all reports and
financial statements furnished to or filed with the Commission, any securities
exchange or the NASD, (v) every material press release and every material news
item or article in respect of the Company or its affairs which was generally
released to shareholders or prepared by the Company or any of its subsidiaries,
and (vi) any additional information of a public nature concerning the Company or
its subsidiaries, or its business which you may reasonably request. During such
five (5) year period, if the Company shall have active subsidiaries, the
foregoing financial statements shall be on a consolidated basis to the extent
that the accounts of the Company and its subsidiaries are
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consolidated, and shall be accompanied by similar financial statements for any
significant subsidiary which is not so consolidated.
(g) The Company will apply the net proceeds from the sale of the
Shares being sold by it in the manner set forth under the caption "Use of
Proceeds" in the Prospectus.
(h) The Company will maintain a transfer agent and, if necessary
under the jurisdiction of incorporation of the Company, a registrar (which may
be the same entity as the transfer agent) for its Common Stock.
(i) If the transactions contemplated hereby are not consummated by
reason of any failure, refusal or inability on the part of the Company to
perform any agreement on its part to be performed hereunder or to fulfill any
condition of the Underwriters' obligations hereunder, or if the Company shall
terminate this Agreement pursuant to Section 11(a) hereof, or if the
Underwriters shall terminate this Agreement pursuant to Section 11(b)(i), the
Company will reimburse the several Underwriters for all out-of-pocket expenses
(including fees and disbursements of Underwriters' Counsel) incurred by the
Underwriters in investigating or preparing to market or marketing the Shares.
(j) If at any time during the ninety (90) day period after the
Registration Statement becomes effective, any rumor, publication or event
relating to or affecting the Company shall occur as a result of which in your
opinion the market price of the Common Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus), the Company will,
after written notice from you advising the Company to the effect set forth
above, forthwith prepare, consult with you concerning the substance of and
disseminate a press release or other public statement, reasonably satisfactory
to you, responding to or commenting on such rumor, publication or event.
(k) During the Lock-up Period, the Company will not, without the
prior written consent of BancBoston Robertson Stephens Inc., effect the
Disposition of, directly or indirectly, any Securities other than the sale of
the Firm Shares and the Option Shares to be sold by the Company hereunder and
the Company's issuance of options or Common Stock under the Company's presently
authorized and 1989 Stock Option Plan, Second Amended and Restated 1995 Stock
Plan, 1995 Employee Stock Purchase Plan and 1995 Non-Employee Director Stock
Option Plan (collectively, the "Option Plans").
(l) During a period of ninety (90) days from the effective date of
the Registration Statement, the Company will not file a registration statement
registering shares under the Option Plans or other employee benefit plan.
5. Expenses.
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(a) The Company agrees with each Underwriter that:
(i) The Company will pay and bear all costs and expenses in
connection with the preparation, printing and filing of the
Registration Statement (including financial statements, schedules and
exhibits), Preliminary Prospectuses and the Prospectus and the
Incorporated Documents and any amendments or supplements thereto; the
printing of this Agreement, the Agreement Among Underwriters, the
Selected Dealer Agreement, the Preliminary Blue Sky Survey and any
Supplemental Blue Sky Survey, the Underwriters' Questionnaire and
Power of Attorney, and any instruments related to any of the
foregoing; the issuance and delivery of the Shares hereunder to the
several Underwriters, including transfer taxes, if any, the cost of
all certificates representing the Shares and transfer agents' and
registrars' fees; the fees and disbursements of counsel for the
Company; all fees and other charges of the Company's independent
certified public accountants; the cost of furnishing to the several
Underwriters copies of the Registration Statement (including
appropriate exhibits), Preliminary Prospectus and the Prospectus and
the Incorporated Documents, and any amendments or supplements to any
of the foregoing; NASD filing fees and the cost of qualifying the
Shares under the laws of such jurisdictions as you may designate
(including filing fees and fees and
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<PAGE>
disbursements of Underwriters' Counsel in connection with such NASD
filings and Blue Sky qualifications); and all other expenses directly
incurred by the Company in connection with the performance of their
obligations hereunder.
(ii) In addition to its other obligations under Section 8(a)
hereof, the Company agrees that, as an interim measure during the
pendency of any claim, action, investigation, inquiry or other
proceeding described in Section 8(a) hereof, it will reimburse the
Underwriters on a monthly basis for all reasonable legal or other
expenses incurred in connection with investigating or defending any
such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the
propriety and enforceability of the Company's obligation to reimburse
the Underwriters for such expenses and the possibility that such
payments might later be held to have been improper by a court of
competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the
Underwriters shall promptly return such payment to the Company
together with interest, compounded daily, determined on the basis of
the prime rate (or other commercial lending rate for borrowers of the
highest credit standing) listed from time to time in The Wall Street
Journal which represents the base rate on corporate loans posted by a
substantial majority of the nation's thirty (30) largest banks (the
"Prime Rate"). Any such interim reimbursement payments which are not
made to the Underwriters within thirty (30) days of a request for
reimbursement shall bear interest at the Prime Rate from the date of
such request.
(b) In addition to their other obligations under Section 8(b) hereof,
the Underwriters severally and not jointly agree that, as an interim measure
during the pendency of any claim, action, investigation, inquiry or other
proceeding described in Section 8(b) hereof, they will reimburse the Company on
a monthly basis for all reasonable legal or other expenses incurred in
connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the
Underwriters' obligation to reimburse the Company for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Company shall
promptly return such payment to the Underwriters together with interest,
compounded daily, determined on the basis of the Prime Rate. Any such interim
reimbursement payments which are not made to the Company within thirty (30) days
of a request for reimbursement shall bear interest at the Prime Rate from the
date of such request.
(c) It is agreed that any controversy arising out of the operation of
the interim reimbursement arrangements set forth in Sections 5(a)(ii) and 5(b)
hereof, including the amounts of any requested reimbursement payments, the
method of determining such amounts and the basis on which such amounts shall be
apportioned among the reimbursing parties, shall be settled by arbitration
conducted under the provisions of the Constitution and Rules of the Board of
Governors of the New York Stock Exchange, Inc. or pursuant to the Code of
Arbitration Procedure of the NASD. Any such arbitration must be commenced by
service of a written demand for arbitration or a written notice of intention to
arbitrate, therein electing the arbitration tribunal. In the event the party
demanding arbitration does not make such designation of an arbitration tribunal
in such demand or notice, then the party responding to said demand or notice is
authorized to do so. Any such arbitration will be limited to the operation of
the interim reimbursement provisions contained in Sections 5(a)(ii) and 5(b)
hereof and will not resolve the ultimate propriety or enforceability of the
obligation to indemnify for expenses which is created by the provisions of
Sections 8(a) and 8(b) hereof or the obligation to contribute to expenses which
is created by the provisions of Section 8(d) hereof.
6. Conditions of Underwriters' Obligations. The obligations of the
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several Underwriters to purchase and pay for the Shares as provided herein shall
be subject to the accuracy, as of the date hereof and the Closing Date and any
later date on which Option Shares are to be purchased, as the case may be, of
the representations and warranties of the Company herein, to the performance by
the Company of their respective obligations hereunder and to the following
additional conditions:
(a) The Registration Statement shall have become effective not later
than 2:00 P.M., San Francisco time, on the date following the date of this
Agreement, or such later date as shall be consented to in writing by you; and no
stop order suspending the effectiveness thereof shall have been issued and no
proceedings for
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<PAGE>
that purpose shall have been initiated or, to the knowledge of the Company or
any Underwriter, threatened by the Commission, and any request of the Commission
for additional information (to be included in the Registration Statement or the
Prospectus or any Incorporated Document or otherwise) shall have been complied
with to the satisfaction of Underwriters' Counsel.
(b) All corporate proceedings and other legal matters in connection
with this Agreement, the form of Registration Statement and the Prospectus, and
the registration, authorization, issue, sale and delivery of the Shares, shall
have been reasonably satisfactory to Underwriters' Counsel, and such counsel
shall have been furnished with such papers and information as they may
reasonably have requested to enable them to pass upon the matters referred to in
this Section.
(c) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date, or any later date on which Option Shares are to be
purchased, as the case may be,
(i) there shall not have been any change in the condition
(financial or otherwise), earnings, operations, business or business
prospects of the Company and its subsidiaries considered as one
enterprise from that set forth in the Registration Statement or
Prospectus, which, in your sole judgment, is material and adverse and
that makes it, in your sole judgment, impracticable or inadvisable to
proceed with the public offering of the Shares as contemplated by the
Prospectus; and
(ii) there shall not have occurred any downgrading, nor shall
any notice have been given of any intended or potential downgrading or
of any review for a possible change that does not indicate the
direction of the possible change, in the rating accorded any of the
Company's securities by any "nationally recognized statistical rating
organization," as such term is defined for purposes of Rule 436(g)(2)
under the Act.
(d) You shall have received on the Closing Date and on any later date
on which Option Shares are to be purchased, as the case may be, the following
opinion of counsel for the Company, dated the Closing Date or such later date on
which Option Shares are to be purchased addressed to the Underwriters and with
reproduced copies or signed counterparts thereof for each of the Underwriters,
to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation;
(ii) The Company has the corporate power and authority to own,
lease and operate its properties and to conduct its business as
described in the Prospectus;
(iii) The Company is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction, if any, in
which the ownership or leasing of its properties or the conduct of its
business requires such qualification, except where the failure to be
so qualified or be in good standing would not have a material adverse
effect on the condition (financial or otherwise), earnings, operations
or business of the Company and its subsidiaries considered as one
enterprise. To such counsel's knowledge, the Company does not own or
control, directly or indirectly, any corporation, association or other
entity other than TranSwitch Europe, N.V./S.A. and TranSwitch India
Private Limited;
(iv) The authorized, issued and outstanding capital stock of
the Company is as set forth in the Prospectus under the caption
"Capitalization" as of the dates stated therein, the issued and
outstanding shares of capital stock of the Company have been duly and
validly issued and are fully paid and nonassessable, and, to such
counsel's knowledge, will not have been issued in violation of or
subject to any preemptive right, co-sale right, registration right,
right of first refusal or other similar right;
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(v) The Firm Shares or the Option Shares, as the case may be,
to be issued by the Company pursuant to the terms of this Agreement
have been duly authorized and, upon issuance and delivery against
payment therefor in accordance with the terms hereof, will be duly and
validly issued and fully paid and nonassessable, and will not have
been issued in violation of or subject to any preemptive right, co-
sale right, registration right, right of first refusal or other
similar right.
(vi) The Company has the corporate power and authority to enter
into this Agreement and to issue, sell and deliver to the Underwriters
the Shares to be issued and sold by it hereunder;
(vii) This Agreement has been duly authorized by all necessary
corporate action on the part of the Company and has been duly executed
and delivered by the Company and, assuming due authorization,
execution and delivery by you, is a valid and binding agreement of the
Company, enforceable in accordance with its terms, except insofar as
indemnification provisions may be limited by applicable law and except
as enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to or affecting
creditors' rights generally or by general equitable principles;
(viii) The Registration Statement has become effective under the
Act and, to such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been instituted or are pending or
threatened under the Act;
(ix) The Registration Statement and the Prospectus, and each
amendment or supplement thereto (other than the financial statements
(including supporting schedules) and financial data derived therefrom
as to which such counsel need express no opinion), as of the effective
date of the Registration Statement, complied as to form in all
material respects with the requirements of the Act and the applicable
Rules and Regulations; and each of the Incorporated Documents (other
than the financial statements (including supporting schedules) and the
financial data derived therefrom as to which such counsel need express
no opinion) complied when filed pursuant to the Exchange Act as to
form in all material respects with the requirements of the Act and the
Rules and Regulations and the Exchange Act and the applicable rules
and regulations of the Commission thereunder;
(x) The information in the Prospectus under the caption
"Description of Capital Stock," to the extent that it constitutes
matters of law or legal conclusions, has been reviewed by such counsel
and is a fair summary of such matters and conclusions; and the forms
of certificates evidencing the Common Stock and filed as exhibits to
the Registration Statement comply with Delaware law;
(xi) The description in the Registration Statement and the
Prospectus of the charter and bylaws of the Company and of statutes
are accurate and fairly present the information required to be
presented by the Act and the applicable Rules and Regulations;
(xii) To such counsel's knowledge, there are no agreements,
contracts, leases or documents to which the Company is a party of a
character required to be described or referred to in the Registration
Statement or Prospectus or any Incorporated Document or to be filed as
an exhibit to the Registration Statement or any Incorporated Document
which are not described or referred to therein or filed as required;
(xiii) The performance of this Agreement and the consummation of
the transactions herein contemplated (other than performance of the
Company's indemnification obligations hereunder, concerning which no
opinion need be expressed) will not (a) result in any violation of the
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Company's charter or bylaws or (b) to such counsel's knowledge, result
in a material breach or violation of any of the terms and provisions
of, or constitute a default under, any bond, debenture, note or other
evidence of indebtedness, or any lease, contract, indenture, mortgage,
deed of trust, loan agreement, joint venture or other agreement or
instrument known to such counsel to which the Company is a party or by
which its properties are bound, or any applicable statute, rule or
regulation known to such counsel or, to such counsel's knowledge, any
order, writ or decree of any court, government or governmental agency
or body having jurisdiction over the Company or any of its
subsidiaries, or over any of their properties or operations;
(xiv) No consent, approval, authorization or order of or
qualification with any court, government or governmental agency or
body having jurisdiction over the Company or any of its subsidiaries,
or over any of their properties or operations is necessary in
connection with the consummation by the Company of the transactions
herein contemplated, except such as have been obtained under the Act
or such as may be required under state or other securities or Blue Sky
laws in connection with the purchase and the distribution of the
Shares by the Underwriters;
(xv) To such counsel's knowledge, there are no legal or
governmental proceedings pending or threatened against the Company or
any of its subsidiaries of a character required to be disclosed in the
Registration Statement or the Prospectus or any Incorporated Document
by the Act or the Rules and Regulations or by the Exchange Act or the
applicable rules and regulations of the Commission thereunder, other
than those described therein;
(xvi) To such counsel's knowledge, neither the Company nor any
of its subsidiaries is presently (a) in material violation of its
respective charter or bylaws, or (b) in material breach of any
applicable statute, rule or regulation known to such counsel or, to
such counsel's knowledge, any order, writ or decree of any court or
governmental agency or body having jurisdiction over the Company or
any of its subsidiaries, or over any of their properties or
operations; and
(xvii) To such counsel's knowledge, except as set forth in the
Registration Statement and Prospectus and any Incorporated Document,
no holders of Common Stock or other securities of the Company have
registration rights with respect to securities of the Company and,
except as set forth in the Registration Statement and Prospectus, all
holders of securities of the Company having rights known to such
counsel to registration of such shares of Common Stock or other
securities, because of the filing of the Registration Statement by the
Company have, with respect to the offering contemplated thereby,
waived such rights or such rights have expired by reason of lapse of
time following notification of the Company's intent to file the
Registration Statement or have included securities in the Registration
Statement pursuant to the exercise of and in full satisfaction of such
rights.
In addition, such counsel shall state that such counsel has
participated in conferences with officials and other representatives of the
Company, the Representatives, Underwriters' Counsel and the independent
certified public accountants of the Company, at which such conferences the
contents of the Registration Statement and Prospectus and related matters were
discussed, and although they have not verified the accuracy or completeness of
the statements contained in the Registration Statement or the Prospectus,
nothing has come to the attention of such counsel which leads them to believe
that, at the time the Registration Statement became effective and at all times
subsequent thereto up to and on the Closing Date and on any later date on which
Option Shares are to be purchased, the Registration Statement and any amendment
or supplement thereto and any Incorporated Document, when such documents became
effective or were filed with the Commission (other than the financial statements
including supporting schedules and other financial and statistical information
derived therefrom, as to which such counsel need express no comment) contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or at the Closing Date or any later date on which the Option Shares
are to be purchased, as the case may be, the Registration Statement, the
Prospectus and
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any amendment or supplement thereto and any Incorporated Document (except as
aforesaid) contained any untrue statement of a material fact or omitted to state
a material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading. Such counsel shall
also state that the conditions for the use of Form S-3 set forth in the General
Instructions thereto have been satisfied.
Counsel rendering the foregoing opinion may rely as to questions of
law not involving the laws of the United States or the Commonwealth of
Massachusetts and State of Delaware upon opinions of local counsel, and as to
questions of fact upon representations or certificates of officers of the
Company, and of government officials, in which case their opinion is to state
that they are so relying and that they have no knowledge of any material
misstatement or inaccuracy in any such opinion, representation or certificate.
Copies of any opinion, representation or certificate so relied upon shall be
delivered to you, as Representatives of the Underwriters, and to Underwriters'
Counsel.
(e) You shall have received on the Closing Date and on any later date
on which Option Shares are to be purchased, as the case may be, the following
opinion of David P. Gordon, patent counsel for the Company, dated the Closing
Date or such later date on which Option Shares are to be purchased, addressed to
the Underwriters and with reproduced copies or signed counterparts thereof for
each of the Underwriters, to the effect that:
(i) To the best of such counsel's knowledge, in the sections
of the Registration Statement and Prospectus titled "Risk Factors --
Our Success Depends on Intellectual Property" and "Business -- Patents
and Licenses" the descriptions of statutes, legal and governmental
proceedings, contracts and other documents relating to the Company's
patents, patent rights, inventions, trade secrets, know-how,
proprietary techniques, trademarks, service marks, trade names and
copyrights ("Intellectual Property") to the extent that they relate to
the Company's business do not contain any material misstatement;
(ii) The Company has duly and properly filed the U.S. patent
applications, listed in the Prospectus under the caption "Business --
Patents and Licenses," and has duly and properly informed and
instructed foreign patent attorneys and/or agents to duly and properly
file the foreign patent applications listed in the Registration
Statement and Prospectus under the caption "Business -- Patents and
Licenses," and to the best of such counsel's knowledge, said foreign
patent attorneys and/or agents have duly and properly filed the
foreign patent applications listed in the Registration Statement and
Prospectus under the caption "Business -- Patents and Licenses," and
except as disclosed in the Prospectus, the Company duly holds the U.S.
patents listed in the Registration Statement and Prospectus under the
caption "Business -- Patents and Licenses," and to the best of such
counsel's knowledge, duly hold the foreign patents listed in the
Registration Statement and Prospectus under the caption "Business --
Patents and Licenses;"
(iii) To the best of such counsel's knowledge, the Company has
not received any notice from any other person pertaining to or
challenging the right of the Company to use any patents owned or used
by or licensed to the Company;
(iv) To the best of such counsel's knowledge, except as
disclosed in the Prospectus, the Company has conducted its business
without claim of infringement of any United States or foreign patents
of others;
(v) To the best of such counsel's knowledge, other than
pending patent and trademark applications, there is not pending or
threatened any action, suit or proceeding to which the Company is a
party, before or by any court or governmental agency or body, relating
to patents or patent rights or patent applications for the Company's
products; and
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<PAGE>
(vi) Such counsel has reviewed the sections of the Registration
Statement and Prospectus titled "Risk Factors -- Our Success Depends
on Intellectual Property" and "Business -- Patents and Licenses,"
which have been delivered to such counsel in connection with such
counsel's opinion, and any further amendments or supplements thereto
made by the Company prior to the Closing Date and brought to such
counsel's attention, and insofar as they concern trademarks, patents
or patent rights, or patent applications pertaining to the Company's
business or products, such counsel has no reason to believe that any
such section included in any part of the Registration Statement, when
such Registration Statement became effective, or the Prospectus
contained any material misstatement or omission.
Such counsel may advise you that, in rendering their opinion, they
have relied on certain factual representations of the Company and that they have
not independently verified the accuracy and completeness of such
representations.
(f) You shall have received on the Closing Date and on any later date
on which Option Shares are to be purchased, as the case may be, an opinion of
Hale and Dorr LLP, in form and substance satisfactory to you, with respect to
the sufficiency of all such corporate proceedings and other legal matters
relating to this Agreement and the transactions contemplated hereby as you may
reasonably require, and the Company shall have furnished to such counsel such
documents as they may have requested for the purpose of enabling them to pass
upon such matters.
(g) You shall have received on the Closing Date and on any later date
on which Option Shares are to be purchased, as the case may be, a letter from
KPMG Peat Marwick LLP addressed to the Underwriters, dated the Closing Date or
such later date on which Option Shares are to be purchased, as the case may be,
confirming that they are independent certified public accountants with respect
to the Company within the meaning of the Act and the applicable published Rules
and Regulations and based upon the procedures described in such letter delivered
to you concurrently with the execution of this Agreement (herein called the
"Original Letter"), but carried out to a date not more than five (5) business
days prior to the Closing Date or such later date on which Option Shares are to
be purchased, as the case may be, (i) confirming, to the extent true, that the
statements and conclusions set forth in the Original Letter are accurate as of
the Closing Date or such later date on which Option Shares are to be purchased,
as the case may be, and (ii) setting forth any revisions and additions to the
statements and conclusions set forth in the Original Letter which are necessary
to reflect any changes in the facts described in the Original Letter since the
date of such letter, or to reflect the availability of more recent financial
statements, data or information. The letter shall not disclose any change in
the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries considered as one
enterprise from that set forth in the Registration Statement or Prospectus,
which, in your sole judgment, is material and adverse and that makes it, in your
sole judgment, impracticable or inadvisable to proceed with the public offering
of the Shares as contemplated by the Prospectus. The Original Letter from KPMG
Peat Marwick LLP shall be addressed to or for the use of the Underwriters in
form and substance satisfactory to the Underwriters and shall (i) represent, to
the extent true, that they are independent certified public accountants with
respect to the Company within the meaning of the Act and the applicable
published Rules and Regulations, (ii) set forth their opinion with respect to
their examination of the consolidated balance sheet of the Company as of
December 31, 1997 and related consolidated statements of operations,
shareholders' equity, and cash flows for the twelve (12) months ended December
31, 1997, (iii) state that KPMG Peat Marwick LLP has performed the procedures
set out in Statement on Auditing Standards No. 71 ("SAS 71") for a review of
interim financial information and providing the report of KPMG Peat Marwick LLP
has described in SAS 71 on the financial statements for each of the quarters in
the three-quarter period ended September 30, 1998 (the "Quarterly Financial
Statements"), (iv) state that in the course of such review, nothing came to
their attention that leads them to believe that any material modifications need
to be made to any of the Quarterly Financial Statements in order for them to be
in compliance with generally accepted accounting principles consistently applied
across the periods presented, and (v) address other matters agreed upon by KPMG
Peat Marwick LLP and you. In addition, you shall have received from KPMG Peat
Marwick LLP a letter addressed to the Company and made available to you for the
use of the Underwriters stating that their review of the Company's system of
internal accounting controls, to the extent they deemed necessary in
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<PAGE>
establishing the scope of their examination of the Company's consolidated
financial statements as of December 31, 1997, did not disclose any weaknesses in
internal controls that they considered to be material weaknesses.
(h) You shall have received on the Closing Date and on any later date
on which Option Shares are to be purchased, as the case may be, a certificate of
the Company, dated the Closing Date or such later date on which Option Shares
are to be purchased, as the case may be, signed by the Chief Executive Officer
and Chief Financial Officer of the Company, to the effect that, and you shall be
satisfied that:
(i) The representations and warranties of the Company in this
Agreement are true and correct, as if made on and as of the Closing
Date or any later date on which Option Shares are to be purchased, as
the case may be, and the Company has complied with all the agreements
and satisfied all the conditions on its part to be performed or
satisfied at or prior to the Closing Date or any later date on which
Option Shares are to be purchased, as the case may be;
(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that
purpose have been instituted or are pending or threatened under the
Act;
(iii) When the Registration Statement became effective and at
all times subsequent thereto up to the delivery of such certificate,
the Registration Statement and the Prospectus, and any amendments or
supplements thereto and the Incorporated Documents, when such
Incorporated Documents became effective or were filed with the
Commission, contained all material information required to be included
therein by the Act and the Rules and Regulations or the Exchange Act
and the applicable rules and regulations of the Commission thereunder,
as the case may be, and in all material respects conformed to the
requirements of the Act and the Rules and Regulations or the Exchange
Act and the applicable rules and regulations of the Commission
thereunder, as the case may be, the Registration Statement, and any
amendment or supplement thereto, did not and does not include any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading, the Prospectus, and any amendment or
supplement thereto, did not and does not include any untrue statement
of a material fact or omit to state a material fact necessary to make
the statements therein, in the light of the circumstances under which
they were made, not misleading, and, since the effective date of the
Registration Statement, there has occurred no event required to be set
forth in an amended or supplemented Prospectus which has not been so
set forth; and
(iv) Subsequent to the respective dates as of which information
is given in the Registration Statement and Prospectus, there has not
been (a) any material adverse change in the condition (financial or
otherwise), earnings, operations, business or business prospects of
the Company and its subsidiaries considered as one enterprise, (b) any
transaction that is material to the Company and its subsidiaries
considered as one enterprise, except transactions entered into in the
ordinary course of business, (c) any obligation, direct or contingent,
that is material to the Company and its subsidiaries considered as one
enterprise, incurred by the Company or its subsidiaries, except
obligations incurred in the ordinary course of business, (d) any
change in the capital stock or outstanding indebtedness of the Company
or any of its subsidiaries that is material to the Company and its
subsidiaries considered as one enterprise, (e) any dividend or
distribution of any kind declared, paid or made on the capital stock
of the Company or any of its subsidiaries, or (f) any loss or damage
(whether or not insured) to the property of the Company or any of its
subsidiaries which has been sustained or will have been sustained
which has a material adverse effect on the condition (financial or
otherwise), earnings, operations, business or business prospects of
the Company and its subsidiaries considered as one enterprise.
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<PAGE>
(i) The Company shall have obtained and delivered to you an agreement
from each officer and director of the Company and each beneficial owner of
________ or more shares of Common Stock in writing prior to the date hereof that
such person will not, during the Lock-up Period, effect the Disposition of any
Securities now owned or hereafter acquired directly by such person or with
respect to which such person has or hereafter acquires the power of disposition,
otherwise than (i) as a bona fide gift or gifts, provided the donee or donees
thereof agree in writing to be bound by this restriction, (ii) as a distribution
to limited partners or shareholders of such person, provided that the
distributees thereof agree in writing to be bound by the terms of this
restriction, (iii) to any trust, the beneficiaries of which are exclusively such
person or the immediate family of such person, provided that the trustee of the
trust agrees to be bound by the terms of this restriction and provided further
that any such transfer shall not involve a disposition for value (for purposes
of the foregoing, "immediate family" shall mean any relationship by blood,
marriage or adoption, not more remote than first cousin) or (iv) with the prior
written consent of BancBoston Robertson Stephens Inc. The foregoing restriction
shall have been expressly agreed to preclude the holder of the Securities from
engaging in any hedging or other transaction which is designed to or reasonably
expected to lead to or result in a Disposition of Securities during the Lock-up
Period, even if such Securities would be disposed of by someone other than the
such holder. Such prohibited hedging or other transactions would including,
without limitation, any short sale (whether or not against the box) or any
purchase, sale or grant of any right (including, without limitation, any put or
call option) with respect to any Securities or with respect to any security
(other than a broad-based market basket or index) that includes, relates to or
derives any significant part of its value from Securities. Furthermore, such
person will have also agreed and consented to the entry of stop transfer
instructions with the Company's transfer agent against the transfer of the
Securities held by such person except in compliance with this restriction.
(j) The Company shall have furnished to you such further certificates
and documents as you shall reasonably request (including certificates of
officers of the Company as to the accuracy of the representations and warranties
of the Company herein, as to the performance by the Company of its obligations
hereunder and as to the other conditions concurrent and precedent to the
obligations of the Underwriters hereunder).
All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
to Underwriters' Counsel. The Company will furnish you with such number of
conformed copies of such opinions, certificates, letters and documents as you
shall reasonably request.
7. Option Shares.
-------------
(a) On the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth, the
Company hereby grants to the several Underwriters, for the purpose of covering
over-allotments in connection with the distribution and sale of the Firm Shares
only, a nontransferable option to purchase up to an aggregate of 255,000 Option
Shares at the purchase price per share for the Firm Shares set forth in Section
3 hereof. Such option may be exercised by the Representatives on behalf of the
several Underwriters on one (1) or more occasions in whole or in part during the
period of thirty (30) days after the date on which the Firm Shares are initially
offered to the public, by giving written notice to the Company. The number of
Option Shares to be purchased by each Underwriter upon the exercise of such
option shall be the same proportion of the total number of Option Shares to be
purchased by the several Underwriters pursuant to the exercise of such option as
the number of Firm Shares purchased by such Underwriter (set forth in Schedule A
hereto) bears to the total number of Firm Shares purchased by the several
Underwriters (set forth in Schedule A hereto), adjusted by the Representatives
in such manner as to avoid fractional shares.
Delivery of definitive certificates for the Option Shares to be
purchased by the several Underwriters pursuant to the exercise of the option
granted by this Section 7 shall be made against payment of the purchase price
therefor by the several Underwriters by certified or official bank check or
checks drawn in next-day funds, payable to the order of the Company (and the
Company agrees not to deposit any such check in the bank on which it is drawn,
and not to take any other action with the purpose or effect of receiving
immediately available funds, until the business day following the date of its
delivery to the Company). In the event of any breach of the foregoing, the
Company shall reimburse the Underwriters for the interest lost and any other
expenses borne by them by reason of such breach. Such
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<PAGE>
delivery and payment shall take place at the offices of Testa, Hurwitz &
Thibeault, LLP, High Street Tower, 125 High Street, Boston, Massachusetts 02110
or at such other place as may be agreed upon among the Representatives and the
Company (i) on the Closing Date, if written notice of the exercise of such
option is received by the Company at least two (2) full business days prior to
the Closing Date, or (ii) on a date which shall not be later than the third
(3rd) full business day following the date the Company receives written notice
of the exercise of such option, if such notice is received by the Company less
than two (2) full business days prior to the Closing Date.
The certificates for the Option Shares to be so delivered will be made
available to you at such office or such other location including, without
limitation, in New York City, as you may reasonably request for checking at
least one (1) full business day prior to the date of payment and delivery and
will be in such names and denominations as you may request, such request to be
made at least two (2) full business days prior to such date of payment and
delivery. If the Representatives so elect, delivery of the Option Shares may be
made by credit through full fast transfer to the accounts at The Depository
Trust Company designated by the Representatives.
It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks shall not have been received by you prior to the date of
payment and delivery for the Option Shares to be purchased by such Underwriter
or Underwriters. Any such payment by you shall not relieve any such Underwriter
or Underwriters of any of its or their obligations hereunder.
(b) Upon exercise of any option provided for in Section 7(a) hereof,
the obligations of the several Underwriters to purchase such Option Shares will
be subject (as of the date hereof and as of the date of payment and delivery for
such Option Shares) to the accuracy of and compliance with the representations,
warranties and agreements of the Company herein, to the accuracy of the
statements of the Company, and officers of the Company made pursuant to the
provisions hereof, to the performance by the Company of its obligations
hereunder, to the conditions set forth in Section 6 hereof, and to the condition
that all proceedings taken at or prior to the payment date in connection with
the sale and transfer of such Option Shares shall be satisfactory in form and
substance to you and to Underwriters' Counsel, and you shall have been furnished
with all such documents, certificates and opinions as you may request in order
to evidence the accuracy and completeness of any of the representations,
warranties or statements, the performance of any of the covenants or agreements
of the Company or the satisfaction of any of the conditions herein contained.
8. Indemnification and Contribution.
--------------------------------
(a) The Company agrees to indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject (including, without
limitation, in its capacity as an Underwriter or as a "qualified independent
underwriter" within the meaning of Schedule E of the Bylaws of the NASD), under
the Act, the Exchange Act or otherwise, specifically including, but not limited
to, losses, claims, damages or liabilities (or actions in respect thereof)
arising out of or based upon (i) any breach of any representation, warranty,
agreement or covenant of the Company herein contained, (ii) any untrue statement
or alleged untrue statement of any material fact contained in the Registration
Statement or any amendment or supplement thereto, including any Incorporated
Document, or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or (iii) any untrue statement or alleged untrue statement of any
material fact contained in any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, and agrees to reimburse each Underwriter for any legal or
other expenses reasonably incurred by it in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however,
-------- -------
that the Company shall not be liable in any such case to the extent that any
such loss, claim, damage, liability or action arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in the Registration Statement, such Preliminary Prospectus or the
Prospectus, or any such amendment or supplement thereto, in reliance upon, and
in conformity with, written information relating to any Underwriter furnished to
the
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Company by such Underwriter, directly or through you, specifically for use in
the preparation thereof and, provided further, that the indemnity agreement
-------- -------
provided in this Section 8(a) with respect to any Preliminary Prospectus shall
not inure to the benefit of any Underwriter from whom the person asserting any
losses, claims, damages, liabilities or actions based upon any untrue statement
or alleged untrue statement of material fact or omission or alleged omission to
state therein a material fact purchased Shares, if a copy of the Prospectus in
which such untrue statement or alleged untrue statement or omission or alleged
omission was corrected had not been sent or given to such person within the time
required by the Act and the Rules and Regulations, unless such failure is the
result of noncompliance by the Company with Section 4(d) hereof.
The indemnity agreement in this Section 8(a) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each person, if
any, who controls any Underwriter within the meaning of the Act or the Exchange
Act. This indemnity agreement shall be in addition to any liabilities which the
Company may otherwise have.
(b) Each Underwriter, severally and not jointly, agrees to indemnify
and hold harmless the Company against any losses, claims, damages or
liabilities, joint or several, to which the Company may become subject under the
Act or otherwise, specifically including, but not limited to, losses, claims,
damages or liabilities (or actions in respect thereof) arising out of or based
upon (i) any breach of any representation, warranty, agreement or covenant of
such Underwriter herein contained, (ii) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement or any
amendment or supplement thereto, including any Incorporated Document, or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
(iii) any untrue statement or alleged untrue statement of any material fact
contained in any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto, or the omission or alleged omission to state therein a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, in the case of
subparagraphs (ii) and (iii) of this Section 8(b) to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with written
information furnished to the Company by such Underwriter, directly or through
you, specifically for use in the preparation thereof, and agrees to reimburse
the Company for any legal or other expenses reasonably incurred by the Company
in connection with investigating or defending any such loss, claim, damage,
liability or action.
The indemnity agreement in this Section 8(b) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each officer of
the Company who signed the Registration Statement and each director of the
Company, and each person, if any, who controls the Company within the meaning of
the Act or the Exchange Act. This indemnity agreement shall be in addition to
any liabilities which each Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section
8 of notice of the commencement of any action, such indemnified party shall, if
a claim in respect thereof is to be made against any indemnifying party under
this Section 8, notify the indemnifying party in writing of the commencement
thereof but the omission so to notify the indemnifying party will not relieve it
from any liability which it may have to any indemnified party otherwise than
under this Section 8. In case any such action is brought against any
indemnified party, and it notified the indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate therein and, to
the extent that it shall elect by written notice delivered to the indemnified
party promptly after receiving the aforesaid notice from such indemnified party,
to assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party; provided, however, that if the defendants in any such action
-------- -------
include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be legal
defenses available to it and/or other indemnified parties which are different
from or additional to those available to the indemnifying party, the indemnified
party or parties shall have the right to select separate counsel to assume such
legal defenses and to otherwise participate in the defense of such action on
behalf of such indemnified party or parties. Upon receipt of notice from the
indemnifying party to such indemnified party of the indemnifying party's
election so to assume the defense of such action and approval by the indemnified
party of counsel, the indemnifying party will not be liable to such indemnified
party under this Section 8 for any legal or other expenses
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<PAGE>
subsequently incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party shall have employed separate counsel in
accordance with the proviso to the next preceding sentence (it being understood,
however, that the indemnifying party shall not be liable for the expenses of
more than one separate counsel (together with appropriate local counsel)
approved by the indemnifying party representing all the indemnified parties
under Section 8(a) or 8(b) hereof who are parties to such action), (ii) the
indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable time
after notice of commencement of the action or (iii) the indemnifying party has
authorized the employment of counsel for the indemnified party at the expense of
the indemnifying party. In no event shall any indemnifying party be liable in
respect of any amounts paid in settlement of any action unless the indemnifying
party shall have approved the terms of such settlement; provided that such
--------
consent shall not be unreasonably withheld. No indemnifying party shall,
without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened proceeding in respect of which any
indemnified party is or could have been a party and indemnification could have
been sought hereunder by such indemnified party, unless such settlement includes
an unconditional release of such indemnified party from all liability on all
claims that are the subject matter of such proceeding.
(d) In order to provide for just and equitable contribution in any
action in which a claim for indemnification is made pursuant to this Section 8
but it is judicially determined (by the entry of a final judgment or decree by a
court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 8 provides for
indemnification in such case, all the parties hereto shall contribute to the
aggregate losses, claims, damages or liabilities to which they may be subject
(after contribution from others) in such proportion so that the Underwriters
severally and not jointly are responsible pro rata for the portion represented
by the percentage that the underwriting discount bears to the initial public
offering price, and the Company is responsible for the remaining portion,
provided, however, that (i) no Underwriter shall be required to contribute any
- -------- -------
amount in excess of the amount by which the underwriting discount applicable to
the Shares purchased by such Underwriter exceeds the amount of damages which
such Underwriter has otherwise required to pay and (ii) no person guilty of a
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation. The contribution agreement in this Section 8(d)
shall extend upon the same terms and conditions to, and shall inure to the
benefit of, each person, if any, who controls any Underwriter, the Company
within the meaning of the Act or the Exchange Act and each officer of the
Company who signed the Registration Statement and each director of the Company.
(e) The parties to this Agreement hereby acknowledge that they are
sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions hereof including, without limitation, the
provisions of this Section 8, and are fully informed regarding said provisions.
They further acknowledge that the provisions of this Section 8 fairly allocate
the risks in light of the ability of the parties to investigate the Company and
its business in order to assure that adequate disclosure is made in the
Registration Statement and Prospectus as required by the Act and the Exchange
Act.
9. Representations, Warranties, Covenants and Agreements to Survive
----------------------------------------------------------------
Delivery. All representations, warranties, covenants and agreements of the
- --------
Company and the Underwriters herein or in certificates delivered pursuant
hereto, and the indemnity and contribution agreements contained in Section 8
hereof shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter within the meaning of the Act or the Exchange Act, or by or on
behalf of the Company or any of its officers, directors or controlling persons
within the meaning of the Act or the Exchange Act, and shall survive the
delivery of the Shares to the several Underwriters hereunder or termination of
this Agreement.
10. Substitution of Underwriters. If any Underwriter or Underwriters
----------------------------
shall fail to take up and pay for the number of Firm Shares agreed by such
Underwriter or Underwriters to be purchased hereunder upon tender of such Firm
Shares in accordance with the terms hereof, and if the aggregate number of Firm
Shares which such defaulting Underwriter or Underwriters so agreed but failed to
purchase does not exceed 10% of the Firm Shares, the remaining
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<PAGE>
Underwriters shall be obligated, severally in proportion to their respective
commitments hereunder, to take up and pay for the Firm Shares of such defaulting
Underwriter or Underwriters.
If any Underwriter or Underwriters so defaults and the aggregate
number of Firm Shares which such defaulting Underwriter or Underwriters agreed
but failed to take up and pay for exceeds 10% of the Firm Shares, the remaining
Underwriters shall have the right, but shall not be obligated, to take up and
pay for (in such proportions as may be agreed upon among them) the Firm Shares
which the defaulting Underwriter or Underwriters so agreed but failed to
purchase. If such remaining Underwriters do not, at the Closing Date, take up
and pay for the Firm Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase, the Closing Date shall be postponed for twenty-
four (24) hours to allow the several Underwriters the privilege of substituting
within twenty-four (24) hours (including non-business hours) another underwriter
or underwriters (which may include any nondefaulting Underwriter) satisfactory
to the Company. If no such underwriter or underwriters shall have been
substituted as aforesaid by such postponed Closing Date, the Closing Date may,
at the option of the Company, be postponed for a further twenty-four (24) hours,
if necessary, to allow the Company the privilege of finding another underwriter
or underwriters, satisfactory to you, to purchase the Firm Shares which the
defaulting Underwriter or Underwriters so agreed but failed to purchase. If it
shall be arranged for the remaining Underwriters or substituted underwriter or
underwriters to take up the Firm Shares of the defaulting Underwriter or
Underwriters as provided in this Section 10, (i) the Company shall have the
right to postpone the time of delivery for a period of not more than seven (7)
full business days, in order to effect whatever changes may thereby be made
necessary in the Registration Statement or the Prospectus, or in any other
documents or arrangements, and the Company agrees promptly to file any
amendments to the Registration Statement, supplements to the Prospectus or other
such documents which may thereby be made necessary, and (ii) the respective
number of Firm Shares to be purchased by the remaining Underwriters and
substituted underwriter or underwriters shall be taken as the basis of their
underwriting obligation. If the remaining Underwriters shall not take up and
pay for all such Firm Shares so agreed to be purchased by the defaulting
Underwriter or Underwriters or substitute another underwriter or underwriters as
aforesaid and the Company shall not find or shall not elect to seek another
underwriter or underwriters for such Firm Shares as aforesaid, then this
Agreement shall terminate.
In the event of any termination of this Agreement pursuant to the
preceding paragraph of this Section 10, the Company shall not be liable to any
Underwriter (except as provided in Sections 4(i), 5 and 8 hereof) nor shall any
Underwriter (other than an Underwriter who shall have failed, otherwise than for
some reason permitted under this Agreement, to purchase the number of Firm
Shares agreed by such Underwriter to be purchased hereunder, which Underwriter
shall remain liable to the Company, and the other Underwriters for damages, if
any, resulting from such default) be liable to the Company (except to the extent
provided in Sections 5 and 8 hereof).
The term "Underwriter" in this Agreement shall include any person
substituted for an Underwriter under this Section 10.
11. Effective Date of this Agreement and Termination.
------------------------------------------------
(a) This Agreement shall become effective at the earlier of (i) 6:30
A.M., San Francisco time, on the first full business day following the effective
date of the Registration Statement, or (ii) the time of the initial public
offering of any of the Shares by the Underwriters after the Registration
Statement becomes effective. The time of the initial public offering shall mean
the time of the release by you, for publication, of the first newspaper
advertisement relating to the Shares, or the time at which the Shares are first
generally offered by the Underwriters to the public by letter, telephone,
telegram or telecopy, whichever shall first occur. By giving notice as set
forth in Section 12 before the time this Agreement becomes effective, you, as
Representatives of the several Underwriters, or the Company, may prevent this
Agreement from becoming effective without liability of any party to any other
party, except as provided in Sections 4(i), 5 and 8 hereof.
(b) You, as Representatives of the several Underwriters, shall have
the right to terminate this Agreement by giving notice as hereinafter specified
at any time on or prior to the Closing Date or on or prior to any
-24-
<PAGE>
later date on which Option Shares are to be purchased, as the case may be, (i)
if the Company shall have failed, refused or been unable to perform any
agreement on its part to be performed, or because any other condition of the
Underwriters' obligations hereunder required to be fulfilled is not fulfilled,
including, without limitation, any change in the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company
and its subsidiaries considered as one enterprise from that set forth in the
Registration Statement or Prospectus, which, in your sole judgment, is material
and adverse, or (ii) if additional material governmental restrictions, not in
force and effect on the date hereof, shall have been imposed upon trading in
securities generally or minimum or maximum prices shall have been generally
established on the New York Stock Exchange or on the American Stock Exchange or
in the over the counter market by the NASD, or trading in securities generally
shall have been suspended on either such exchange or in the over the counter
market by the NASD, or if a banking moratorium shall have been declared by
federal, New York or California authorities, or (iii) if the Company shall have
sustained a loss by strike, fire, flood, earthquake, accident or other calamity
of such character as to interfere materially with the conduct of the business
and operations of the Company regardless of whether or not such loss shall have
been insured, or (iv) if there shall have been a material adverse change in the
general political or economic conditions or financial markets as in your
reasonable judgment makes it inadvisable or impracticable to proceed with the
offering, sale and delivery of the Shares, or (v) if there shall have been an
outbreak or escalation of hostilities or of any other insurrection or armed
conflict or the declaration by the United States of a national emergency which,
in the reasonable opinion of the Representatives, makes it impracticable or
inadvisable to proceed with the public offering of the Shares as contemplated by
the Prospectus. In the event of termination pursuant to subparagraph (i) above,
the Company shall remain obligated to pay costs and expenses pursuant to
Sections 4(i), 5 and 8 hereof. Any termination pursuant to any of subparagraphs
(ii) through (v) above shall be without liability of any party to any other
party except as provided in Sections 5 and 8 hereof.
If you elect to prevent this Agreement from becoming effective or to
terminate this Agreement as provided in this Section 11, you shall promptly
notify the Company by telephone, telecopy or telegram, in each case confirmed by
letter. If the Company shall elect to prevent this Agreement from becoming
effective, the Company shall promptly notify you by telephone, telecopy or
telegram, in each case, confirmed by letter.
12. Notices. All notices or communications hereunder, except as herein
-------
otherwise specifically provided, shall be in writing and if sent to you shall be
mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and
confirmed by letter) to you c/o BancBoston Robertson Stephens Inc., 555
California Street, Suite 2600, San Francisco, California 94104, telecopier
number (415) 781-0278, Attention: General Counsel; if sent to the Company, such
notice shall be mailed, delivered, telegraphed (and confirmed by letter) or
telecopied (and confirmed by letter) to TranSwitch Corporation, Three Enterprise
Drive, Shelton, Connecticut 06484, telecopier number (203) 929-8810, Attention:
Dr. Santanu Das, Chief Executive Officer.
13. Parties. This Agreement shall inure to the benefit of and be binding
-------
upon the several Underwriters and the Company and their respective executors,
administrators, successors and assigns. Nothing expressed or mentioned in this
Agreement is intended or shall be construed to give any person or entity, other
than the parties hereto and their respective executors, administrators,
successors and assigns, and the controlling persons within the meaning of the
Act or the Exchange Act, officers and directors referred to in Section 8 hereof,
any legal or equitable right, remedy or claim in respect of this Agreement or
any provisions herein contained, this Agreement and all conditions and
provisions hereof being intended to be and being for the sole and exclusive
benefit of the parties hereto and their respective executors, administrators,
successors and assigns and said controlling persons and said officers and
directors, and for the benefit of no other person or entity. No purchaser of
any of the Shares from any Underwriter shall be construed a successor or assign
by reason merely of such purchase.
In all dealings with the Company under this Agreement, you shall act
on behalf of each of the several Underwriters, and the Company shall be entitled
to act and rely upon any statement, request, notice or agreement made or given
by you jointly or by BancBoston Robertson Stephens Inc. on behalf of you.
-25-
<PAGE>
14. Applicable Law. This Agreement shall be governed by, and construed in
--------------
accordance with, the internal laws of the State of New York.
15. Counterparts. This Agreement may be signed in several counterparts,
------------
each of which will constitute an original.
-26-
<PAGE>
If the foregoing correctly sets forth the understanding among the Company
and the several Underwriters, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement among
the Company and the several Underwriters.
Very truly yours,
TRANSWITCH CORPORATION
By
---------------------------------------
Dr. Santanu Das
Chairman of the Board, President and
Chief Executive Officer
Accepted as of the date first above written:
BANCBOSTON ROBERTSON STEPHENS INC.
NATIONSBANC MONTGOMERY SECURITIES LLC
ADVEST, INC.
On their behalf and on behalf of each of the
several Underwriters named in Schedule A hereto.
By BANCBOSTON ROBERTSON STEPHENS INC.
By ---------------------------------------------
Authorized Signatory
-27-
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Firm Shares
To Be
Underwriters Purchased
- ------------ -----------
<S> <C>
BancBoston Robertson Stephens Inc......
NationsBanc Montgomery Securities LLC..
Advest, Inc............................
-----------
Total.............................
===========
</TABLE>
<PAGE>
EXHIBIT 5.1
-----------
December 16, 1998
TranSwitch Corporation
Three Enterprise Drive
Shelton, CT 06484
RE: Registration Statement on Form S-3
Relating to 1,955,000 shares of Common Stock
--------------------------------------------
Dear Sir or Madam:
We are counsel to TranSwitch Corporation, a Delaware corporation (the
"Company"), and have represented the Company in connection with the preparation
and filing of the Company's Registration Statement on Form S-3 (the
"Registration Statement"), covering the offer and sale by the Company of up to
1,955,000 shares of the Company's Common Stock, $.001 par value per share (the
"Shares"), pursuant to the terms described in the Registration Statement.
The 1,955,000 shares of Common Stock covered by the Registration Statement
consist of 1,700,000 shares of Common Stock being sold by the Company and an
additional 255,000 shares subject to an over-allotment option granted by the
Company to the underwriters named in the prospectus (the "Prospectus") included
in the Registration Statement.
We have reviewed the corporate proceedings taken by the Board of Directors
of the Company with respect to the authorization and issuance of the Shares. We
have also examined and relied upon originals or copies, certified or otherwise
authenticated to our satisfaction, of all corporate records, documents,
agreements or other instruments of the Company and have made all investigations
of law and have discussed with the Company's officers all questions of fact that
we have deemed necessary or appropriate.
Based upon and subject to the foregoing, we are of the opinion that the
Shares have been duly and validly authorized and, when issued pursuant to the
Underwriting Agreement filed as an exhibit to the Registration Statement, the
Shares will be legally issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to our firm in the Prospectus
contained in the Registration Statement under the caption "Legal Matters."
Very truly yours,
/s/ Testa, Hurwitz & Thibeault, LLP
Testa, Hurwitz & Thibeault, LLP
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of TranSwitch Corporation:
We consent to the use of our reports included herein and incorporated by
reference and to the reference to our firm under the heading "Experts" in the
prospectus.
KPMG Peat Marwick LLP
Stamford, Connecticut
December 16, 1998
1
