<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X]Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Fiscal Year Ended December 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)
Three 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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of Common Stock on February 26,
1999, as reported on the Nasdaq National Market, was approximately
$480,786,370. Shares of Common Stock held by each executive officer and
director and by each person who to the Company's knowledge owns 5% or more of
the outstanding voting stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
Common Stock, par value $.001 per share, outstanding at February 28, 1999:
16,541,620
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following document are incorporated by reference in Part III of
this Form 10-K Report:
(1) Proxy Statement for Registrant's 1999 Annual Meeting of Shareholders--
Items 10, 11, 12 and 13.
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<PAGE>
PART I
ITEM 1. BUSINESS
The following description of the Company's business should be read in
conjunction with the information included elsewhere in this document. The
description contains certain forward-looking statements that involve risks and
uncertainties. When used in this document, the words "intend," "believe,"
"estimate," "plan," "expect" and similar expressions as they relate to the
Company are included to identify forward-looking statements. TranSwitch
Corporation'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 document. See also "Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations--
Certain Factors That May Affect Future Results."
General
TranSwitch Corporation, a Delaware corporation established in April 1988
("TranSwitch" or 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. The
Company's customers are original equipment manufacturers (OEMs) who serve
three communications market segments: worldwide public network infrastructure
that supports voice and data communications, Internet infrastructure and
corporate wide area networks (WANs).
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 an OEM's 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 discreet solutions.
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-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.
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.
1
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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 the Far
East. The Company's mappers, which bridge the interconnection 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.
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
products such as routers and hubs in central offices, adding integrated fiber
optic transmission capability to telephone switches.
Asynchronous Products
TranSwitch's asynchronous products provide high bandwidth connections and
can be used to configure transmission products 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 include customer
premises equipment products such as hubs and routers used in WANs and LANs to
access the public network for voice and data communication 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 DS-1 through DS-3 and E-1
through E-3 transmission lines. This product line also 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
Company offers framers, devices that identify the starting point of defined
bit streams and enable systems to recognize the remaining bits.
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 adapter
functions. TranSwitch's CellBus is a system architecture for implementing ATM
access multiplexers and ATM switching systems.
Technology
The Company believes that one of its core competencies is the
telecommunications and data communications knowledge and expertise of its key
executives and 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, 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
2
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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 a proprietary toolset called "Test Benches,"
which facilitate on-time development of products and help assure that 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 availability of Test Benches provides it with a
competitive advantage.
The Company has invested significant resources in developing an architecture
that allows increased 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 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 customers, thereby accelerating their time
to market. The Company's certification approach and tools have been recognized
by customers as a key benefit.
Sales and Marketing
TranSwitch'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.
TranSwitch's sales strategy is to focus on worldwide suppliers of high-speed
communications and communications-oriented equipment. These customers are
easily identifiable and include telecommunications, data communications,
Internet, customer premises equipment, computing, process control and defense
equipment vendors. The Company has established a direct sales force and a
worldwide network of independent distributors and sales representatives for
marketing its products.
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 and the Far East. These field sales engineers and independent
distributors and sales representatives support the Company's customers.
TranSwitch maintains a technical support team at the Company's headquarters as
a backup to the field sales engineers.
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, Ma., Chicago, Ill., San Jose, Ca.,
Morristown, N.J., Atlanta Ga., Ottawa, Ontario, Canada, Brussels, Belgium, and
Taipei, Taiwan, as well as in its headquarters facility in Shelton,
Connecticut.
3
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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.
Foreign sales represented 46%, 33% and 46% of total revenues during 1998,
1997 and 1996, respectively.
The following revenues from external customers is based on the geographic
location of the Company's customers. All sales are exported from the United
States and are denominated in U.S. dollars.
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
Region 1998 1997 1996
------ ------- ------- -------
(in millions)
<S> <C> <C> <C>
United States.......................................... $ 23.7 $ 18.1 $ 10.8
Israel................................................. 5.8 0.5 4.2
China.................................................. 7.2 1.8 0.4
Other regions.......................................... 7.5 6.7 4.3
------- ------- -------
Total revenues....................................... $ 44.2 $ 27.1 $ 19.7
The following table sets forth for the periods indicated, the percentage of
the Company's total revenues derived from its significant customers listed
below:
<CAPTION>
Year ended December 31,
-----------------------
Customer 1998 1997 1996
-------- ------- ------- -------
<S> <C> <C> <C>
Columbia Technologies (1).............................. 15% * *
Insight Electronics, Inc. (1).......................... 20% 41% 16%
Tellabs Operations, Inc. (2)........................... 21% 16% 14%
ECI Telecom, Ltd....................................... * * 22%
</TABLE>
- --------
* Below 10% of the Company's total revenues.
(1) Columbia Technologies 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 1996 and 1997 were made through
Reptron Electronics, Inc., Tellabs' designated distributor. During 1998,
sales to Tellabs were made through Reptron and Arrow Electronics Inc.,
also Tellabs' designated distributor. Sales to Tellabs through Arrow
during 1998 represented 17% 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 December 31, 1998, the
Company had 72 full-time employees engaged in research and development
efforts. The Company believes that its research and development staffing will
only moderately increase in 1999. Expenditures for research and development in
1998, 1997 and 1996 were approximately $11.1 million, $9.2 million and $8.9
million, respectively.
All developments are carried out using ISO 9001 certified design processes
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 Tests 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.
4
<PAGE>
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 five
patents issued and 15 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, China, Mexico, Norway, Japan 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 be issued 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 Company cannot be sure that its products 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 seven more U.S. applications for trademarks awaiting
approval. The Company has also filed three trademark applications 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,
there can be no assurance 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 patents.
The Company sells its products into the telecommunications industry, an
industry whose products are subject to various standards that 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
5
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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, that such patents are not valid or
on other basis. 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 commensurate with the value of its products.
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. See also Note (11) of
"Notes to Consolidated Financial Statements."
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 manufacturing 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
6
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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 becoming 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 such as IBM
Corporation, Lucent Technologies Inc., NEC Corporation and Siemens AG. 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 Applied Micro Circuits Corporation, Crystal Semiconductor Corporation,
Dallas Semiconductor Corporation, EXAR Corporation, Lucent Technologies Inc.,
National Semiconductor Corporation, PMC-Sierra Inc., Texas Instruments
Incorporated, TriQuint Semiconductor Corporation, Vitesse Semiconductor
Corporation and VLSI Technology, Inc. In addition, there are a number of ASIC
vendors, including AMI Industries, Inc., LSI Logic Corp. and STM
Microelectronics Group, who compete with the Company by supplying customer-
specific products to OEMs. In the ATM area, the Company's principal
competitors include all the vendors mentioned above and, in addition, Advanced
Micro Devices, Inc., Integrated Device Technology, Inc. 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 in the
semiconductor industry 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 systems
architecture skills and its proprietary design and development tools,
including its proprietary simulations and testing software and its library of
analog and digital blocks and cells.
7
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The ability of the Company to compete successfully in the rapidly evolving
area of high performance integrated circuit technology depends on factors both
within and outside its control, including:
. success in designing and subcontracting the manufacture of new products
that implement new technologies;
. protection of Company products by effective utilization of intellectual
property laws;
. product quality;
. reliability;
. price;
. efficiency of production;
. the pace at which customers incorporate the Company's integrated circuits
into their products;
. success of competitors' products; and
. general economic conditions.
Backlog
As of December 31, 1998, the Company's backlog was $14.0 million, as
compared to $9.4 million as of December 31, 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.
Employees
As of December 31, 1998, the Company had 140 full time employees. The
Company's employees are not represented by any collective bargaining
agreement, and the Company has never experienced a work stoppage. The Company
believes that its employee relationships are good.
ITEM 2. PROPERTIES
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 January 1997, the Company opened a new leased facility
of 2,000 square feet in Taipei, Taiwan for product development and sales
support, and in May 1998, the Company opened a 2,500 square-foot facility in
New Delhi, India for product development.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matters were submitted to a vote of security holders during the three
months ended December 31, 1998.
8
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been quoted on the Nasdaq National Market
tier of The Nasdaq Stock Market under the symbol "TXCC" since its initial
public offering on June 14, 1995. The following table sets forth, for the
periods indicated, the range of quarterly high and low bid information for the
Company's Common Stock as reported on the Nasdaq National Market:
<TABLE>
<CAPTION>
High Bid Low Bid
-------- -------
<S> <C> <C>
1997
First Quarter.................................................. $ 7.38 $ 4.63
Second Quarter................................................. 9.75 4.00
Third Quarter.................................................. 12.13 8.13
Fourth Quarter................................................. 14.13 6.75
1998
First Quarter.................................................. $12.38 $ 7.50
Second Quarter................................................. 15.13 10.75
Third Quarter.................................................. 19.88 12.75
Fourth Quarter................................................. 44.88 10.88
</TABLE>
As of February 28, 1999, there were approximately 186 holders of record of
the Company's Common Stock.
The Company has never paid cash dividends on its Common Stock. The Company
currently intends to retain earnings, if any, for use in its business and does
not anticipate paying any cash dividend in the foreseeable future. In
addition, the Company's line of credit loan agreement prohibits the payment of
cash dividends without prior bank approval. Any future declaration and payment
of dividends will be subject to the discretion of the Company's Board of
Directors, will be subject to applicable law and will depend upon the
Company's results of operations, earnings, financial condition, contractual
limitations, cash requirements, future prospects and other factors deemed
relevant by the Company's Board of Directors.
9
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ITEM 6. SELECTED FINANCIAL DATA
The following table includes selected consolidated financial data for each
of the five years ended December 31, 1998, which are derived from and more
fully described in the consolidated financial statements and notes included in
this report at Item 14.
Amounts presented in thousands, except per share data
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Total revenues.................... $44,169 $27,084 $19,650 $17,466 $12,101
Gross profit...................... 27,524 15,830 5,844 10,071 6,185
Net income (loss)................. 6,003 ( 1,873) (10,077) (1,773) (3,937)
Diluted earnings (loss) per share
(1).............................. $ .40 $ ( .15) $ (.86) $ (.18) $ (.48)
Shares used in calculation of
diluted earnings (loss) per
share............................ 14,883 12,152 11,751 10,062 8,178
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and short
term investments(2)................ $27,196 $21,618 $12,688 $17,250 $ 3,352
Working capital..................... 33,758 25,648 14,650 21,811 3,656
Total assets........................ 47,809 36,589 23,311 32,670 8,969
Note payable to bank................ -- -- -- -- 1,191
Mandatorily redeemable convertible
preferred stock.................... -- -- -- -- 20,252
Stockholders' equity (deficit)...... $40,354 $30,161 $17,299 $26,706 $(15,324)
</TABLE>
- --------
(1) Gives effect to the mandatory conversion of all then outstanding
Preferred Stock into 7,009,742 shares of Common Stock on completion of
the Company's initial public offering in June 1995. 1994 per share amount
is based on pro-forma weighted average shares outstanding for 1994.
(2) Subsequent to the end of the fiscal year 1998, the Company completed a
follow on public offering of 1,955,000 shares and raised, in the
aggregate, $68.4 million on February 12, 1999 and March 16, 1999, net of
underwriters' commissions.
10
<PAGE>
ITEM 7. 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 document, the words, "intend,"
"anticipate," "believe," "estimate," "plan," "expect" and similar expressions
as they relate to the Company 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 "Certain Factors That May Affect
Future Results." This discussion should be read in conjunction with the
Consolidated Financial Statements and the notes thereto included in this
report at Item 14.
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 nine 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
worldwide public network, Internet and corporate wide area network markets and
are compliant with established standards in these markets, including
SONET/SDH, asynchronous/PDH and ATM/IP.
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's products
designed into the OEMs' products. The Company's sales cycle often extends over
more than one year because of the long lead times between the OEM's design and
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 and amortization of
product licenses. The Company intends to continue to outsource all of its VLSI
device fabrication requirements.
Prior to the year ended December 31, 1998, TranSwitch had not been
profitable, on a yearly basis, since its inception. As of December 31, 1998,
the Company had an accumulated deficit of $24.0 million. The Company'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 products of both the Company and its customers;
. the level of orders that are received and can be shipped in a quarter;
. the timing and provision of price protection and returns from the
Company's distributors;
. availability and cost of semiconductor foundry capacity and materials;
. fluctuations in manufacturing yields;
. changes in product mix;
. the Company'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;
11
<PAGE>
. whether TranSwitch's customers purchase through a distributor or directly
from the Company;
. competitive pressures on selling prices; and
. general economic conditions.
Results of Operations
Years Ended December 31, 1998, 1997 and 1996
Total Revenues. In 1998, the Company reported revenues of $44.2 million, an
increase of 63.1% over 1997. The increase was primarily driven by the strength
in the Company's SONET/SDH product lines. In 1997, the Company reported
revenues of $27.1 million, an increase of 38.0% over 1996. The increase was
primarily in product revenues as this was the Company's focus. The Company did
not derive any revenue in 1998 or 1997 attributable to product license and
royalty fees.
In 1998, Insight Electronics, Inc., Columbia Technologies (both distributors
selling to various end users, none of which comprise more than 10% of the
Company's total revenues) and Tellabs Operations, Inc. accounted for 20%, 15%
and 21% of total revenues, respectively. In 1997, Insight Electronics, Inc.
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.
Foreign sales, consisting primarily of sales to customers in Europe, Israel
and the Far East, constituted 46%, 33% and 46% of total revenues in 1998, 1997
and 1996, respectively.
Product revenues, net. In 1998, product revenues grew 64% to $44.2 million
from $26.9 million in 1997. This growth was primarily driven by the strength
of the Company's SONET/SDH product line. In 1997, product revenues grew 40.1%
to $26.9 million from $19.2 million in 1996. This growth was driven by broad
strength across all of the Company'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.
Gross profit. Gross margin in 1998 increased to 62.3% from 58.4% in 1997.
The increase in gross margin from 1997 is primarily a result of the reduction
in costs of products, achieved by meeting higher volume milestones established
by its foundries. Gross margin in 1997 increased to 58.4% from 29.7% in 1996.
The increase was due to the lack of expenses attributable to a license
agreement repurchased from Texas Instruments in December 1995 (the "TI
License").
In 1998, gross profit increased to $27.5 million as a result of the increase
in overall volume and the improvement in the gross margin. In 1997, gross
profit increased to $15.8 million from $5.8 million in 1996 as a result of the
increase in overall volume and the lack of the TI License expense recognized
in 1996.
Research and development. In 1998, research and development expenses were
$11.1 million, or 25.0% of total revenues, an increase of 20.2% over 1997
expenditures. In 1997, research and development expenditures were $9.2
million, or 33.9% of total revenues, an increase of 3.3% over 1996. The
increase was primarily attributable to increases in staff and in non-recurring
engineering charges related to the introduction of new products during 1998
and 1997. The Company believes that the continued introduction of new products
is essential to its competitiveness and is committed to continued investment
in research and development. The Company 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 1998, marketing and sales expenses increased 30.2%
to $8.7 million and represented 19.7% of total revenues. The increase is the
result of the increase in variable cost of commissions on the increased
volumes and additional staff. In 1997, marketing and sales expenses increased
22.5% to $6.7 million or 24.7% of total revenues compared to 1996. The
increase is a result of the increase in variable commissions on the increased
volume as well as an increase in staff in this area. The Company anticipates
that it will continue to incur higher marketing and sales expenses in absolute
dollars as it expands its marketing and sales efforts.
12
<PAGE>
General and administrative. In 1998, general and administrative expenses
increased 10.0% over 1997 to $2.5 million, or 5.7% of total revenues. In 1997,
general and administrative expenses increased 2.6% to $2.3 million, or 8.5% of
total revenues. The increase in the overall expenses was the result of
TranSwitch's continued investment in the general and administrative area.
Income taxes
The Company's effective tax rate was 4.5 percent for the year ended December
31, 1998, which reflects the estimated state and foreign income taxes.
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 of credit and
equipment financing line of credit from Silicon Valley Bank, an initial public
offering of its common stock in June 1995, and cash generated from its
operations. In October 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. All such shares had been converted into shares of
common stock as of September 30, 1998. Subsequent to the end of fiscal year
1998, on February 12, 1999 and March 16, 1999, the Company completed a follow-
on public offering and raised $68.4 million, net of underwriters' commissions,
and issued 1,955,000 shares of its common stock.
The Company's principal sources of liquidity as of December 31, 1998
consisted of $27.2 million in cash, cash equivalents and short-term
investments and $10.0 million available under the Company's working capital
line of credit and equipment line of credit provided by Silicon Valley Bank.
As of December 31, 1998 the Company had no outstanding balance under these
lines of credit. Pursuant to the working capital and equipment financing
agreements with Silicon Valley Bank, the Company is restricted from further
pledging its assets or granting additional security interests in such assets.
In 1998, the Company generated $6.7 million in cash from its operations, the
result of net income of $6.0 million, $2.4 million of depreciation and
amortization and $0.4 million in other non-cash charges, offset by a net
decrease in working capital of $2.1 million. In 1997, the Company used $2.0
million in cash for operating activities, the result of a loss of $1.9
million, inclusive of non-cash charges of $1.8 million for depreciation and
amortization, an increase of $2.9 million in accounts receivable and inventory
and a corresponding increase of $1.6 million in accrued expenses. In 1996, the
Company used $2.2 million in cash for operating activities, the result of a
loss of $10.1 million, offset by non-cash charges of $2.2 million for
depreciation and amortization, a $3.1 million write-down of the TI License, a
decrease of $2.5 million in accounts receivable and the remainder in other
working capital items.
Net cash provided by financing activities consists of proceeds from the
exercise of stock options and warrants of $3.9, $0.7 and $0.3 million in 1998,
1997 and 1996, respectively, and net proceeds from the issuance of preferred
stock of $13.7 million in 1997.
The Company believes that its existing cash resources, cash generated from
operations, and the cash raised in the follow-on public offering will fund
necessary purchases of capital equipment and provide adequate working capital
through the end of 1999. 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.
Inflation has not had a significant impact on the Company's operations.
13
<PAGE>
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 of 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.
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 issues 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, or 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 the Year 2000 issues will not have
a material adverse effect on TranSwitch's business, results of operation or
financial results.
Certain Factors That May Affect Future Results
From time to time, information provided by the Company, statements made by
its employees, or information included in its filings with the Securities and
Exchange Commission (including this Form 10-K) may contain statements that are
not historical facts, so-called "forward-looking statements," which involve
risks and uncertainties. Such forward-looking statements are made pursuant to
the safe harbor provisions of Section 21E of the Securities Exchange Act of
1934, as amended. In particular, statements in "Item 1. Business" relating to
product introductions and the availability of third-party VLSI fabrication
facilities, in "Item 2. Properties"
14
<PAGE>
concerning the adequacy of the Company's current facility space and in "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations" relating to anticipated levels of contract revenues and license
and royalty fees, the anticipated level of foreign sales, anticipated
increases in research and development and sales and marketing expenses and the
availability of capital for working capital and for the purchase of capital
equipment, may be forward-looking statements. The Company's actual future
results may differ significantly from those stated in any forward-looking
statements. Factors that may cause such differences include, but are not
limited to, the factors discussed below. Each of these factors, and others,
are discussed from time-to-time in the Company's filings with the Securities
and Exchange Commission.
Potential Fluctuations in Operating Results. The Company's quarterly and
annual operating revenues, expenses and operating results may fluctuate due to
a number of factors including:
. the timing and cancellation of customer orders;
. market acceptance of the Company's and customers' products;
. competitive pressures on selling prices; and
. general economic conditions.
Management of Growth and Dependence on Key Personnel. TranSwitch must
attract and retain highly qualified and well-trained personnel, including
senior managers. Competition for such employees is intense, and it may become
increasingly difficult for the Company to hire and retain such personnel.
TranSwitch Depends on a Few Outside Fabrication Facilities. The Company does
not own or operate a Very Large Scale Integrated (VLSI) circuit fabrication
facility and depends upon four foundries for most of its semiconductor device
requirements. The Company cannot be certain that it will be able to renew or
maintain contracts with these foundries on terms as favorable as current
contract terms. There are other significant risks associated with reliance on
a few 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.
Dependence on Telecommunications, Internet and Wide Area Communications
Markets. The Company derives virtually all of its product revenues from sales
of products to the telecommunications, Internet and wide area communications
markets, which are characterized by intense competition, rapid technological
change and short product life cycles. Although the telecommunications,
Internet and wide area communications equipment markets have grown rapidly in
the last few years, they may not continue to grow, or a significant slowdown
in these markets may occur.
Dependence on New Products; Risk of Product Development Delays. The
development of new VLSI devices is highly complex, and from time-to-time, the
Company has experienced delays in completing the development of new products.
Customer Concentration. Historically, a relatively small number of customers
have accounted for a significant portion of the Company's total revenues in
any particular period and probably will continue to do so.
TranSwitch's Success Depends on Intellectual Property. The Company's success
depends in part on its ability to obtain patents and licenses and to preserve
other intellectual property rights covering its products and development and
testing tools. The Company cannot ensure that:
. patents be will issued from currently pending or future applications;
. its existing patents or any new patents will be sufficient in scope or
strength to provide meaningful protection or any commercial advantage;
15
<PAGE>
. foreign intellectual property laws will protect the Company's intellectual
property rights; or
. others will not independently develop similar products, duplicate the
Company's products or design around any patents issued to the Company.
In addition, the Company may be unknowingly infringing on the proprietary
rights of others and may be liable for that infringement, which could result
in significant liability.
Competition. The semiconductor industry is intensely competitive and is
characterized by factors likely to result in pricing pressures on the
Company's products.
Foreign Sales. TranSwitch expects foreign sales to continue to account for a
significant percentage of revenues. A significant portion of total revenues
will therefore be subject to risks associated with foreign sales. In
particular, sales to Pacific Rim countries may be impacted by the current
financial instability plaguing these nations.
The Semiconductor Industry. TranSwitch provides 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.
Year 2000. None of the Company's current products utilize internal calendars
that are dependent upon the input of a specific date. As a result, all of the
Company's current products are inherently Year 2000 compliant. Moreover, based
on assessments made to date, TranSwitch does not anticipate material
disruptions to 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 the Company maintains
accounts or key suppliers of its parts and materials fail to provide needed
services to the Company, 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 Company has not developed contingency plans, but will
determine whether to develop any such plans as the assessment of Year 2000 is
completed. Accordingly, the Company cannot be certain that Year 2000 issues
will not adversely affect its business, results of operations and financial
results.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is contained in the financial
statements and schedule set forth in Item 14 (a) of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has been no change of accountants nor any disagreements with
accountants on any matter of accounting principles or practices or financial
statement disclosure required to be reported under this Item.
16
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated herein by reference to
the information in the sections entitled "Election of Directors," "Occupations
of Directors and Executive Officers" and "Compensation and Other Information
Concerning Directors and Officers" contained in the Company's definitive proxy
statement to be filed with the Securities and Exchange Commission not later
than 120 days after the close of the fiscal year ended December 31, 1998.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to
the information in the section entitled "Compensation and Other Information
Concerning Directors and Executive Officers" contained in the Company's
definitive proxy statement to be filed with the Securities and Exchange
Commission not later than 120 days after the close of the fiscal year ended
December 31, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference to
the information in the section entitled "Management and Principal
Stockholders" contained in the Company's definitive proxy statement to be
filed with the Securities and Exchange Commission not later than 120 days
after the close of the fiscal year ended December 31, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Consolidated Financial Statements
For the following financial information included herein, see Index on page
F-1:
Independent Auditors' Report.
Consolidated Balance Sheets as of December 31, 1998 and December 31, 1997.
Consolidated Statements of Operations for each of the years in the three-
year period ended December 31, 1998.
Consolidated Statements of Stockholders' Equity (Deficit) for each of the
years in the three-year period ended December 31, 1998.
Consolidated Statements of Cash Flows for each of the years in the three-
year period ended December 31, 1998.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedule
The following financial statement schedule is included herein:
Schedule II Valuation and Qualifying Accounts.
All other schedules are not submitted because they are not applicable, not
required or because the information is included in the Consolidated
Financial Statements or Notes to Consolidated Financial Statements.
17
<PAGE>
3. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
3.1* Amended and Restated Certificate of Incorporation of the Company
3.2* By-laws, as amended and restated, of the Company
4.1* Specimen certificate representing the Common Stock
4.2* Fourth Amended and Restated Registration Rights Agreement
4.3+ Certificate of Designations, Preferences and Rights of Series A
Preferred Stock
4.4+ Form of Stock Purchase Agreement, dated October 10, 1997 among the
Company and the purchasers of Series A Convertible Preferred
Stock
10.1* 1989 Stock Option Plan
10.2++ Third Amended and Restated 1995 Stock Plan
10.3* 1995 Employee Stock Purchase Plan
10.4++ 1995 Non-Employee Director Stock Option Plan, as amended
10.5* Form of Incentive Stock Option Agreement for 1989 Stock Option
Plan
10.6* Form of Non-Qualified Stock Option Agreement for 1989 Stock Option
Plan
10.7*** Form of Incentive Stock Option Agreement under the 1995 Stock Plan
of the Company
10.8*** Form of Non-Qualified Stock Option Agreement under the 1995 Stock
Plan of the Company
10.9*** 1995 Employee Stock Purchase Plan Enrollment/Authorization Form of
the Company
10.10*** Form of Non-Qualified Stock Option Agreement under the 1995 Non-
Employee Director Stock Option Plan of the Company
#10.11* Agreement with Texas Instruments Incorporated
10.12* Authorized Distributor Agreement with Insight Electronics, Inc.
10.13* Development Agreement with Connecticut Innovations, Incorporated
10.14***** Lease Agreement, as amended, with Robert D. Scinto
10.15** Amended and Restated Promissory Note (Working Capital Line of
Credit) with Silicon Valley Bank
10.16** Amended and restated Promissory Note (Equipment Line of Credit)
with Silicon Valley Bank
10.17* Commitment Letter, as amended, from Silicon Valley Bank
10.18* Security Agreement with Silicon Valley Bank
10.19+++ Silicon Valley Bank Loan Modification Agreement
10.20* Development and License Agreement with Adaptive Corporation
10.21* OEM Agreement for Acquisition of IBM Products with International
Business Machines Corporation
#10.22* License Agreement with StrataCom, Inc.
#10.23**** Agreement with Texas Instruments Incorporated
#10.24**** Integrated Circuit Foundry Agreement with Texas Instruments
Incorporated
10.25** Sixth Loan Modification Agreement
10.26** Negative Pledge Agreement
21.1** Subsidiaries of the Company
23.1** Consent of KPMG LLP
27.1** Financial Data Schedule
</TABLE>
- --------
# Confidential treatment obtained as to certain portions.
* Previously filed as an exhibit to the Company's Registration Statement
on Form S-1 (File No. 33-91694) and incorporated herein by reference.
+ Previously filed as an exhibit to the Company's Registration Statement
on Form S-3 (File No. 333-40897) and incorporated herein by reference.
++ Previously filed as an exhibit to the Company's Definitive Proxy
Statement on Schedule 14A dated April 20, 1998 and incorporated herein
by reference.
+++ Previously filed as an exhibit to the Company's Form 10-Q for the
quarter ended September 30, 1997 and incorporated herein by reference.
** Filed herewith.
18
<PAGE>
*** Previously filed as an exhibit to the Company's Registration Statement
on Form S-8 (File No. 33-94324) and incorporated herein by reference.
**** Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1995
***** Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1997.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the fourth quarter
ended December 31, 1998. On January 21, 1999, the Company filed a Form 8-K
reporting its unaudited financial results for its fourth quarter and the
fiscal year ended December 31, 1998. On January 28, 1999, the Company filed a
Form 8-K/A supplementing the aforementioned Form 8-K.
(c) Exhibits
The Company hereby files, as exhibits to this Form 10-K, those exhibits
listed in Item 14 (a) (3) above.
(d) Financial Statement Schedule
The Company hereby files, as a financial statement schedule to this Form 10-
K, the financial statement schedule listed in Item 14(a) (2) above.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
March 26, 1999
TranSwitch Corporation
by: /s/ Dr. Santanu Das
_____________________________________
Name: Dr. Santanu Das
Title: Chairman of the Board,
President and Chief Executive
Officer
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of TranSwitch Corporation, hereby
severally constitute and appoint Santanu Das and Michael McCoy, and each of
them singly, our true and lawful attorneys, with full power to them and each
of them singly, to sign for us in our names in the capacities indicated below,
all amendments to this report, and generally to do all things in our names and
on our behalf in such capacities to enable TranSwitch Corporation to comply
with the provisions of the Securities Exchange Act of 1934, as amended and all
requirements of the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name and Signature Title(s) Date
------------------ -------- ----
<S> <C> <C>
/s/ Dr. Santanu Das Chairman of the Board, March 26, 1999
____________________________________ President, and Chief
Dr. Santanu Das Executive Officer (principal
executive officer)
/s/ Michael F. Stauff Senior Vice President, Chief March 26, 1999
____________________________________ Financial Officer and
Michael F. Stauff Treasurer (principal
financial and accounting
officer)
/s/ Alfred R. Boschulte Director March 26, 1999
____________________________________
Alfred R. Boschulte
/s/ Dr. Steward S. Flaschen Director March 26, 1999
____________________________________
Dr. Steward S. Flaschen
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Name and Signature Title(s) Date
------------------ -------- ----
<S> <C> <C>
/s/ Dr. Charles Lee Director March 26, 1999
____________________________________
Dr. Charles Lee
/s/ Dr. Ljubomir Micic. Director March 26, 1999
____________________________________
Dr. Ljubomir Micic
/s/ Dr. Albert E. Paladino Director March 26, 1999
____________________________________
Dr. Albert E. Paladino
</TABLE>
<TABLE>
<S> <C> <C>
/s/ Erik van der Kaay Director March 26, 1999
____________________________________
Erik van der Kaay
</TABLE>
21
<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, 1998 and 1997............... F-3
Consolidated Statements of Operations for each of the years
in the three-year period ended December 31, 1998.......................... F-4
Consolidated Statements of Stockholders' Equity for
each of the years in the three-year period ended December 31, 1998........ F-5
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 31, 1998 ......................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders of TranSwitch Corporation:
We have audited the accompanying consolidated balance sheets of TranSwitch
Corporation and subsidiaries as of December 31, 1998 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, 1998. 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 subsidiaries as of December 31, 1998 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, 1998 in conformity with generally accepted
accounting principles.
Stamford, Connecticut
January 21, 1999, except for Note 12, which is as of February 12, 1999
F-2
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
----------------
1998 1997
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................... $24,243 $20,508
Short-term investments...................................... 2,953 1,110
Accounts receivable, less allowance
for doubtful accounts of $261 in 1998
and $218 in 1997........................................... 7,624 4,528
Inventories, net............................................ 5,476 4,812
Prepaid expenses and other current assets................... 917 815
------- -------
Total current assets...................................... 41,213 31,773
Property and equipment, net................................... 5,143 3,816
Product licenses and other assets, net........................ 1,453 1,000
------- -------
Total assets.............................................. $47,809 $36,589
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................ $ 2,858 $ 1,350
Accrued expenses............................................ 1,218 1,534
Accrued compensation........................................ 1,366 993
Sales allowance reserve..................................... 1,049 649
Warranty reserve............................................ 661 532
Product license fee payable, current portion................ 303 1,067
------- -------
Total current liabilities................................. 7,455 6,125
Product license fee payable, less current portion............. -- 303
Commitments and contingencies (Note 11)
Stockholders' equity:
Preferred Stock, $.01 par value, authorized 1,000,000:
Convertible Preferred Stock, issued and outstanding,
none in 1998 and 14,500 shares in 1997..................... -- 14,357
Common Stock, $.001 par value authorized
25,000,000 shares: issued and outstanding
14,678,531 shares in 1998 and 12,318,271
shares in 1997............................................. 15 12
Additional paid-in capital.................................. 64,297 45,753
Accumulated deficit......................................... (23,958) (29,961)
------- -------
Total stockholders' equity................................ 40,354 30,161
------- -------
Total liabilities and stockholders' equity................ $47,809 $36,589
======= =======
</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>
Year Ended December 31,
--------------------------
1998 1997 1996
------- ------- --------
<S> <C> <C> <C>
Revenues:
Product revenues, net............................ $44,169 $26,930 $ 19,236
Research and development contracts............... -- 154 414
------- ------- --------
Total revenues................................. 44,169 27,084 19,650
------- ------- --------
Cost of revenues:
Cost of products sold............................ 16,645 11,254 10,615
Write-down of product license.................... -- -- 3,128
Cost of research and development contracts....... -- -- 63
------- ------- --------
Total cost of revenues......................... 16,645 11,254 13,806
------- ------- --------
Gross profit....................................... 27,524 15,830 5,844
------- ------- --------
Operating expenses:
Research and development......................... 11,053 9,194 8,928
Marketing and sales.............................. 8,699 6,681 5,454
General and administrative....................... 2,516 2,288 2,229
------- ------- --------
Total operating expenses....................... 22,268 18,163 16,611
------- ------- --------
Operating income (loss)............................ 5,256 (2,333) (10,767)
------- ------- --------
Interest income (expense):
Interest income.................................. 1,121 641 819
Interest expense................................. (90) (181) (129)
------- ------- --------
Interest income, net........................... 1,031 460 690
------- ------- --------
Income (loss) before income taxes.................. 6,287 (1,873) (10,077)
Income tax expense................................. 284 -- --
------- ------- --------
Net income (loss).................................. $ 6,003 $(1,873) $(10,077)
======= ======= ========
Basic earnings (loss) per share (Note 9)........... $ 0.43 $ (0.15) $ (0.86)
======= ======= ========
Diluted earnings (loss) per share (Note 9)......... $ 0.40 $ (0.15) $ (0.86)
======= ======= ========
</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 Additional
----------------- Convertible Paid-in Accumulated
Shares Amount Preferred Stock Capital Deficit Total
---------- ------ --------------- ---------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995................... 11,503,606 $12 $ -- $44,705 $(18,011) $26,706
Shares of common stock
issued in connection
with the exercise of
stock options and
warrants, and the stock
purchase plan.......... 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 in connection
with the exercise of
stock options and
warrants, and the stock
purchase plan.......... 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 in connection
with the exercise of
stock options and the
stock purchase plan.... 781,485 1 3,880 -- 3,881
Deemed dividend on
convertible preferred
stock.................. -- -- 143 (143) -- --
Issuance costs for
convertible preferred
stock.................. -- -- -- (75) -- (75)
Shares of common stock
issued upon conversion
of preferred stock..... 1,578,775 2 (14,500) 14,498 -- --
Compensation related to
issuance of stock
options................ -- -- -- 384 -- 384
Net income.............. -- -- -- -- 6,003 6,003
---------- --- ------- ------- -------- -------
Balance at December 31,
1998................... 14,678,531 $15 $ -- $64,297 $(23,958) $40,354
========== === ======= ======= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1998 1997 1996
------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................ $ 6,003 $(1,873) $(10,077)
------- ------- --------
Adjustments required to reconcile net income
(loss)
to cash flows from operating activities:
Depreciation and amortization.................. 2,445 1,807 2,195
Write-down of product license.................. -- -- 3,128
Stock compensation expense..................... 384 380 351
Changes in assets and liabilities:
Decrease (increase) in accounts receivable... (3,096) (1,635) 2,487
(Increase) in inventories.................... (664) (1,288) (753)
Decrease (increase) in prepaids and other
current assets.............................. (413) (510) 194
Increase (decrease) in accounts payable...... 1,508 (455) (216)
Increase in accrued expenses and other
liabilities................................. 564 1,598 516
------- ------- --------
Total adjustments.......................... 728 (103) 7,902
------- ------- --------
Net cash provided by (used in) operating
activities................................ 6,731 (1,976) (2,175)
------- ------- --------
Cash flows from investing activities:
Purchase of product licenses..................... (550) (3) (445)
Capital expenditures............................. (3,364) (2,719) (1,892)
Purchases of short-term investments.............. (6,405) (8,615) (24,057)
Proceeds from maturities of short-term
investments..................................... 4,562 16,282 18,900
------- ------- --------
Net cash provided by (used in) investing
activities................................ (5,757) 4,945 (7,494)
------- ------- --------
Cash flows from financing activities:
Payments on product license obligations.......... (1,045) (727) (369)
Proceeds from the exercise of stock options and
warrants........................................ 3,881 699 319
Proceeds from the issuance of convertible
preferred stock, net of issuance costs.......... (75) 13,656 --
------- ------- --------
Net cash provided by (used in) financing
activities................................ 2,761 13,628 (50)
------- ------- --------
Increase (decrease) in cash and cash equivalents... 3,735 16,597 (9,719)
Cash and cash equivalents at beginning of year..... 20,508 3,911 13,630
------- ------- --------
Cash and cash equivalents at end of year........... $24,243 $20,508 $ 3,911
======= ======= ========
Supplemental disclosure of cash flows information:
Cash paid for interest........................... $ 109 $ 181 $ 129
Cash paid for income taxes....................... $ 214 $ 30 $ --
Supplemental schedule of non-cash financing
activities:
Obligations for purchase of product licenses..... $ -- $ -- $ 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. The Company has two wholly-owned subsidiaries: TranSwitch Europe
N.V./S.A. in Brussels, Belgium and TranSwitch India Private Limited in New
Delhi, India. The Company designs, develops, markets and supports highly
integrated digital and mixed-signal 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 $13,262 and $18,668 at December 31, 1998 and 1997,
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.
Short-term Investments
Short-term investments at December 31, 1998 and 1997 consist of U.S.
Treasury Bills, commercial paper and corporate debt securities with maturities
of less than one year from the balance sheet date. The Company classifies its
securities as held-to-maturity. Held-to-maturity securities are those
securities in which the Company has the ability and intent to hold the
securities to maturity. These securities are recorded at amortized cost,
adjusted for the amortization or accretion of premiums or discounts.
Gross realized gains and losses on sales of securities in 1998 and 1997 were
immaterial.
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.
F-7
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share amounts)
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 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 that 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.
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 period 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 January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." This
statement requires that companies disclose comprehensive income, which
includes net income and other comprehensive income, such as 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 (loss) is the same as net income (loss).
Effective December 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131
requires companies to report segment information as it is used internally to
assess performance and allocate resources. See Note 6.
In June 1998, the Financial Accounting Standards Board 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 value. Gains or losses resulting from changes in the
value of those derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. The Company has not
yet made a determination of the impact of this accounting standard. This
statement is effective for fiscal years beginning after June 15, 1999. We will
adopt this accounting standard beginning January 1, 2000.
(2) Fair Value of Financial Instruments
The carrying amounts for cash and cash equivalents, short-term investments,
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.
(3) Inventories
The components of inventories at December 31, 1998 and 1997 follow:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Raw materials............................................... $ 947 $ 1,086
Work in process............................................. 809 1,654
Finished goods.............................................. 3,720 2,072
------- -------
Total inventories........................................... $ 5,476 $ 4,812
======= =======
</TABLE>
F-9
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share amounts)
(4) Property and Equipment, Net
The components of property and equipment, net at December 31, 1998 and 1997
follow:
<TABLE>
<CAPTION>
Estimated
Useful
Lives 1998 1997
---------- ------- -------
<S> <C> <C> <C>
Purchased computer software................... 3 years $ 4,732 $ 4,220
Equipment..................................... 3-7 years 4,947 3,171
Semiconductor tooling......................... 3 years 998 879
Furniture..................................... 3-7 years 1,120 967
Leasehold improvements........................ Lease term 196 186
Construction in progress...................... 789 106
------- -------
12,782 9,529
Less accumulated depreciation and
amortization................................. (7,639) (5,713)
------- -------
Property and equipment, net................... $ 5,143 $ 3,816
======= =======
</TABLE>
(5) Product Licenses, Net
Product licenses, net, amounted to $1,142 and $1,000 at December 31, 1998
and 1997, 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 1998 and 1997 for $550
and $3, respectively, which are being amortized over a three year period.
Amortization of product licenses amounted to $408, $257 and $705 in 1998,
1997 and 1996, respectively.
(6) Segment Reporting
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for
reporting information about operating segments in annual financial statements
and requires that certain selected information about operating segments be
reported in interim financial reports. It also establishes standards for
related disclosures about products and services and geographic areas.
Operating segments are defined as components of an enterprise about which
separate financial information is evaluated regularly by the chief operating
decision maker, or decision making group, in deciding how to allocate
resources and in assessing performance. The Company's chief operating decision
maker is our Chief Executive Officer. SFAS No. 131 differs from the previous
accounting standard SFAS No. 14, which required companies to disclose certain
financial information about an industry segment in which they operate. Under
both SFAS No. 14 and SFAS No. 131, we have one segment: Communication
Semiconductor Products.
F-10
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share amounts)
Products and Services
TranSwitch products are Very Large Scale Integrated (VLSI) semiconductor
solutions that provide core functionality of communications network equipment.
The integration of various technologies and standards in these solutions
result in a homogeneous product line for management and measurement purposes.
Information about Geographic Areas
The following revenues from external customers is based on the geographic
location of the Company's customers. All sales are exported from the United
States and are denominated in U.S. dollars.
<TABLE>
<CAPTION>
Revenues
-----------------------
Years Ended December
31,
-----------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
United States.................................... $23,689 $18,059 $10,750
Israel .......................................... 5,772 517 4,232
China............................................ 7,175 1,831 426
Other areas......................................
7,533 6,677 4,242
------- ------- -------
Total revenues................................... $44,169 $27,084 $19,650
======= ======= =======
</TABLE>
Export revenues represented 46%, 33% and 46% of total revenues in 1998, 1997
and 1996, respectively.
Long-lived assets of the Company are located in the following areas at
December 31, 1998, 1997, and 1996, respectively:
<TABLE>
<CAPTION>
Long-lived Assets
-----------------
December 31,
--------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
United States....................................... $4,677 $3,499 $2,256
Foreign countries .................................. 466 317 391
------ ------ ------
Total long-lived assets............................. $5,143 $3,816 $2,647
====== ====== ======
</TABLE>
F-11
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share amounts)
Information about Major Customers
The percentage of total revenues attributable to the Company's significant
customers for the years ended December 31, 1998, 1997 and 1996 follow:
<TABLE>
<CAPTION>
Years Ended
December 31,
----------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Insight Electronics, Inc. (1)................................. 20% 41% 16%
Columbia Technologies (1)..................................... 15% * *
Tellabs Operations, Inc. (2).................................. 21% 16% 14%
ECI Telecom Ltd. ............................................. * * 22%
</TABLE>
- --------
(1) 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.
(2) The Company's sales to Tellabs Operations, Inc. during 1998 were made
through Reptron Electronics, Inc. and Arrow Electronics, Inc., which are
Tellabs' designated distributors. In 1997 and 1996 sales to Tellabs were
made through Reptron Electronics, Inc. only. The remaining end users to
which Arrow sells do not compromise more than 10% of the Company's end
users.
* Revenues were less than 10% of the Company's total revenues in these years.
(7) Income Taxes
The components of 1998 income before income taxes are as follows:
<TABLE>
<CAPTION>
<S> <C>
Domestic income....................... $6,212
Foreign income........................ 75
------
Income before income taxes ........... $6,287
======
</TABLE>
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997 1996
-------- ----------------
<S> <C> <C> <C>
Federal income taxes
Current.......................................... $ 161 $ -- $ --
Deferred......................................... (161) -- --
State income taxes
Current.......................................... 252 -- --
Deferred......................................... -- -- --
Foreign income taxes
Current.......................................... 32 -- --
Deferred......................................... -- -- --
-------- ------- -------
Income taxes....................................... $ 284 $ -- $ --
======== ======= =======
</TABLE>
F-12
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share amounts)
The tax effect of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31, 1998 and 1997 are
presented below:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Property and equipment................................. $ 160 $ --
Nondeductible reserves................................. 1,710 1,160
Net operating losses................................... 10,333 12,244
Research and development credit........................ 2,429 1,860
Other.................................................. 366 90
-------- --------
Total gross deferred tax assets.......................... 14,998 15,137
Less valuation allowance................................. (14,825) (14,867)
-------- --------
Net deferred tax assets.................................. 173 487
-------- --------
Deferred tax liabilities:
Property and equipment................................. -- (70)
Inventory.............................................. -- (217)
Product license........................................ (125) (200)
-------- --------
Total gross deferred tax liabilities..................... (125) (487)
-------- --------
Total deferred taxes, net of valuation allowance..... $ 48 $ --
======== ========
</TABLE>
The net change in the total valuation allowance for the year ended December
31, 1998 was a net decrease of $42. Due to the Company's operating losses from
inception through 1997, 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 $14,825,
subsequently recognized tax benefits, if any, in the amount of $4,000 will be
applied directly to contributed capital. This amount relates to the tax effect
of employee stock option deductions included in the Company's net operating
loss ("NOL") carryforward.
At December 31, 1998, the Company had available, for federal income tax
purposes, NOL carryforwards of approximately $26,422 and research and
development tax credit carryforwards of approximately $2,243 expiring in
varying amounts from 2003 through 2018.
Certain transactions involving beneficial ownership of the Company have
occurred that resulted in a stock ownership change for purposes of Section 382
of the Internal Revenue Code of 1986, as amended. Consequently, approximately
$21,623 of the Company's NOL carryforward and $1,410 of the Company's research
and development tax credit carryforward are subject to these limitations.
The difference between the statutory federal income tax rate and the
Company's effective tax rate for the years ended December 31, 1997 and 1996 is
principally due to net operating losses. The following table summarizes the
differences between the U.S. Federal statutory rate and the Company's
effective tax rate for financial statement purposes for the year ended
December 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
U.S federal statutory tax rate........ 34.0%
State taxes........................... 4.0
Utilization of NOL.................... (34.4)
Permanent differences and other....... 0.9
-----
Effective income tax rate............. 4.5%
=====
</TABLE>
F-13
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share amounts)
The Company has sufficient NOL carryforwards to offset current taxable
income before any tax deductions attributable to employee stock options.
Accordingly, no federal income tax expense is allocated to income from
operations in 1998.
(8) Stockholders' Equity
Convertible Preferred Stock
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 was
accreted ratably to the Series A Stock as a deemed dividend through the
earliest conversion date.
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 common shares 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.
As of December 31, 1998, all outstanding shares of Series A Stock had been
converted into 1,578,755 shares of Common Stock.
Stock Based Compensation
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 employees who own five
percent or more of Common Stock, 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.
Third Amended and Restated 1995 Stock Plan
The Third Amended and Restated 1995 Stock Plan (the "Stock Plan") was
adopted by the Board of Directors on March 5, 1998 and approved by the
Company's stockholders on May 27, 1998. The Stock Plan currently provides for
the issuance of a maximum of 3,500,000 shares of the Company's Common Stock
pursuant to the grant to employees of incentive stock options and the grant of
non-qualified stock options, stock awards or opportunities to make direct
purchases of the Company's Common Stock to employees, consultants, directors
and executive officers of the Company. The terms of the options granted will
be subject to the
F-14
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share amounts)
provisions of the Stock Plan as determined by the Compensation Committee of
the Board of Directors. The Stock Plan will terminate ten years after its
adoption unless earlier terminated by the Board of Directors.
As of December 31, 1998 and 1997, 324,400 and 685,526 shares, respectively,
were available for grant under the Stock Plan.
1995 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, up to an
aggregate of 250,000 shares, 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 an option
to purchase 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 an option to purchase 9,600 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 is set forth as follows:
<TABLE>
<CAPTION>
Number
of Weighted Average
Options Option Price
--------- ----------------
<S> <C> <C>
Outstanding at December 31, 1995 1,304,681 $ 3.86
Granted........................................ 1,585,054 7.63
Exercised...................................... (309,454) 0.58
Canceled....................................... (778,968) 10.17
--------- ------
Outstanding at December 31, 1996 1,801,313 4.81
Granted........................................ 1,338,800 7.26
Exercised...................................... (380,180) 1.48
Canceled....................................... (589,617) 8.38
--------- ------
Outstanding at December 31, 1997 2,170,316 5.72
Granted........................................ 1,611,263 13.98
Exercised...................................... (758,864) 4.88
Canceled....................................... (153,953) 7.86
--------- ------
Outstanding at December 31, 1998................. 2,868,762 $11.91
========= ======
</TABLE>
F-15
<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, 1998 are as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------- --------------------------
Weighted Weighted Weighted
Range of Number Average Remaining Average Number Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
--------------- ----------- ----------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.40
to
$ 1.20 86,817 0.15 $ 0.83 85,335 $ 0.82
4.13
to
6.38 745,581 7.31 5.29 404,653 5.49
6.50
to
10.81 746,918 8.71 9.29 172,234 8.87
10.88
to
12.63 330,883 8.47 11.55 61,583 11.34
12.94
to
14.63 737,863 9.71 14.56 -- --
15.63
to
17.63 34,500 8.69 16.24 16,500 16.22
19.00
to
33.06 186,200 9.34 25.63 18,267 28.29
$ 0.40
to
$33.06 2,868,762 7.48 $11.91 758,572 $10.15
====== ========= ==== ====== ======= ======
</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, 1998, 1997 and 1996, the Company recorded compensation expense of
$155, $155 and $156, 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 income (loss) and earnings
(loss) per share would be as follows:
<TABLE>
<CAPTION>
Years Ended December
31,
------------------------
1998 1997 1996
------ ------- --------
<S> <C> <C> <C>
Net income (loss)--as reported.................... $6,003 $(1,873) $(10,077)
Net income (loss)--pro forma...................... 590 (4,317) (11,590)
Basic earnings (loss) per share--as reported...... 0.43 (0.15) (0.86)
Basic earnings (loss) per share--pro forma........ 0.04 (0.36) (0.99)
Diluted earnings (loss) per share--as reported.... 0.40 (0.15) (0.86)
Diluted earnings (loss) per share--pro forma...... 0.04 (0.36) (0.99)
</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.
F-16
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share amounts)
As reflected in the pro forma amounts in the preceding table, the average fair
value of each option granted in 1998, 1997 and 1996 was $7.64, $3.76 and
$3.68, 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>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate.................................... 5.2% 5.7% 6.0%
Expected life in years..................................... 8.1 7.7 7.9
Expected volatility........................................ 68.9% 66.0% 52.0%
Expected dividend yield.................................... -- -- --
</TABLE>
For the years ended December 31, 1998, 1997 and 1996, the Company recognized
additional compensation expense of $229, $225 and $195, respectively, as
required by SFAS No. 123, relating to stock options granted to non-employees.
Warrants
Warrants to purchase Common Stock and Preferred Stock were 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.
<TABLE>
<CAPTION>
Warrants--Common Stock
-------------------------------
Number
of Price Per Expiration
Warrants Share Date
-------- --------- -----------
<S> <C> <C> <C>
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 ............ 2,396 $.40-1.00 12/96-11/98
Expired.................................... (2.396) -- --
------- --------- -----------
Outstanding at December 31, 1998............. -- $ -- --
======= ========= ===========
</TABLE>
(9) Earnings Per Share
The basic earnings (loss) per share for the years ended December 31, 1998,
1997 and 1996 follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------
1998 1997 1996
------- ------- --------
<S> <C> <C> <C>
Net income (loss)................................ $ 6,003 $(1,873) $(10,077)
Average shares (in thousands).................... 13,926 12,152 11,751
Basic earnings (loss) per share.................. $ 0.43 $ (0.15) $ (0.86)
</TABLE>
Diluted loss per share amounts are not presented for the years ended
December 31, 1997 and 1996 as they are the same as basic. Because the Company
recorded a net loss in each of these years, the assumed exercise of dilutive
securities would be antidilutive.
F-17
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share amounts)
Diluted earnings per share for the year ended December 31, 1998 follows:
<TABLE>
<CAPTION>
$ 6,003
Net income -------
<S> <C>
Average common shares outstanding for the period
(in thousands)............................................... 13,926
Stock options, net of assumed treasury share repurchases
(in thousands)............................................... 957
-------
Adjusted average shares outstanding for the period
(in thousands)............................................... 14,883
=======
Diluted earnings per share.................................... $ 0.40
=======
</TABLE>
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, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1997 1996
------------- ------------
<S> <C> <C>
Stock options................................. 634,867 281,460
Warrants...................................... 1,954 5,153
Convertible preferred stock................... 380,697 --
------------- -----------
Total....................................... 1,017,518 286,613
============= ===========
</TABLE>
(10) Employee Savings Plan
On November 21, 1988, the Company established a 401(k) retirement savings
plan (the "Plan"). All employees are entitled to contribute from 1% to 15% of
their pre-tax income to the Plan, not to exceed the IRS maximum for income
deferrals. Each participant may elect to invest their contributions in various
established funds, which include money market, fixed income and equity funds.
In 1998, the maximum contribution was 20% of pre-tax income subject to IRS
limitations. In 1996, the Company began providing matching contributions for
50 percent of the employees' deferred compensation, up to a maximum of 6
percent. The Company's contribution expense amounted to $230, $188 and $156
for 1998, 1997 and 1996, respectively.
(11) Commitments and Contingencies
Line of Credit
In July 1998, the Company entered into a new line of credit agreement with
Silicon Valley Bank whereby the Company has access up to $8,000 for working
capital purposes, bearing interest at prime +3/4% due on July 8, 1999, 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, 1998 and 1997, no amounts were outstanding under this
agreement.
F-18
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share amounts)
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 based upon actual sales
of these products. The Company recognized royalty expense of $673, $829, and
$1,266 in 1998, 1997 and 1996, respectively, under these agreements; these
amounts are included in cost of products sold in the consolidated statements
of operations.
Lease Agreements
Total rental expense under all operating lease agreements aggregated $797,
$745 and $446 during 1998, 1997 and 1996, respectively. Future minimum
operating lease commitments that have remaining, non-cancelable lease terms in
excess of one year at December 31, 1998 follow:
<TABLE>
<S> <C>
1999.............................................................. $ 658
2000.............................................................. 579
2001.............................................................. 434
2002.............................................................. 393
2003.............................................................. 393
Thereafter........................................................ 1,473
------
$3,930
======
</TABLE>
Foundry Purchase Commitments
In April, 1996, the Company entered into a foundry agreement with Taiwan
Semiconductor Manufacturing Co., Ltd. (TSMC) which includes a future minimum
purchase commitment of $128 for 1999.
(12) Subsequent Events
On February 12, 1999, the Company completed a follow-on public offering for
1,700,000 shares of its Common Stock, as described in detail in the Company's
prospectus dated February 9, 1999. As a result of the offering, the Company
raised proceeds of approximately $59,100, net of underwriter's commissions and
related direct offering costs.
F-19
<PAGE>
Schedule II
TRANSWITCH CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Additions
-------------------
Balance
Balance at Charged to Charges at End
Beginning Costs and to Other of
Description of Period Expenses Accounts Deductions Period
- ----------- ---------- ---------- -------- ---------- -------
Year ended December 31,
1998:
<S> <C> <C> <C> <C> <C>
Allowance for losses on:
Accounts receivable....... $ 218 $ 50 $-- $ (7) $ 261
Inventory................. 1,278 503 -- (238) 1,543
Deferred tax valuation
allowance.................. 14,867 -- -- (42) 14,825
-------- ------ ---- ----- -------
$ 16,363 $ 553 $-- $(287) $16,629
======== ====== ==== ===== =======
<CAPTION>
Year ended December 31,
1997:
<S> <C> <C> <C> <C> <C>
Allowance for losses on:
Accounts receivable....... $ 140 $ 100 $-- $ (22) $ 218
Inventory................. 1,196 121 -- (39) 1,278
Deferred tax valuation
allowance.................. 13,384 1,483 -- -- 14,867
-------- ------ ---- ----- -------
$ 14,720 $1,704 $-- $ (61) $16,363
======== ====== ==== ===== =======
<CAPTION>
Year ended December 31,
1996:
<S> <C> <C> <C> <C> <C>
Allowance for losses on:
Accounts receivable....... $ 138 $ 14 $-- $ (12) $ 140
Inventory................. 295 1,261 -- (360) 1,196
Deferred tax valuation
allowance.................. 8,426 4,958 -- -- 13,384
-------- ------ ---- ----- -------
$ 8,859 $6,233 $-- $(372) $14,720
======== ====== ==== ===== =======
</TABLE>
<PAGE>
Exhibit 10.15
-------------
[AMENDED AND RESTATED PROMISSORY NOTE]
(Working Capital Line of Credit Loans)
$8,000,000 Shelton, Connecticut
July 16, 1998 (originally
dated July 1, 1993, as
previously amended)
For value received, the undersigned TRANSWITCH CORPORATION, a Delaware
corporation (the "Borrower"), promises to pay to SILICON VALLEY BANK (the
"Bank") at the office of the Bank located at 3003 Tasman Drive, Santa Clara,
California 95054, or to its order, the lesser of (i) Eight Million Dollars
($8,000,000.) or (ii) the principal outstanding hereunder on July 15, 1999 (the
"Maturity Date"), together with interest on the principal amount hereof from
time to time outstanding at a fluctuating rate per annum equal to the Prime Rate
(as defined below) until the Maturity Date, payable monthly in arrears on the
fifteenth (15th) day of each calendar month occurring after the date hereof and
on the Maturity Date. The Borrower promises to pay on demand interest at a per
annum rate of interest equal to the Prime Rate plus five percent (5%) on any
overdue principal (and to the extent permitted by law, overdue interest). The
Bank's "Prime Rate" is the per annum rate of interest from time to time
announced and made effective by the Bank as its Prime Rate (which rate may or
may not be the lowest rate available from the Bank at any given time).
Computations of interest shall be made by the Bank on the basis of a year
of 360 days for the actual number of days occurring in the period for which such
interest is payable.
This promissory note amends and restates the terms and conditions of the
obligations of the Borrower under the Working Capital Note dated July 1, 1993
(the "Original Note"), by the Borrower to the Bank, as amended from time to
-------------
time. Nothing contained in this promissory note shall be deemed to create or
represent the issuance of new indebtedness or the exchange by the Borrower of
the Original Note for a new promissory note. This promissory note is the
Working Capital Note referred to in the Sixth Loan Modification Agreement of
even date herewith, which amends the Commitment Letter dated as of July 1, 1993,
between the Bank and the Borrower, as amended by letter amendments dated as of
September 1, 1994 and March 21, 1995, and as further amended by loan
modification agreements dated as of April 8, 1994, April 19, 1995, January 5,
1996, December 31, 1996 and July 11, 1997, together with all related schedules,
as the same may be further amended, modified or supplemented from time to time
(the "Commitment Letter"), and is entitled to the benefits of the Commitment
-----------------
Letter and of the other Loan Documents referred to therein, and is subject to
optional and mandatory prepayment as provided therein.
Upon the occurrence of any Event of Default under, and as defined in, the
Commitment Letter, the principal amount then outstanding of, and the accrued
interest on, the advances under this promissory note, and all other amounts
payable under this promissory note shall, at the option of the Bank, become
immediately due and payable, without notice (including, without
<PAGE>
-2-
limitation, notice of intent to accelerate), presentment, demand, protest or
other formalities of any kind, all of which are hereby expressly waived by the
Borrower.
The Bank shall keep a record of the amount and the date of the making of
each advance pursuant to the Commitment Letter and each payment of principal
with respect thereto by maintaining a computerized record of such information
and printouts of such computerized record, which endorsement or computerized
record, and the printouts thereof, shall constitute prima facie evidence of the
accuracy of the information so endorsed.
The undersigned agrees to pay all reasonable costs and expenses of the Bank
(including, without limitation, the reasonable fees and expenses of attorneys)
in connection with the enforcement of this promissory note and the other Loan
Documents and the preservation of their respective rights hereunder and
thereunder.
No delay or omission on the part of the Bank in exercising any right
hereunder shall operate as a waiver of such right or of any other right of the
Bank, nor shall any delay, omission or waiver on any one occasion be deemed a
bar to or waiver of the same or any other right on any future occasion. The
Borrower and every endorser or guarantor of this promissory note regardless of
the time, order or place of signing waives presentment, demand, protest and
notices of every kind and assents to any one or more extensions or postponements
of the time of payment or any other indulgences, to any substitutions, exchanges
or releases of collateral for this promissory note, and to the additions or
releases of any other parties or persons primarily or secondarily liable.
THIS PROMISSORY NOTE SHALL BE DEEMED DELIVERED TO THE BANK AND ACCEPTED BY
THE BANK IN THE STATE OF CALIFORNIA.
THE BORROWER HEREBY EXPRESSLY WAIVES ANY RIGHT IT MAY NOW OR HEREAFTER HAVE
TO A JURY TRIAL IN ANY SUIT, ACTION OR PROCEEDING WHICH ARISES OUT OF OR BY
REASON OF THIS PROMISSORY NOTE, ANY LOAN DOCUMENT (AS DEFINED IN THE COMMITMENT
LETTER), OR THE TRANSACTIONS CONTEMPLATED HEREBY.
BY ITS EXECUTION AND DELIVERY OF THIS PROMISSORY NOTE, THE BORROWER ACCEPTS
FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY,
THE NONEXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF COMPETENT
JURISDICTION IN THE COMMONWEALTH OF MASSACHUSETTS (OR IF FOR ANY REASON ACCESS
TO SUCH COURTS IS DENIED TO THE BANK, THEN IN THE STATE OF CALIFORNIA) IN ANY
ACTION, SUIT OR PROCEEDING OF ANY KIND AGAINST IT WHICH ARISES OUT OF OR BY
REASON OF THIS PROMISSORY NOTE, ANY LOAN DOCUMENT (AS DEFINED IN THE CREDIT
AGREEMENT), OR THE TRANSACTIONS CONTEMPLATED HEREBY, IN ADDITION TO ANY OTHER
COURT IN WHICH SUCH ACTION, SUIT OR PROCEEDING MAY BE BROUGHT, IRREVOCABLY
AGREES TO BE BOUND BY ANY FINAL JUDGMENT RENDERED BY ANY SUCH COURT IN ANY SUCH
ACTION, SUIT OR PROCEEDING IN WHICH IT SHALL HAVE BEEN SERVED WITH PROCESS IN
THE
<PAGE>
-3-
MANNER HEREINAFTER PROVIDED, SUBJECT TO EXERCISE AND EXHAUSTION OF ALL RIGHTS OF
APPEAL AND TO THE EXTENT THAT IT MAY LAWFULLY DO SO, WAIVES AND AGREES NOT TO
ASSERT, BY WAY OF MOTION, AS A DEFENSE OR OTHERWISE, IN SUCH ACTION, SUIT OR
PROCEEDING ANY CLAIMS THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF
SUCH COURT, THAT ITS PROPERTY IS EXEMPT OR IMMUNE FROM ATTACHMENT OR EXECUTION,
THAT THE ACTION, SUIT OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT
THE VENUE THEREOF IS IMPROPER, AND AGREES THAT PROCESS MAY BE SERVED UPON IT IN
ANY SUCH ACTION, SUIT OR PROCEEDING IN THE MANNER PROVIDED BY CHAPTER 223A OF
THE GENERAL LAWS OF MASSACHUSETTS, RULE 4 OF THE MASSACHUSETTS RULES OF CIVIL
PROCEDURE OR RULE 4 OF THE FEDERAL RULES OF CIVIL PROCEDURE.
ALL RIGHTS AND OBLIGATIONS HEREUNDER SHALL BE GOVERNED BY THE LAWS OF THE
COMMONWEALTH OF MASSACHUSETTS AND THIS PROMISSORY NOTE SHALL BE DEEMED TO BE
UNDER SEAL.
TRANSWITCH CORPORATION
By: /s/ Michael F. Stauff
----------------------------------
Michael F. Stauff, SVP & Treasurer
<PAGE>
Exhibit 10.16
------------
[AMENDED AND RESTATED PROMISSORY NOTE]
(Equipment Line of Credit Loans)
$2,000,000 Shelton, Connecticut
July 16, 1998 (originally
dated December 31, 1996)
For value received, the undersigned TRANSWITCH CORPORATION, a Delaware
corporation (the "Borrower"), promises to pay to SILICON VALLEY BANK (the
"Bank") at the office of the Bank located at 3003 Tasman Drive, Santa Clara,
California 95054, or to its order, the lesser of (i) Two Million Dollars
($2,000,000.) or (ii) the principal outstanding hereunder as of July 15, 1999,
in forty-eight (48) equal monthly installments payable on the fifteenth day of
each month, commencing August 15, 1999 and ending on July 15, 2003 (the
"Maturity Date"), together with interest on the principal amount hereof from
time to time outstanding at a fluctuating rate per annum equal to the Prime Rate
(as defined below) until the Maturity Date, payable monthly in arrears on the
fifteenth (15th) day of each calendar month occurring after the date hereof and
on the Maturity Date. The Borrower promises to pay on demand interest at a per
annum rate of interest equal to the Prime Rate plus five percent (5%) on any
overdue principal (and to the extent permitted by law, overdue interest). The
Bank's "Prime Rate" is the per annum rate of interest from time to time
announced and made effective by the Bank as its Prime Rate (which rate may or
may not be the lowest rate available from the Bank at any given time).
Computations of interest shall be made by the Bank on the basis of a
year of 360 days for the actual number of days occurring in the period for which
such interest is payable.
This promissory note amends and restates the terms and conditions of
the obligations of the Borrower under the Promissory Note (Equipment Line of
Credit Loans) dated December 31, 1996 (the "Original Note"), by the Borrower to
the Bank, as amended from time to time. Nothing contained in this promissory
note shall be deemed to create or represent the issuance of new indebtedness or
the exchange by the Borrower of the Original Note for a new promissory note.
This promissory note is the Equipment Note referred to in the Sixth Loan
Modification Agreement of even date herewith, which amends the Commitment Letter
dated as of July 1, 1993, between the Bank and the Borrower, as amended by
letter amendments dated as of September 1, 1994 and March 21, 1995, and as
further amended by loan modification agreements dated as of April 8, 1994, April
19, 1995, January 5, 1996, December 31, 1996 and July 11, 1997, together with
all related schedules, as the same may be further amended, modified or
supplemented from time to time (the "Commitment Letter"), and is entitled to the
benefits of the Commitment Letter and of the other Loan Documents referred to
therein, and is subject to optional and mandatory prepayment as provided
therein.
Upon the occurrence of any Event of Default under, and as defined in,
the Commitment Letter, the principal amount then outstanding of, and the accrued
interest on, the advances under this promissory note, and all other amounts
payable under this promissory note shall, at the option of the Bank become
immediately due and payable, without notice (including, without
<PAGE>
-2-
limitation, notice of intent to accelerate), presentment, demand, protest or
other formalities of any kind, all of which are hereby expressly waived by the
Borrower.
The Bank shall keep a record of the amount and the date of the making
of each advance pursuant to the Commitment Letter and each payment of principal
with respect thereto by maintaining a computerized record of such information
and printouts of such computerized record, which endorsement or computerized
record, and the printouts thereof, shall constitute prima facie evidence of the
----- -----
accuracy of the information so endorsed.
The undersigned agrees to pay all reasonable costs and expenses of the
Bank (including, without limitation, the reasonable fees and expenses of
attorneys) in connection with the enforcement of this promissory note and the
other Loan Documents and the preservation of their respective rights hereunder
and thereunder.
No delay or omission on the part of the Bank in exercising any right
hereunder shall operate as a waiver of such right or of any other right of the
Bank, nor shall any delay, omission or waiver on any one occasion be deemed a
bar to or waiver of the same or any other right on any future occasion. The
Borrower and every endorser or guarantor of this promissory note regardless of
the time, order or place of signing waives presentment, demand, protest and
notices of every kind and assents to any one or more extensions or postponements
of the time of payment or any other indulgences, to any substitutions, exchanges
or releases of collateral for this promissory note, and to the additions or
releases of any other parties or persons primarily or secondarily liable.
THIS PROMISSORY NOTE SHALL BE DEEMED DELIVERED TO THE BANK AND
ACCEPTED BY THE BANK IN THE STATE OF CALIFORNIA.
THE BORROWER HEREBY EXPRESSLY WAIVES ANY RIGHT IT MAY NOW OR HEREAFTER
HAVE TO A JURY TRIAL IN ANY SUIT, ACTION OR PROCEEDING WHICH ARISES OUT OF OR BY
REASON OF THIS PROMISSORY NOTE, ANY LOAN DOCUMENT (AS DEFINED IN THE COMMITMENT
LETTER), OR THE TRANSACTIONS CONTEMPLATED HEREBY.
BY ITS EXECUTION AND DELIVERY OF THIS PROMISSORY NOTE, THE BORROWER
ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND
UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF
COMPETENT JURISDICTION IN THE COMMONWEALTH OF MASSACHUSETTS (OR IF FOR ANY
REASON ACCESS TO SUCH COURTS IS DENIED TO THE BANK, THEN IN THE STATE OF
CALIFORNIA) IN ANY ACTION, SUIT OR PROCEEDING OF ANY KIND AGAINST IT WHICH
ARISES OUT OF OR BY REASON OF THIS PROMISSORY NOTE, ANY LOAN DOCUMENT (AS
DEFINED IN THE CREDIT AGREEMENT), OR THE TRANSACTIONS CONTEMPLATED HEREBY, IN
ADDITION TO ANY OTHER COURT IN WHICH SUCH ACTION, SUIT
<PAGE>
-3-
OR PROCEEDING MAY BE BROUGHT, IRREVOCABLY AGREES TO BE BOUND BY ANY FINAL
JUDGMENT RENDERED BY ANY SUCH COURT IN ANY SUCH ACTION, SUIT OR PROCEEDING IN
WHICH IT SHALL HAVE BEEN SERVED WITH PROCESS IN THE MANNER HEREINAFTER PROVIDED,
SUBJECT TO EXERCISE AND EXHAUSTION OF ALL RIGHTS OF APPEAL AND TO THE EXTENT
THAT IT MAY LAWFULLY DO SO, WAIVES AND AGREES NOT TO ASSERT, BY WAY OF MOTION,
AS A DEFENSE OR OTHERWISE, IN SUCH ACTION, SUIT OR PROCEEDING ANY CLAIMS THAT IT
IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURT, THAT ITS PROPERTY
IS EXEMPT OR IMMUNE FROM ATTACHMENT OR EXECUTION, THAT THE ACTION, SUIT OR
PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE VENUE THEREOF IS
IMPROPER, AND AGREES THAT PROCESS MAY BE SERVED UPON IT IN ANY SUCH ACTION, SUIT
OR PROCEEDING IN THE MANNER PROVIDED BY CHAPTER 223A OF THE GENERAL LAWS OF
MASSACHUSETTS, RULE 4 OF THE MASSACHUSETTS RULES OF CIVIL PROCEDURE OR RULE 4 OF
THE FEDERAL RULES OF CIVIL PROCEDURE.
ALL RIGHTS AND OBLIGATIONS HEREUNDER SHALL BE GOVERNED BY THE LAWS OF
THE COMMONWEALTH OF MASSACHUSETTS AND THIS PROMISSORY NOTE SHALL BE DEEMED TO BE
UNDER SEAL.
TRANSWITCH CORPORATION
By: /s/ Michael F. Stauff
----------------------------------
Michael F. Stauff, SVP & Treasurer
<PAGE>
Exhibit 10.25
-------------
SIXTH LOAN MODIFICATION AGREEMENT
This SIXTH LOAN MODIFICATION AGREEMENT is entered into as of July 16, 1998,
by and between SILICON VALLEY BANK, a California-chartered bank with its
principal place of business at 3003 Tasman Drive, Santa Clara, CA 95054 and with
a loan production office located at Wellesley Office Park, 40 William Street,
Suite 350, Wellesley, MA 02181, doing business under the name Silicon Valley
East ("Bank"), and TRANSWITCH CORPORATION, a Delaware corporation with its
principal place of business at 3 Enterprise Drive, Shelton, Connecticut 06484
("Borrower").
RECITALS
Borrower has borrowed money from Bank pursuant to certain Existing Loan
Documents, as defined below. In consideration of certain financial
accommodations from Bank, and Borrower's continuing obligations under the
Existing Loan Documents, Borrower and Bank agree as follows:
AGREEMENT
1. DESCRIPTION OF EXISTING LOAN DOCUMENTS. Reference is hereby made to
--------------------------------------
that certain Commitment Letter dated as of July 1, 1993 between Bank and
Borrower, as amended by letter amendments dated as of September 1, 1994 and
March 21, 1995, as further amended by Loan Modification Agreements dated April
8, 1994, April 19, 1995, January 5, 1996, December 31, 1996 and July 11, 1997
between Borrower and Bank, and as such Commitment Letter may be further amended
from time to time (the "Commitment Letter"), providing for certain financing
from Bank to Borrower, such financing to be evidenced by promissory notes as
referenced herein. Hereinafter, all indebtedness owing by Borrower to Bank
pursuant to the Commitment Letter and any promissory notes shall be referred to
as the "Indebtedness." Repayment of the Indebtedness is secured pursuant to a
Security Agreement dated as of July 1, 1993 between Borrower and Bank, as
amended (the "Security Agreement"). Hereinafter, the Commitment Letter,
Security Agreement, and any promissory notes, together with all other documents
securing payment of the Indebtedness, shall be referred to as the "Existing Loan
Documents." Unless otherwise defined herein, capitalized terms used in this
Agreement shall have the same respective meanings as set forth in the Commitment
Letter.
2. DESCRIPTION OF CHANGES IN TERMS.
-------------------------------
2.1 Modifications to Commitment Letter.
----------------------------------
2.1.1 The first sentence of the first unnumbered paragraph of the
Commitment Letter, as heretofore amended, is hereby replaced in its entirety as
follows:
Silicon Valley Bank (the "Bank") is pleased to inform you that it has
approved for TranSwitch Corporation (the "Borrower"), subject to the
terms set forth in this letter and the attached schedules
(collectively
<PAGE>
referred to as the "Commitment Letter"), the following credit
facilities: (i) a working capital line of credit of $8,000,000 (the
"Working Capital Commitment"); and (ii) an equipment line of credit
of $2,000,000 (the "Equipment Commitment" and, together with the
Working Capital Commitment, the "Commitments").
2.1.2 Subparagraphs (a) and (b) of numbered paragraph 1 of the Commitment
Letter, as heretofore amended, are hereby replaced in their entirety as follows:
(a) a promissory note payable to the order of the Bank by the
Borrower in the principal amount of $8,000,000 with respect to the
Working Capital Commitment (as the same may be amended, modified or
supplemented from time to time, the "Working Capital Note"),
(b) a promissory note payable to the order of the Bank by the
Borrower in the principal amount of $2,000,000 with respect to the
Equipment Commitment (as the same may be amended, modified or
supplemented from time to time, the "Equipment Note" and together
with the Working Capital Note, the "Notes");
2.1.3 Subsections (d) and (e) of numbered paragraph 1 of the Commitment
Letter, as heretofore amended, are hereby replaced in their entirety as follows:
(d) a Negative Pledge Agreement by the Borrower in favor of the Bank
(as the same may be amended, modified or supplemented from time to
time, the "Negative Pledge Agreement");
(e) INTENTIONALLY OMITTED;
2.1.4 Numbered paragraph 2 of the Commitment Letter, as heretofore
amended, is hereby replaced in its entirety as follows:
2. The Working Capital Commitment will commence July 16, 1998 and
will expire on July 15, 1999 (the "Working Capital Expiry Date").
The Equipment Commitment will commence July 16, 1998 and will expire
on July 15, 1999 (the "Equipment Expiry Date").
2.1.5 The first two sentences of numbered paragraph 3 of the Commitment
Letter, as heretofore amended, are hereby replaced in their entirety as follows:
Advances under the Working Capital Commitment shall bear interest at
a fluctuating rate of interest equal to the Bank's Prime Rate (as
defined below) per annum, and advances under the Equipment Line of
Credit Commitment shall bear interest at a fluctuating rate of
interest equal to the Bank's Prime Rate per annum. Borrower shall
make payments of interest in respect of advances under the Working
Capital Commitment monthly
-2-
<PAGE>
on the fifteenth (15th ) day of each month and on the Working
Capital Expiry Date. Borrower shall make payments of interest in
respect of advances under the Equipment Commitment monthly on the
fifteenth (15th) day of each month and on the Equipment Expiry Date.
2.1.6 Paragraph 7C of the Commitment Letter, as heretofore amended, is
hereby replaced in its entirety as follows:
Proceeds of all advances under the Equipment Commitment shall be
used by the Borrower solely to finance the purchase by the Borrower
of Eligible Equipment purchased within 30 days of Borrowees request
for an advance under the Equipment Commitment. The principal amount
of any advance made by the Equipment Commitment shall not exceed
100% of the invoice price of any item of Eligible Equipment less
taxes, shipping, installation and similar or related costs. The
Borrower shall provide the Bank with copies of all invoices for
items of Eligible Equipment not later than the date of its request
for such an advance and shall promptly provide such other
information as the Bank shall reasonably request in support of
Borrower's request.
2.1.7 Numbered paragraph 8 of the Commitment Letter, as heretofore
amended, is hereby amended so that Borrower may use all of the Working Capital
Commitment for Letters of Credit.
2.1.8 Numbered paragraph 4 of Schedule II to the Commitment Letter, as
heretofore amended, is hereby replaced in its entirety as follows:
4. Financial Statements, Etc. Borrower will furnish to Bank:
(a) as soon as available, but in any event within forty five (45)
days after the end of each fiscal quarter, commencing with the
quarter ending June 30, 1998, consolidated financial statements of
Borrower on Form 10-Q;
(b) as soon as available, but in any event within one hundred twenty
(120) days after the end of Borrowees fiscal year, audited
consolidated financial statements of Borrower on Form 10-K;
(c) within five (5) days of filing, copies of all statements,
reports and notices sent or made available generally by Borrower to
its security holders or to any holders of Subordinated Debt and all
reports on Form 10-K, 10-Q and 8-K (to the extent not previously
provided to Bank) filed with the Securities and Exchange Commission;
-3-
<PAGE>
(d) promptly upon receipt of notice thereof, a report of any legal
actions pending or threatened against Borrower or any Subsidiary
that could result in a Material Adverse Effect;
(f) such budgets, sales projections, operating plans or other
financial information as Bank may reasonably request from time to
time.
(g) prior to any Advances under the Working Capital Commitment, and
within thirty (30) days after the last day of each month in which
any Advances under the Working Capital Commitment are outstanding, a
Borrowing Base Certificate signed by the Chief Financial Officer or
the President of Borrower in a form acceptable to Bank and
appropriately completed, together with aged listings of accounts
receivable.
(h) within thirty (30) days after the last day of each quarter,
commencing with the quarter ending June 30, 1998, a Compliance
Certificate signed by the Chief Financial Officer or the President
of Borrower in a form acceptable to Bank and appropriately
completed.
2.1.9 Numbered paragraphs 21 through 25 of Schedule II to the Commitment
Letter, as heretofore amended, are hereby replaced in their entirety as follows:
21. Adjusted Quick Ratio. The Borrower will not permit its
--------------------
Adjusted Quick Ratio to be less than 2.00 to 1 at the end of any
calendar quarter, commencing with the quarter ending June 30, 1998.
22. Minimum Profitability. INTENTIONALLY OMITTED
---------------------
23. Leverage. The Borrower will not permit the ratio of Total
--------
Adjusted Liabilities to Tangible Net Worth at the end of any
calendar quarter, commencing with the quarter ending June 30, 1998,
to be more than 1.25 to 1.
24. Tangible Net Worth. The Borrower will not permit Tangible Net
------------------
Worth at the end of any calendar quarter, commencing with the
quarter ending June 30, 1998, to be less than $28,000,000.
25. Liquidity. INTENTIONALLY OMITTED
---------
2.1.10 The Compliance Certificate referred to in numbered subparagraph
4(c) of Schedule II to the Commitment Letter, as heretofore amended, is hereby
deleted and replaced with the Compliance Certificate attached hereto as Exhibit
A.
2.1.11 Subsection (i) of the definition of "Eligible Domestic Accounts
Receivable" on Schedule III to the Commitment Letter, as heretofore amended, is
hereby replaced in its entirety as follows:
-4-
<PAGE>
(i) The aggregate accounts receivables from the account debtor do
not exceed 25% of the total Eligible Accounts Receivable of the
Borrower; that portion of the account over the 25% level will be
disqualified.
2.1.12 The definition. of "Eligible Equipment' in Schedule III of the
Commitment Letter, as heretofore amended, is hereby amended by deleting the date
July 11, 1997 appearing in the last line of subparagraph (b) thereof and
substituting the date July 16, 1998.
2.1.13 The following definition is hereby added to Schedule III to the
Commitment Letter, as heretofore amended, as follows:
"Adjusted Quick Ratio" means, at any time, all cash and accounts
receivable, less reserves for doubtful accounts, of the Borrower
and its Subsidiaries at such time, on a consolidated basis,
determined in accordance with GAAP, divided by the aggregate of all
Current Liabilities (less deferred revenues) plus, to the extent
not already included, all Indebtedness of Borrower to Bank.
3. TERMINATION OF SECURITY AGREEMENT. The Security Agreement is
---------------------------------
hereby terminated effective with Borrower's compliance with all of the
conditions set forth in Section 5 of this Sixth Loan Modification Agreement, and
all rights to the Collateral shall revert to Borrower, subject to the Negative
Pledge Agreement between Borrower and Bank of even date herewith.
4. FACILITY FEE. Borrower shall pay to Bank a Working Capital
------------
Commitment facility fee of EIGHT THOUSAND AND NO/100THS Dollars ($8,000) and an
Equipment Commitment facility fee of TWO THOUSAND AND NO/100THS Dollars ($2,000)
as well as any out-of-pocket expenses incurred by the Bank through the date
hereof, including reasonable attorneys' fees and expenses, and after the date
hereof, all Bank Expenses, including reasonable attorneys' fees and expenses, as
and when they become due.
5. CONDITIONS PRECEDENT TO FURTHER ADVANCES. The obligation of Bank
----------------------------------------
to make further advances to Borrower under this line is subject to the condition
precedent that Bank shall have received, in form and substance satisfactory to
Bank, the following:
(a) this Sixth Loan Modification Agreement (in duplicate), the
Working Capital Note and the Equipment Note, each duly executed by Borrower;
(b) a certificate of the Secretary of Borrower with respect to
resolutions authorizing the execution and delivery of this Sixth Loan
Modification Agreement and the Loan Documents;
(c) Negative Pledge Agreement covering all assets of Borrower:
(d) UCC-1 financing statements evidencing the negative pledge;
-5-
<PAGE>
(e) insurance certificate;
(f) payment of the fees and Bank Expenses then due specified in
Section 4 hereof; and
(g) such other documents, and completion of such other matters, as
Bank may reasonably deem necessary or appropriate.
6. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended
------------------
wherever necessary to reflect the changes described in this Sixth Loan
Modification Agreement.
7. NO DEFENSES OF BORROWER. Borrower agrees that as of this date, it
-----------------------
has no defenses against any of the obligations to pay any amounts under the
Indebtedness.
8. CONTINUING VALIDITY. Borrower understands and agrees that (i) in
-------------------
modifying the Existing Loan Documents, Bank is relying upon Borrower's
representations, warranties and agreements, as set forth in the Existing Loan
Documents, (ii) except as expressly modified pursuant to this Sixth Loan
Modification Agreement (including the effects of Section 6 hereof), the Existing
Loan Documents remain unchanged and in full force and effect, (iii) Bank's
agreement to modify the Existing Loan Documents pursuant to this Sixth Loan
Modification Agreement shall in no way obligate Bank to make any future
modifications to the Existing Loan Documents, (iv) it is the intention of Bank
and Borrower to retain as liable parties all makers and endorsers of the
Existing Loan Documents, unless a party is expressly released by Bank in
writing, (v) no maker, endorser or guarantor will be released by virtue of this
Sixth Loan Modification Agreement, and (vi) the terms of this Section 8 apply
not only to this Sixth Loan Modification Agreement but also to all subsequent
loan modification agreements, if any.
9. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER. The laws of the
------------------------------------------
Commonwealth of Massachusetts shall apply to this Agreement. BORROWER ACCEPTS
FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, UNCONDITIONALLY, THE NON-
EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION
IN THE COMMONWEALTH OF MASSACHUSETTS IN ANY ACTION, SUIT, OR PROCEEDING OF ANY
KIND AGAINST IT WHICH ARISES OUT OF OR BY REASON OF THIS AGREEMENT; PROVIDED,
HOWEVER, THAT IF FOR ANY REASON BANK CANNOT AVAIL ITSELF OF THE COURTS OF THE
COMMONWEALTH OF MASSACHUSETTS, BORROWER ACCEPTS JURISDICTION OF THE COURTS AND
VENUE IN SANTA CLARA COUNTY, CALIFORNIA. BORROWER AND BANK EACH HEREBY WAIVE
THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED
UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS
CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY
CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND
AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO
ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS
REVIEWED THIS WAIVER WITH ITS
-6-
<PAGE>
LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS
FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
10. EFFECTIVENESS. This Agreement shall become effective only when it
-------------
shall have been executed by Borrower and Bank (provided, however, in no event
shall this Agreement become effective until signed by an officer of Bank in
California).
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as a sealed instrument as of the date first set forth above.
"Borrower" "Bank"
TRANSWITCH CORPORATION SILICON VALLEY BANK, doing business as
SILICON VALLEY EAST
By: /s/ Michael F. Stauff By:
------------------------ --------------------------------
Michael F. Stauff, SVP William R. Howell, AVP
& Treasurer
SILICON VALLEY BANK
By:
--------------------------------
Title:
------------------------------
-7-
<PAGE>
ExhibiT 10.26
-------------
NEGATIVE PLEDGE AGREEMENT
This Negative Pledge Agreement is made as of July 16, 1998, by and between
SILICON VALLEY BANK, a California-chartered bank with its principal place of
business at 3003 Tasman Drive, Santa Clara, CA 95054 and with a loan production
office located at Wellesley Office Park, 40 William Street, Suite 350,
Wellesley, MA 02181, doing business under the name Silicon Valley East ("Bank"),
and TRANSWITCH CORPORATION, a Delaware corporation with its principal place of
business at 3 Enterprise Drive, Shelton, Connecticut 06484 ("Borrower").
In connection with the Loan Documents (as that term is defined in the Commitment
Letter between Borrower and Bank dated July 1, 1993, as amended) concurrently
being executed between Borrower and Bank, Borrower agrees as follows:
1. Borrower shall not, without Bank's prior written consent which consent shall
not be unreasonably withheld, sell, transfer, or assign other than in the
ordinary course of business mortgage, pledge, lease, grant a security interest
in, or encumber any of Borrower's property, including, without limitation, the
following:
(a) All goods and equipment now owned or hereafter acquired, including,
without limitation, all machinery, fixtures, vehicles (including motor
vehicles and trailers), and any interest in any of the foregoing, and
all attachments, accessories, accessions, replacements, substitutions,
additions, and improvements to any of the foregoing, wherever located;
(b) All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing
and shipping materials, work in process and finished products
including such inventory as is temporarily out of Borrower's custody
or possession or in transit and including any returns upon any
accounts or other proceeds, including insurance proceeds, resulting
from the sale or disposition of any of the foregoing and any documents
of title representing any of the above;
(c) All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, trademarks, service
marks, trade styles, trade names, patents, patent applications,
leases, license agreements, franchise agreements, blueprints,
drawings, purchase orders, customer lists, route lists, infringements,
claims, computer programs, computer discs, computer tapes, literature,
reports, catalogs, design rights, income tax refunds, payments of
insurance and rights to payment of any kind;
(d) All now existing and hereafter arising accounts, contract rights,
royalties, license rights and all other forms of obligations owing to
Borrower arising out of the sale or lease of goods, the licensing of
technology or the rendering of services by Borrower, whether or not
earned by performance, and any and all credit insurance, guaranties,
and other security therefor, as well as all merchandise returned to or
reclaimed by Borrower;
<PAGE>
-2-
(e) All documents, cash, deposit accounts, securities, investment
property, letters of credit, certificates of deposit, instruments and
chattel paper now owned or hereafter acquired and Borrower's Books
relating to the foregoing;
(f) All copyright rights, copyright applications, copyright registrations
and like protections in each work of authorship and derivative work
thereof, whether published or unpublished, now owned or hereafter
acquired; all trade secret rights, including all rights to unpatented
inventions, know-how, operating manuals, license rights and agreements
and confidential information, now owned or hereafter acquired; all
mask work or similar rights available for the protection of
semiconductor chips, now owned or hereafter acquired all claims for
damages by way of any past, present and future infringement of any of
the foregoing; and
(g) All Borrower's Books relating to the foregoing and any and all claims,
rights and interests in any of the above and all substitutions for,
additions and accessions to and proceeds thereof.
2. It shall be an event of default under the Loan Documents between Borrower
and Bank if there is a breach of any terms of this Negative Pledge Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as a sealed instrument as of the date first set forth above.
"Borrower" "Bank"
TRANSWITCH CORPORATION SILICON VALLEY BANK, doing business
as SILICON VALLEY EAST
By: /s/ Michael F. Stauff By:
---------------------------------- --------------------------------
Michael F. Stauff, SVP & Treasurer William R. Howell, AVP
<PAGE>
Exhibit 21.1
SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION>
Name Jurisdiction
---- ------------
<S> <C>
TranSwitch Europe N.V./S.A. Belgium
TranSwitch India Private
Limited India
</TABLE>
<PAGE>
Exhibit 23.1
------------
Report and Consent of Independent Auditors
To the Board of Directors and Shareholders of TranSwitch Corporation:
The audits referred to in our report dated January 21, 1999, except for Note 12,
which is as of February 12, 1999, included the related financial statement
schedule for each of the years in the three-year period ended December 31, 1998,
included in the TranSwitch Corporation 1998 Annual Report on Form 10-K. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this financial statement schedule
based on our audits. In our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
We consent to the use of our reports included herein and incorporated by
reference in the Registration Statements of TranSwitch Corporation on Form S-8
(No. 33-94234) and Form S-3 (No. 333-40897), relating to the consolidated
balance sheets of TranSwitch Corporation and subsidiaries as of December 31,
1998 and 1997, and the related consolidated statements of operations,
stockholders' equity, and cash flows and related financial statement schedule
for each of the years in the three-year period ended December 31, 1998, which
reports appear in the TranSwitch Corporation 1998 Annual Report on Form 10-K.
KPMG LLP
Stamford, Connecticut
March 26, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> OCT-1-1998 JAN-1-1998
<PERIOD-END> DEC-31-1998 DEC-31-1998
<CASH> 24,243 24,243
<SECURITIES> 2,953 2,953
<RECEIVABLES> 7,885 7,885
<ALLOWANCES> 261 261
<INVENTORY> 5,476 5,476
<CURRENT-ASSETS> 41,213 41,213
<PP&E> 12,748 12,748
<DEPRECIATION> 7,605 7,605
<TOTAL-ASSETS> 47,809 47,809
<CURRENT-LIABILITIES> 7,450 7,450
<BONDS> 0 0
0 0
0 0
<COMMON> 15 15
<OTHER-SE> 40,339 40,339
<TOTAL-LIABILITY-AND-EQUITY> 47,804 47,804
<SALES> 13,692 44,169
<TOTAL-REVENUES> 13,692 44,169
<CGS> 5,026 16,645
<TOTAL-COSTS> 6,313 22,268
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 2,621 6,287
<INCOME-TAX> 120 284
<INCOME-CONTINUING> 2,501 6,003
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,501 6,003
<EPS-PRIMARY> $0.17 $0.43
<EPS-DILUTED> $0.16 $0.40
</TABLE>
