<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10 - Q
[ x ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
for the quarterly period ended March 31, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
for the transition period from ____________ to ____________
Commission File Number 0-25996
TRANSWITCH CORPORATION
(Exact name of Registrant as Specified in its Charter)
Delaware 06-1236189
(State of Incorporation) (I.R.S. Employer Identification Number)
3 Enterprise Drive
Shelton, Connecticut 06484
(Address of Principal Executive Offices)
Telephone (203) 929-8810
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ----
COMMON STOCK, PAR VALUE $.001 PER SHARE, OUTSTANDING AT APRIL 30, 1998:
13,392,568 SHARES.
Page 1 of 13
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TranSwitch Corporation
INDEX
For the quarter ended March 31, 1998
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1998
and December 31, 1997 3
Consolidated Statements of Operations for the Three
Months Ended March 31, 1998 and 1997 4
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
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Page 2 of 13
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Part I FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
TranSwitch Corporation
Consolidated Balance Sheets
(in thousands, except share data) March 31, December 31,
ASSETS 1998 1997
------ --------- -----------
<S> <C> <C>
Current assets: (unaudited)
Cash and cash equivalents $ 19,904 $ 20,508
Short term investments 1,110 1,110
Accounts receivable, net 5,559 4,528
Inventories, net 5,436 4,812
Prepaid expenses and other current assets 743 815
--------- -----------
Total current assets 32,752 31,773
Property and equipment, net 3,630 3,816
Product licenses, net 889 1,000
--------- -----------
Total Assets $ 37,271 $ 36,589
============ ========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 2,116 $ 1,350
Accrued liabilities 2,851 3,708
Product license fee payable, current portion 1,162 1,067
--------- -----------
Total current liabilities 6,129 6,125
Product license fee payable, less current portion - 303
Stockholders' equity:
Convertible Preferred Stock $0.01 par value; authorized 15,000 7,750 14,357
shares; issued and outstanding 14,500 shares December 31,1997;
7,750 shares March 31, 1998
Common Stock, $.001 par value; authorized 25,000,000 shares;
issued and outstanding 12,318,271 shares December 31, 1997;
13,297,893 shares March 31, 1998 13 12
Additional paid in capital 52,779 45,753
Accumulated deficit (29,400) (29,961)
--------- -----------
Total stockholders' equity 31,142 30,161
--------- -----------
Total Liabilities and Stockholders' Equity $ 37,271 $ 36,589
========================================== ========= ===========
</TABLE>
Page 3 of 13
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<TABLE>
<CAPTION>
TranSwitch Corporation
Consolidated Statements of Operations
Unaudited
(in thousands, except per share data)
Three Months Ended
March 31,
1998 1997
-------- --------
<S> <C> <C>
Net Revenues $ 8,606 $ 5,056
Cost of Revenues 3,354 2,374
-------- --------
Gross Profit 5,252 2,682
Operating Expenses:
Research and development 2,543 2,398
Marketing and sales 1,818 1,501
General and administrative 564 518
-------- --------
Total Operating Expenses 4,925 4,417
-------- --------
Operating Income (Loss) 327 (1,735)
Interest Income, net 234 143
-------- --------
Net Income (Loss) $ 561 $ (1,592)
======== ========
Basic Earnings (Loss) per Common Share $ 0.04 $ (0.13)
Weighted Average Number of
Common Shares Outstanding 13,270 12,033
======== ========
Diluted Earnings (Loss) per Common Share $ 0.04 $ (0.13)
Weighted Average Number of
Common Shares and Equivalents Outstanding 14,610 12,033
======== ========
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Page 4 of 13
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TranSwitch Corporation
Consolidated Statements of Cash Flows
Unaudited
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 561 $ (1,592)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 551 376
Stock compensation expense 181 86
Changes in assets and liabilities:
(Increase) in accounts receivable (1,031) (1,515)
Decrease (increase) in prepaids and other current assets 72 (300)
(Increase) decrease in inventories (624) 98
Increase in accounts payable 766 306
(Decrease) increase in accrued liabilities (857) 357
-------- --------
Total adjustments (942) (592)
-------- --------
Net cash used in operating activities (381) (2,184)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures and purchase of product licenses (254) (829)
Purchase of short term investments -- (4,506)
Proceeds from sale of short term investments -- 8,274
-------- --------
Net cash (used in) provided by investing activities (254) 2,939
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the exercise of stock options and warrants 239 97
Payments on product license obligations (208) (113)
-------- --------
Net cash (used in) provided by financing activities 31 (16)
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (604) 739
-------- --------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 20,508 3,911
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 19,904 $ 4,650
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid for interest $ 46 $ 45
</TABLE>
Page 5 of 13
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the first quarter ended March 31, 1998
Note 1. Interim Financial Statements
- -------------------------------------
The accompanying unaudited interim financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
for reporting on Form 10-Q. Accordingly, certain information and footnotes
required by generally accepted accounting principles for complete financial
statements are not included herein. The financial statements are prepared on a
consistent basis with and should be read in conjunction with the statements and
notes thereto contained in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 filed with the Securities and Exchange
Commission on March 31, 1998.
In the opinion of management, these statements include all adjustments,
consisting of normal, recurring adjustments, which are necessary for a fair
presentation for such periods. The results of operations for any interim period
are not necessarily indicative of the results which may be achieved for the
entire fiscal year ending December 31, 1998.
Note 2. Inventories
- --------------------
Inventories are carried at the lower of cost (on a first in, first out
basis) or estimated net realizable value. Inventories are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
Raw Materials $1,131 $1,086
Work in Process 1,521 1,654
Finished Goods 2,784 2,072
------ ------
Total Inventories $5,436 $4,812
================= ====== ======
</TABLE>
Note 3. Comprehensive Income
- ----------------------------
Effective January 1, 1998, the Company adopted the Statement of Financial
Accounting Standards 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 three months ended March 31, 1998 and 1997,
comprehensive income (loss) equaled net income (loss) of $561 thousand and
($1,592) thousand, respectively.
Page 6 of 13
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the first quarter ended March 31, 1998
Note 4. Consolidated Statement of Stockholders' Equity
- -------------------------------------------------------
(in thousands, except share data)
<TABLE>
<CAPTION>
Convertible Additional
Common Stock Preferred Paid-in Accumulated
Shares Amount Stock Capital Deficit Total
---------- ---------- ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
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 133,355 -- -- 294 -- 294
Deemed dividend on convertible preferred stock -- -- 143 (143) -- --
Issuance cost of convertible preferred stock -- -- -- (55) -- (55)
Shares of common stock issued upon conversion
of preferred stock 846,267 1 (6,750) 6,749 -- --
Compensation related to issuance of stock options -- -- -- 181 -- 181
Net Income -- -- -- -- 561 561
---------- ---------- ---------- ---------- ---------- ----------
Balance at March 31, 1998 13,297,893 $ 13 $ 7,750 $52,779 ($29,400) $31,142
========================= ========== ========== ========== ========== ========== ==========
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Page 7 of 13
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
GENERAL
TranSwitch Corporation, a Delaware Corporation ("TranSwitch" or the
"Company") was organized and commenced operations in April 1988. Since its
incorporation, the Company has designed, sourced and marketed highly integrated
digital and mixed-signal semiconductor solutions for the telecommunications and
data communications markets. The Company's customers are the original equipment
manufacturers (OEM's) who serve three communications market segments: worldwide
public network infrastructure, including cable television (CATV), internet
infrastructure and corporate wide area networks (WAN). The Company's products
are generally incorporated into OEM's products at the design stage, which often
requires significant expenditures by the Company well in advance of substantial
orders from the customer.
The Company believes that period to period comparisons of its financial
results are not necessarily meaningful and should not be relied upon as an
indication of future performance. In addition, the Company's results of
operations may fluctuate from period to period in the future.
THREE MONTH PERIODS ENDED MARCH 31, 1998 AND MARCH 31, 1997
REVENUE
The Company derives its revenues principally from product sales. Total
revenues for the quarter ended March 31, 1998 were $8.6 million, representing a
70.2% increase from the $5.1 million recorded in the prior year comparable
period. The increase in net revenue in the quarter is primarily attributable to
increase in sales with respect to the SONET/SDH product lines and also moderate
growth in both the Asynchronous and ATM product lines.
GROSS PROFIT
Gross profit increased to $5.3 million for the quarter ended March 31, 1998
from $2.7 million in the corresponding period of the prior year. The increase in
gross profit for the first quarter of 1998 was primarily the result of higher
volume in the quarter versus the comparable quarter a year ago. Gross margin was
61.0% for the quarter ended March 31, 1998 as compared to 53.1% for the quarter
ended March 31, 1997. The increase in the gross margin is primarily attributable
to the higher volume absorbing fixed costs for the period.
RESEARCH AND DEVELOPMENT
Research and development expenses were 29.5% of total revenues for the
quarter ended
Page 8 of 13
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March 31, 1998 as compared to 47.4% of total revenues for the quarter ended
March 31, 1997. Total spending increased 4.2% to $2.5 million for the quarter
ended March 31, 1998 as compared to $2.4 million for the quarter ended March 31,
1997. The increases were the result of the Company's continued investment in
research and development activities. The decrease as a percentage of total
revenue in the quarter is attributed to the increase in the revenue level in the
first quarter of 1998.
MARKETING AND SALES
Marketing and sales expenses were 21.1% of total revenues for the quarter
ended March 31, 1998 compared to 29.7% for the quarter ended March 31, 1997. The
marketing and sales expenses increased 21.0% to $1.8 million for the quarter
ended March 31, 1998 compared to $1.5 million for the quarter ended March 31,
1997. The increase in spending was the result of the costs associated with the
higher revenue in the first quarter of 1998, the increase in marketing and sales
personnel and expansion of the Company's distribution network as part of the
Company's continued investment in its marketing and sales infrastructure. The
decrease as a percentage of total revenue in the quarter is attributed to the
increase in the revenue level in the first quarter of 1998.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the quarter ended March 31, 1998
increased to $564,000 from $518,000 for the same quarter in the prior year, and
as a percentage of total revenues decreased to 6.6% for the quarter ended March
31, 1998 compared to 10.2% for the quarter ended March 31, 1997. The increase in
expense in actual dollars is nominal. The decrease as a percentage of total
revenue in the quarter is attributed to the increase in the revenue level in the
first quarter of 1998.
INTEREST INCOME, NET
Interest income, net of interest expense, was $234,000 in the quarter ended
March 31, 1998 compared to $143,000 in the quarter ended March 31, 1997. The
increase in interest income, net is primarily the result of the increase in cash
between the two periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations and met its capital requirements
since it was incorporated in 1988 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. On October 10, 1997 the
Company received net proceeds of $13.7 million in cash in connection with a
private placement of its Series A convertible preferred stock.
In the first three months of 1998, the Company used $381,000 of cash in its
operating
Page 9 of 13
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activities, the result of a net income of $561,000, non cash items of $732,000
and offset by an increase in working capital of $1,674 thousand. Capital
expenditures in this period were $254,000, including purchases of computer
equipment, tooling, software acquisitions and product licenses.
At March 31, 1998 the Company had cash and cash equivalents and short term
investments of approximately $21.0 million. The Company believes its existing
cash, the cash flow from operations, if any, and cash available under its lines
of credit will be sufficient to satisfy the Company's cash needs for at least
the next 12 months. However, there can be no assurance that events in the future
will not require the Company to seek additional capital sooner or, if so
required, that such capital will be available on terms favorable or acceptable
to the Company, if at all.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company does not provide financial performance forecasts. The forward
looking statements in this Form 10-Q and presented elsewhere by management from
time to time are made under the safe harbor provisions of Section 21E of the
Securities Exchange Act of 1934, as amended. The Company's operating results and
financial condition have varied and may vary in the future significantly
depending on a number of factors and involve risks and uncertainties that could
materially adversely affect revenues and profitability, including: competitive
pressures on selling prices; the timing and cancellation of customers orders;
the timing and provision of pricing protections and returns from certain
distributors; availability of foundry capacity and raw materials; fluctuations
in yields; changes in product mix; the Company's ability to introduce new
products and technologies on a timely basis; introduction of products and
technologies by the Company's competitors; market acceptance of the Company's
and its competitors' products; the level of orders received which can be shipped
in a quarter; the amount and timing of recognition of non-recurring engineering
revenue; the timing of investments in research and development, including
tooling expenses associated with product development and pre-production; and
whether the Company's customers buy directly from the Company or a distributor.
Sudden shortages of raw materials or production capacity constraints can lead
producers to allocate available supplies or capacity to customers with resources
greater than those of the Company, which could interrupt the Company's ability
to meet its production obligations. Historically, average selling prices in the
semiconductor industry have decreased over the life of a product, and as a
result, the average selling prices of the Company's products may be subject to
significant pricing pressures in the future. The Company's business is
characterized by short-term orders and shipment schedules, and customer orders
typically can be canceled or rescheduled without significant penalty to the
customer. Due to the absence of a substantial noncancellable backlog, the
Company typically plans its production and inventory levels based on internal
forecasts of customer demand, which are highly unpredictable and can fluctuate
substantially. Because the Company is continuing to increase its operating
expenses for personnel and new product development and for inventory in
anticipation of future sales levels, operating results would be adversely
affected if increased sales are not achieved. In addition, the Company is
limited in its ability to reduce costs quickly in response to any revenue
shortfalls. From time to time, in response to anticipated long lead times to
obtain inventory and materials from its foundries, the Company may order in
advance of anticipated customer demand, which might result
Page 10 of 13
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in excess inventory levels if expected orders fail to materialize or other
factors render the customer's products less marketable. As a result of the
foregoing and other factors, the Company may experience material fluctuations in
future operating results on a quarterly or annual basis which could materially
and adversely affect its business, financial condition, operating results and
stock price.
Page 11 of 13
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 11, Statement re: computation of per share earnings.
Exhibit 27, Financial Data Schedule (electronic format only)
(b) Reports on Form 8-K
On February 13, 1998, the Company filed a Form 8-K reporting its
unaudited financial results for its fourth quarter and the fiscal year
ended December 31, 1997.
Page 12 of 13
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TranSwitch Corporation
(Registrant)
Date: May 8, 1998 /s/ Dr. Santanu Das
----------------------------
Dr. Santanu Das
President, Chief Executive Officer
(Principal Executive Officer)
/s/ Michael F. Stauff
-----------------------------
Michael F. Stauff
Senior Vice President and Chief
Financial Officer and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
Page 13 of 13
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Exhibit 11:
TranSwitch Corporation
Computation of Earnings per Share (1)
Unaudited
(in thousands, except per share data)
Three Months Ended
March 31,
1998 1997
-------- --------
Basic earnings (loss) per share:
Net income (loss) $ 561 $ (1,592)
======== ========
Weighted average number of common shares
outstanding during the period 13,270 12,033
Basic earnings (loss) per share $ 0.04 $ (0.13)
======== ========
Diluted earnings (loss) per share:
Net income (loss) $ 561 $ --
======== ========
Weighted average number of common shares
outstanding during the period 13,270 --
Common stock issuable with respect to:
Stock options and warrants 607 --
Convertible preferred stock 733 --
-------- --------
Adjusted weighted average number of shares 14,610 --
outstanding during the period
Diluted earnings (loss) per share $ 0.04 $ -- (2)
======== ========
- ----------
(1) This exhibit should be read in connection with "Consolidated Statement of
Stockholders' Equity" in Note 4 of the notes to the Consolidated Financial
Statements.
(2) Diluted per share amount is the same as basic for the three months ended
March 31, 1998.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 19,904
<SECURITIES> 1,110
<RECEIVABLES> 5,777
<ALLOWANCES> 218
<INVENTORY> 5,435
<CURRENT-ASSETS> 32,752
<PP&E> 9,780
<DEPRECIATION> 6,150
<TOTAL-ASSETS> 37,271
<CURRENT-LIABILITIES> 6,129
<BONDS> 0
0
7,750
<COMMON> 13
<OTHER-SE> 23,379
<TOTAL-LIABILITY-AND-EQUITY> 37,271
<SALES> 8,606
<TOTAL-REVENUES> 8,606
<CGS> 3,354
<TOTAL-COSTS> 4,925
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 561
<INCOME-TAX> 0
<INCOME-CONTINUING> 561
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 561
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
