<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10 - Q
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
for the quarterly period ended September 30, 1999
or
|_| Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
for the transition period from ____________ to ____________
Commission File Number 0-25996
TRANSWITCH CORPORATION
(Exact name of Registrant as Specified in its Charter)
Delaware 06-1236189
(State of Incorporation) (I.R.S. Employer Identification Number)
3 Enterprise Drive
Shelton, Connecticut 06484
(Address of Principal Executive Offices)
Telephone (203) 929-8810
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Common stock, par value $.001 per share, outstanding at October 29, 1999:
25,997,392 shares.
Page 1 of 18
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TranSwitch Corporation
FORM 10-Q
September 30, 1999
Table of Contents
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 1999
and December 31, 1998 3
Consolidated Statements of Operations for the Three and
Nine Months periods Ended September 30, 1999 and 1998 4
Consolidated Statements of Cash Flows for the Nine Months
period Ended September 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
Page 2 of 18
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Part I FINANCIAL INFORMATION
Item 1. Financial Statements
TranSwitch Corporation
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(in thousands, except share data) September 30, December 31,
Assets 1999 1998
------ ---- ----
<S> <C> <C>
Current assets: (unaudited)
Cash and cash equivalents $ 9,253 $ 24,243
Short term investments 76,537 2,953
Accounts receivable, net 10,675 7,624
Inventories 6,701 5,476
Prepaid expenses and other current assets 2,464 917
--------- ---------
Total current assets 105,630 41,213
Long term investments 22,696 --
Property and equipment, net 6,892 5,143
Product licenses, net 817 1,142
Deferred tax 7,549 --
Other assets 2,982 311
--------- ---------
Total Assets $ 146,566 $ 47,809
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 6,159 $ 2,858
Accrued expenses and other liabilities 5,420 4,294
Product license fee payable, current portion -- 303
--------- ---------
Total current liabilities 11,579 7,455
Stockholders' equity:
Common Stock, $.001 par value; authorized 100,000,000 shares;
issued and outstanding: 25,958,183 shares at September 30, 1999;
22,017,797 shares at December 31, 1998* 26 22
Additional paid in capital 141,179 64,290
Accumulated deficit (6,218) (23,958)
--------- ---------
Total stockholders' equity 134,987 40,354
--------- ---------
Total Liabilities and Stockholders' Equity $ 146,566 $ 47,809
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
* Adjusted to reflect a three-for-two stock split effective June 3, 1999.
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TranSwitch Corporation
Consolidated Statements of Operations
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $ 18,537 $ 12,264 $ 49,118 $ 30,477
Cost of Sales 6,305 4,537 17,161 11,619
-------- -------- -------- --------
Gross Profit 12,232 7,727 31,957 18,858
Operating Expenses:
Research and development 3,527 2,887 9,861 7,967
Marketing and sales 3,153 2,420 8,616 6,163
General and administrative 894 672 2,413 1,825
-------- -------- -------- --------
Total Operating Expenses 7,574 5,979 20,890 15,955
-------- -------- -------- --------
Operating Income 4,658 1,748 11,067 2,903
Interest Income, net 1,438 265 3,191 763
-------- -------- -------- --------
Income before income taxes 6,096 2,013 14,258 3,666
Provision (benefit) for income taxes (3,879) 92 (3,482) 164
-------- -------- -------- --------
Net Income $ 9,975 $ 1,921 $ 17,740 $ 3,502
======== ======== ======== ========
Basic Earnings per Common Share $ 0.39 $ 0.09 $ 0.71 $ 0.17
Weighted Average Number of 25,871 21,401 25,156 20,552
Common Shares Outstanding ======== ======== ======== ========
Diluted Earnings per Common Share $ 0.36 $ 0.08 $ 0.65 $ 0.16
Weighted Average Number of 27,967 22,652 27,398 21,869
Common Shares and Equivalents Outstanding ======== ======== ======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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TranSwitch Corporation
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 17,740 $ 3,502
Adjustments to reconcile net income to
net cash provided by operating activities:
Deferred income tax (4,545) --
Depreciation and amortization 2,159 1,464
Stock compensation expense 100 334
Changes in assets and liabilities:
(Increase) in accounts receivable (3,051) (1,204)
(Increase) in inventories (1,225) (1,354)
(Increase) in prepaids and other assets (1,761) (335)
Increase in accounts payable 3,301 2,090
Increase (decrease) in accrued liabilities 1,126 (45)
--------- ---------
Total adjustments (3,896) 950
--------- ---------
Net cash provided by operating activities 13,844 4,452
--------- ---------
Cash flows from investing activities:
Capital expenditures and cost of product licenses (3,583) (2,552)
Purchase of other investments (2,457) --
Purchase of long and short term investments (119,468) (4,424)
Proceeds from maturities of long and short term investments 23,188 2,096
--------- ---------
Net cash (used in) investing activities (102,320) (4,880)
--------- ---------
Cash flows from financing activities:
Proceeds from the exercise of stock options and warrants 5,608 1,592
Proceeds from the issuance of common stock, net of issuance cost 68,181 --
Payment of issuance costs for convertible preferred stock -- (75)
Payments on product license obligations (303) (705)
--------- ---------
Net cash provided by financing activities 73,486 812
--------- ---------
(Decrease) increase in cash and cash equivalents (14,990) 384
Cash and cash equivalents at beginning of period 24,243 20,508
--------- ---------
Cash and cash equivalents at end of period $ 9,253 $ 20,892
========= =========
Supplemental disclosure of cash flows information:
Cash paid for interest $ 33 $ 68
Increase in additional paid in capital due to reversal
of deferred tax valuation allowance $ 3,004 $ --
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 5 of 18
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TranSwitch Corporation
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the quarter ended September 30, 1999
Note 1. Interim Financial Statements
The accompanying unaudited consolidated interim financial statements have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission for reporting on Form 10-Q. Accordingly, certain information
and footnotes required by generally accepted accounting principles for complete
financial statements are not included herein. The financial statements are
prepared on a consistent basis with and should be read in conjunction with the
statements and notes thereto contained in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1998 filed with the Securities and
Exchange Commission on March 26, 1999.
In the opinion of management, these statements include all adjustments,
consisting of normal recurring adjustments, which are necessary for a fair
presentation for such periods. The results of operations for any interim period
are not necessarily indicative of the results that may be achieved for the
entire fiscal year ending December 31, 1999.
Note 2. Inventories
Inventories are carried at the lower of cost (on a first in, first out
basis) or estimated net realizable value. Inventories are summarized as follows
(in thousands):
September 30, 1999 December 31, 1998
------------------ -----------------
Raw Materials $ 753 $ 947
Work in Process 2,586 809
Finished Goods 3,362 3,720
------ ------
Total Inventories $6,701 $5,476
====== ======
Note 3. Stock Split
On April 14, 1999, the Board of Directors announced a three for two stock split
of the Company's common stock. The effective date of the stock split was June 3,
1999 for shareholders of record as of April 26, 1999. Stockholders' equity has
been restated to give retroactive recognition to the stock split in prior
periods by reclassifying from additional paid-in capital to common stock the par
value of the additional shares arising from the split. In addition, all
references in the financial statements to number of shares and per share amounts
have been restated.
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Note 4. Income taxes
During the third quarter of 1999, the Company concluded that it is more likely
than not that substantially all of its net deferred tax assets will be realized.
Accordingly the Company reversed its valuation allowance for net deferred tax
assets of approximately $7.5 million at September 30, 1999. Of the total $7.5
million valuation allowance reversal, approximately $4.5 million was recorded as
a tax benefit in the statement of operations, and approximately $3.0 million as
an increase to additional paid-in capital, which represents the amount of
deferred tax assets generated from the exercise of stock options.
Note 5. Consolidated Statement of Stockholders' Equity
(in thousands, except share data)
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit Total
------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1998 22,017,797 $22 $ 64,290 ($23,958) $40,354
Shares of common stock issued upon exercise of stock options 294,294 -- 922 922
Common stock issued in follow on public offering 2,932,500 4 68,177 -- 68,181
Compensation related to issuance of stock options -- -- 33 33
Net income -- -- -- 3,124 3,124
---------- --- -------- -------- --------
Balance at March 31, 1999 25,244,591 $26 $133,422 $(20,834) $112,614
Shares of common stock issued upon exercise of stock options 347,791 -- 2,167 2,167
Compensation related to issuance of stock options -- -- 53 53
Net income -- -- -- 4,641 4,641
---------- --- -------- -------- --------
Balance at June 30, 1999 25,592,382 $26 $135,642 $(16,193) $119,475
Shares of common stock issued upon exercise of stock options 365,801 -- 2,519 2,519
Reversal of deferred tax valuation allowance -- -- 3,004 3,004
Compensation related to issuance of stock options -- -- 14 14
Net income -- -- -- 9,975 9,975
---------- --- -------- -------- --------
Balance at September 30, 1999 25,958,183 $26 $141,179 $ (6,218) $134,987
========== === ======== ======== ========
</TABLE>
Page 7 of 18
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
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 (WAN).
The Company's products are Very Large Scale Integrated (VLSI)
semiconductor devices that provide core functionality for communications network
equipment. The Company's VLSI solutions are programmable to provide high levels
of functionality for high-speed broadband communication networks. These products
are incorporated into OEMs' networking equipment. TranSwitch's VLSI devices are
compliant with SONET/SDH (Synchronous Optical Network/Synchronous Digital
Hierarchy), asynchronous and ATM (Asynchronous Transfer Mode) standards. The
Company's mixed-signal and digital design capability, together with its
telecommunications systems expertise, enables it to determine and implement
optimal combinations of design elements for enhanced functionality. The Company
believes that this approach allows its customers to achieve faster time to
market and to introduce systems that offer greater functionality, improved
performance, lower power dissipation, reduced system size and cost and greater
reliability relative to discreet solutions.
The Company believes that period-to-period comparisons of its financial
results are not necessarily meaningful and should not be relied upon as an
indication of future performance. In addition, the Company's results of
operations may fluctuate from period to period in the future.
Three and nine month periods ended September 30, 1999 and 1998
Revenues
The Company derives its revenues from product sales. Total revenues for
the quarter ended June 30, 1999 were $18.5 million, representing a 51% increase
over the $12.3 million recorded in the prior year comparable period. Total
revenues for the nine months ended September 30, 1999 were $49.1 million, an
increase of 61% over the $30.5 million for the nine months ended September 30,
1998. The increase in revenue in the quarter is attributable to the increase in
the revenue across all three of its product lines, SONET/SDH, Asynchronous and
ATM.
Page 8 of 18
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Gross Profit
Gross profit was $12.2 million for the quarter ended September 30, 1999,
compared to $7.7 million in the corresponding period of the prior year. Gross
Profit for the nine months ended September 30, 1999 was $32.0 million, compared
to $18.9 million for the same period in 1998. Gross margin was 66.0% for the
quarter ended September 30, 1999, compared to 63.0% for the quarter ended
September 30, 1998; gross margin for the nine months ended September 30, 1999
was 65.1%, compared to 61.9% for the same period a year ago. The increase in
gross profit and margin is principally the result of lower costs resulting from
improved pricing from the Company's vendors achieved as higher volumes of
products were purchased by the Company.
Research and Development
Research and development expenses were 19.0% of total revenues for the
quarter ended September 30, 1999, compared to 23.5% of total revenues for the
quarter ended September 30, 1998; total spending increased 22.2% to $3.5 million
for the quarter ended September 30, 1999, compared to $2.9 million for the
quarter ended September 30, 1998. In the nine month period ended September 30,
1999, research and development expenses were 20.1% of revenues as compared to
26.1% for the same period a year ago. The increases in period-over-period
expense were the result of the Company's continued investment in research and
development activities. The decrease as a percentage of total revenues in the
quarters were attributable to the growth in revenues from the comparable periods
in the prior year.
Marketing and Sales
Marketing and sales expenses were 17.0% of total revenues for the quarter
ended September 30, 1999, compared to 19.7% for the quarter ended September 30,
1998. Marketing and sales expenses increased 30.3% to $3.2 million for the
quarter ended September 30, 1999, compared to $2.4 million for the quarter ended
September 30, 1998. In the nine month period ended September 30, 1999, marketing
and sales were 17.5% of total revenues, compared to 20.2% for the same period in
1998. Total spending increased 39.8% to $8.6 million for the nine month period
ended September 30, 1999 as compared to $6.2 million in the comparable period in
1998. The increases in spending were primarily the result of the increase in
marketing and sales personnel, expansion of the Company's distribution network
as part of the Company's continued investment in its marketing and sales
infrastructure and increased commissions paid to manufacturer's representatives
attributed to the higher sales volumes. The decreases as a percentage of total
revenues in the quarters were attributable to the growth in revenues from the
comparable periods in the prior year.
General and Administrative
General and administrative expenses for the quarter ended September 30,
1999 increased to $894 thousand from $672 thousand for the same quarter in the
prior year and as a percentage of total revenues decreased to 4.8% for the
quarter ended September 30, 1999, compared to 5.5% for the
Page 9 of 18
<PAGE>
quarter ended September 30, 1998. The total spending for the nine month period
ended September 30, 1999 increased 32.2% to $2.4 million from $1.8 million for
the comparable period in 1998 and as a percentage of revenue decreased to 4.9%
for the nine months ended September 30, 1999 as compared to the 6.0% for the
comparable period a year ago. The increases in period-over-period expense were
the result of the Company's continued investment in the general and
administrative area. The decrease as a percentage of total revenues in the
quarter was attributable to the growth in revenues from the comparable period in
the prior year.
Interest Income, net
Interest income, net of interest expense, was $1.4 million in the quarter
ended September 30, 1999, compared to $265 thousand in the corresponding period
in 1998; for nine months ended September 30, 1999, interest income net, was $3.2
million, compared to $763 thousand in the same period in 1998. The increase in
interest income, net of interest expense, was primarily the result of the
increase in cash balances between the two periods, due to the follow on public
offering of the Company's common stock that was completed in February and March
1999 and cash generated from operations.
Income taxes
During the third quarter of 1999 the Company concluded that it is more
likely than not that all of its net deferred tax assets will be realized.
According, the Company reversed its valuation allowance for net deferred tax
assets, which resulted in the recording of a net tax benefit for the three
months and nine months ended September 30, 1999. The Company's effective tax
rate for the third quarter of 1999, before the effect of the valuation allowance
reversal, was 7.5%, reflecting federal alternative minimum tax and state 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 (all such shares had been converted into shares of Common Stock
as of September 30, 1998), the borrowings from a working capital line and
equipment financing from Silicon Valley Bank, public offerings of its common
stock and cash generated from its operations. In the first quarter of 1999, the
Company completed a follow-on public offering and raised $68.2 million, net of
commissions, and issued 2,932,500 shares of its common stock, as adjusted for
the stock split on June 3, 1999.
The Company's principal sources of liquidity as of September 30, 1999
consisted of $85.8 million in cash, cash equivalents and short-term investments,
$22.7 million in long 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 September 30, 1999, 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
Page 10 of 18
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assets or granting additional security interests in such assets.
In the first nine months of 1999, the Company generated $13.8 million of
cash from its operating activities, the result of net income of $17.7 million
adjusted for non-cash items of $2.3 million, offset by a net increase in working
capital of $1.7 million. Capital expenditures during this period totaled $3.6
million, including purchases of computer equipment and software. During the
quarter the Company made an investment of $2.5 million in Onex Communications
Corporation, a privately-held Boston based company specializing in developing
and marketing VLSI solutions for emerging converged communications networks.
The Company believes that its existing cash resources and cash generated
from operations, will fund necessary purchases of capital equipment and provide
adequate working capital at least 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 in the future or, if so required, that such capital will be
available on terms favorable or acceptable to the Company, if at all.
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 have 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
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all of TranSwitch's key software systems, including its MRP, order entry and
customer services 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
certification from each that it has resolved or will resolve by year end any
Year 2000 issues that might have a material impact on operations. To date, 100%
of its semiconductor foundries and financial institutions and over half of all
other such parties have so certified.
We currently estimate that costs, exclusive of software and systems that
are being replaced or upgraded in the normal course of business, will be
approximately $120,000, plus staff time, of which approximately $20,000 was
spent in 1998 and $50,000 in the first nine months of 1999. We estimate that
$50,000 will be spent in the remainder of 1999. 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. The Committee has developed
various contingency plans and will continue to develop plans for contingencies
as the needs are identified. 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.
Recently Issued Accounting Standards
In June 1998, the FASB issued No. 133 "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133 requires companies to recognize all
derivatives as assets or liabilities mentioned at their fair value. Gains or
losses resulting from changes in the values of those derivatives would be
accounted for depending on the use of the derivative and whether it qualified
for hedge accounting.
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of FASB
Statement No. 133, an Amendment of FASB Statement No. 133" SFAS No. 137 defers
the effective date of SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities" for one year. SFAS No. 133 as amended, is now effective for
all fiscal quarters of all fiscal years beginning after June 15, 2000. The
Company is
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<PAGE>
currently evaluating the impact of SFAS No. 133 on the Company's financial
position and operating 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-Q) may contain statements which 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. 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;
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-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 Data Communications Markets. The
Company derives virtually all of its product revenues from sales of products for
the telecommunications, Internet and data communications markets, which are
characterized by intense competition, rapid technological change and short
product life cycles. Although the telecommunications, Internet and data
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;
-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,
therefore, will be subject to risks associated with foreign sales.
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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.
Page 15 of 18
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PART II. OTHER INFORMATION
Item 5. Other Information.
The Company's By-Laws establish an advance notice procedure with regard to
certain matters, including nominations of persons for election to the
Board of Directors and the proposal of business to be considered by the
stockholders entitled to vote at the next annual meeting of stockholders.
In general for the annual meeting to be held in 2000, notice must be
received, in writing, at the Company's principal executive offices not
later than December 21, 1999 and not before November 21, 1999. Notice
should be sent to the attention of the Secretary of the Company and must
contain specified information concerning the matters to be brought before
such meeting and concerning the stockholder proposing such matters. In
order to curtail any controversy as to the date on which notice was
received by the Company, it is suggested that proponents submit their
notice by Certified Mail, Return Receipt Requested.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11, Statement re: computation of per share earnings.
Exhibit 27, Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September
30, 1999.
Page 17 of 18
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TranSwitch Corporation
(Registrant)
Date: November 11, 1999 /s/ Dr. Santanu Das
---------------------------------------
Dr. Santanu Das
Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Michael F. Stauff
---------------------------------------
Michael F. Stauff
Senior Vice President and Chief
Financial Officer and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
Page 18 of 18
<PAGE>
Exhibit 11:
TranSwitch Corporation
Computation of Earnings per Share (1)
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic earnings per share:
Net income 9,975 1,921 17,740 3,502
====== ====== ====== ======
Weighted average number of common shares
outstanding during the period 25,871 21,401 25,156 20,552
------ ------ ------ ------
Basic earnings per share 0.39 0.09 0.71 0.17
====== ====== ====== ======
Diluted earnings per share:
Net income 9,975 1,921 17,740 3,502
====== ====== ====== ======
Weighted average number of common shares
outstanding during the period 25,871 21,401 25,156 20,552
Common stock issuable with respect to:
Stock options and warrants 2,096 1,251 2,242 1,317
------ ------ ------ ------
Adjusted weighted average number of shares 27,967 22,652 27,398 21,869
outstanding during the period ====== ====== ====== ======
Diluted earnings per share $0.36 $0.08 $0.65 $0.16
====== ====== ====== ======
</TABLE>
- ----------
(1) This exhibit should be read in connection with "Consolidated Statement of
Stockholders' Equity" in Note 5 of Notes to Unaudited Consolidated
Financial Statements.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JUL-01-1999 JAN-01-1999
<PERIOD-END> SEP-30-1999 SEP-30-1999
<CASH> 9,178 9,178
<SECURITIES> 99,233 99,233
<RECEIVABLES> 10,923 10,923
<ALLOWANCES> 248 248
<INVENTORY> 6,701 6,701
<CURRENT-ASSETS> 105,630 105,630
<PP&E> 16,340 16,340
<DEPRECIATION> 9,449 9,449
<TOTAL-ASSETS> 146,566 146,566
<CURRENT-LIABILITIES> 11,579 11,579
<BONDS> 0 0
<COMMON> 25 25
0 0
0 0
<OTHER-SE> 134,962 134,962
<TOTAL-LIABILITY-AND-EQUITY> 134,987 134,987
<SALES> 18,537 49,118
<TOTAL-REVENUES> 18,537 49,118
<CGS> 6,305 17,161
<TOTAL-COSTS> 7,574 20,890
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 6,096 14,258
<INCOME-TAX> (3,879) (3,482)
<INCOME-CONTINUING> 9,975 17,740
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 9,975 17,740
<EPS-BASIC> $0.39 $0.71
<EPS-DILUTED> $0.36 $0.65
</TABLE>
