<PAGE>
EXHIBIT 99.1
TRANSWITCH CORPORATION AND SUBSIDIARIES
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-3
Consolidated Statements of Operations for each of the years
in the three-year period ended December 31, 1999 F-4
Consolidated Statements of Stockholders' Equity for each of the
years in the three-year period ended December 31, 1999 F-5
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 31, 1999 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
TranSwitch Corporation:
We have audited the accompanying consolidated balance sheets of TranSwitch
Corporation and subsidiaries as of December 31, 1999 and 1998, 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, 1999. 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 auditing standards generally accepted
in the United States. 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, 1999 and 1998, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
/s/KPMG LLP
Stamford, Connecticut
August 31, 2000
F-2
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1999 1998
------------------ ------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 55,685 $ 24,950
Short-term investments 20,117 2,953
Accounts receivable, less allowance for doubtful accounts
of $294 and $261 at December 31, 1999 and 1998, respectively 13,208 8,016
Inventories 7,900 5,476
Prepaid expenses and other current assets 5,242 1,251
------------------ ------------------
Total current assets 102,152 42,646
Long-term investments 36,003 --
Property and equipment, net 7,563 5,655
Deferred taxes 11,624 --
Product licenses, net 1,657 1,142
Other assets 3,068 732
------------------ ------------------
Total assets $ 162,067 $ 50,175
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of lease obligations $ 192 $ 224
Accounts payable 4,297 3,003
Accrued expenses 664 958
Accrued compensation 1,628 1,366
Sales return reserve 1,494 1,049
Product license fee payable -- 303
Other current liabilities 1,438 1,457
------------------ ------------------
Total current liabilities 9,713 8,360
Long-term lease obligations 216 521
Deferred taxes -- 39
------------------ ------------------
Commitments and contingencies (note 12)
Total liabilities 9,929 8,920
------------------ ------------------
Stockholders' equity:
Common stock $.001 par value; authorized 100,000,000 shares at
December 31, 1999; and 25,000,000 shares at December 31, 1998; issued
and outstanding 79,038,312 shares at December 31, 1999; and 66,558,774
shares at December 31, 1998 79 66
Additional paid-in capital 150,151 64,479
Accumulated other comprehensive loss (162) (26)
Retained earnings (accumulated deficit) 2,070 (23,264)
------------------ ------------------
Total stockholders' equity 152,138 41,255
------------------ ------------------
Total liabilities and stockholders' equity $ 162,067 $ 50,175
================== ==================
</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,
---------------------------------------------------------
1999 1998 1997
------------------ ------------------- ----------------
<S> <C> <C> <C>
Total revenues $ 73,533 $ 45,993 $ 28,802
Cost of revenues 25,210 17,274 11,802
------------------ ------------------- ----------------
Gross profit 48,323 28,719 17,000
------------------ ------------------- ----------------
Operating expenses:
Research and development 14,543 11,500 9,539
Marketing and sales 12,098 8,824 6,793
General and administrative 3,865 2,875 2,758
------------------ ------------------- ----------------
Total operating expenses 30,506 23,199 19,090
------------------ ------------------- ----------------
Operating income (loss) 17,817 5,520 (2,090)
Interest income (expense):
Interest income 4,740 1,167 677
Interest expense (35) (143) (208)
------------------ ------------------- ----------------
Interest income, net 4,705 1,024 469
------------------ ------------------- ----------------
Income (loss) before income taxes 22,522 6,544 (1,621)
Income tax expense (benefit) (2,812) 387 101
------------------ ------------------- ----------------
Net income (loss) $ 25,334 $ 6,157 $ (1,722)
================== =================== ================
Basic earnings (loss) per share (note 10) $ 0.33 $ 0.10 $ (0.03)
================== =================== ================
Diluted earnings (loss) per share (note 10) $ 0.31 $ 0.09 $ (0.03)
================== =================== ================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(in thousands, except share data)
<TABLE>
<CAPTION>
Common stock Convertible Additional
--------------------------- preferred paid-in
Shares Amount stock capital
----------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 54,111,570 $ 54 $ -- $ 45,566
Comprehensive loss:
Net loss -- -- -- --
Currency translation adjustment -- -- -- --
Total comprehensive loss
Shares of common stock issued in connection with the exercise
of stock options and warrants, and the stock purchase plan 1,826,034 2 -- 697
Issuance of convertible preferred stock, net of issuance costs -- -- 12,886 770
Deemed dividend on convertible preferred stock -- -- 1,471 (1,471)
Compensation related to issuance of stock options -- -- -- 380
----------- ------------ ----------- -----------
Balance at December 31, 1997 55,937,604 56 14,357 45,942
Comprehensive income:
Net income -- -- -- --
Currency translation adjustment -- -- -- --
Total comprehensive income
Shares of common stock issued in connection with the exercise
of stock options, and the stock purchase plan 3,516,680 3 3,876
Deemed dividend on convertible preferred stock -- -- 143 (143)
Issuance costs for convertible preferred stock -- -- -- (75)
Shares of common stock issued upon
conversion of preferred stock 7,104,490 7 (14,500) 14,495
Compensation related to issuance of stock options -- -- -- 384
----------- ------------ ----------- -----------
Balance at December 31, 1998 66,558,774 66 -- 64,479
Comprehensive income:
Net income -- -- -- --
Currency translation adjustment -- -- -- --
Total comprehensive income
Shares of common stock issued in connection with the exercise
of stock options, and the stock purchase plan 3,682,038 4 -- 7,101
Shares of common stock issued in connection with
follow-on public offering, net of issuance costs 8,797,500 9 -- 68,172
Tax benefits on stock options -- -- -- 8,266
Reversal of deferred tax asset valuation allowance relating
to tax benefits on stock options -- -- -- 2,000
Compensation related to issuance of stock options -- -- -- 133
----------- ------------ ----------- -----------
Balance at December 31, 1999 $79,038,312 $ 79 $ -- $ 150,151
=========== ============ =========== ===========
<CAPTION>
Accumulated
Retained other
earnings comprehensive
(accumulated income
deficit) (loss) Total
------------- ------------- -----------
<S> <C> <C> <C>
Balance at December 31, 1996 $ (27,699) $ 9 $ 17,930
Comprehensive loss:
Net loss (1,722) -- (1,722)
Currency translation adjustment -- (89) (89)
-----------
Total comprehensive loss (1,811)
-----------
Shares of common stock issued in connection with the exercise
of stock options and warrants, and the stock purchase plan -- -- 699
Issuance of convertible preferred stock, net of issuance costs -- -- 13,656
Deemed dividend on convertible preferred stock -- -- --
Compensation related to issuance of stock options -- -- 380
-------------- ------------- -----------
Balance at December 31, 1997 (29,421) (80) 30,854
Comprehensive income:
Net income 6,157 -- 6,157
Currency translation adjustment -- 54 54
-----------
Total comprehensive income 6,211
-----------
Shares of common stock issued in connection with the exercise
of stock options, and the stock purchase plan -- -- 3,879
Deemed dividend on convertible preferred stock -- -- --
Issuance costs for convertible preferred stock -- -- (75)
Shares of common stock issued upon
conversion of preferred stock -- -- 2
Compensation related to issuance of stock options -- -- 384
-------------- ------------- -----------
Balance at December 31, 1998 (23,264) (26) 41,255
Comprehensive income:
Net income 25,334 -- 25,334
Currency translation adjustment (136) (136)
-----------
Total comprehensive income 25,198
-----------
Shares of common stock issued in connection with the exercise
of stock options, and the stock purchase plan -- -- 7,105
Shares of common stock issued in connection with
follow-on public offering, net of issuance costs -- -- 68,181
Tax benefits on stock options -- -- 8,266
Reversal of deferred tax asset valuation allowance relating
to tax benefits on stock options -- -- 2,000
Compensation related to issuance of stock options -- -- 133
-------------- ------------- -----------
Balance at December 31, 1999 $ 2,070 $ (162) $ 152,138
============== ============= ===========
</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,
-------------------------------------------------------------------
1999 1998 1997
---------------- ----------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 25,334 $ 6,157 $ (1,722)
---------------- ----------------- ----------------
Adjustments required to reconcile net income (loss) to
cash flows from operating activities:
Depreciation and amortization 3,494 2,702 1,987
Provision for bad debt -- 50 --
Deferred income taxes (5,043) (167) --
Other non-cash items -- -- --
Stock compensation expense 133 384 380
Changes in assets and liabilities:
(Increase) in accounts receivable (5,192) (3,161) (1,688)
(Increase) in inventories (2,424) (664) (1,288)
(Increase) in prepaids and other assets (1,541) (873) (645)
Increase (decrease) in accounts payable 1,294 1,530 (413)
Increase in accrued expenses and other liabilities 1,753 859 1,633
---------------- ----------------- -----------------
Total adjustments (7,526) 660 (34)
---------------- ----------------- ----------------
Net cash provided by (used in)
operating activities 17,808 6,817 (1,756)
---------------- ----------------- ----------------
Cash flows from investing activities:
Purchase of product licenses (1,000) (550) (3)
Capital expenditures (5,053) (3,057) (2,895)
Purchase of other investments (2,499) -- --
Purchases of held-to-maturity investments (98,855) (6,405) (8,615)
Proceeds from maturities of investments 45,688 4,562 16,282
---------------- ----------------- ----------------
Net cash provided by (used in)
investing activities (61,719) (5,450) 4,769
---------------- ----------------- ----------------
Cash flows from financing activities:
Payments on product license obligations (303) (1,045) (727)
Proceeds from the exercise of stock options
and warrants 7,105 3,879 699
Payments on lease obligations (337) (237) (69)
Proceeds from the issuance of common stock, net of
issuance costs 68,181 -- --
Proceeds from the issuance of convertible preferred
stock, net of issuance costs -- (73) 13,656
---------------- -------------- ----------------
Net cash provided by
financing activities 74,646 2,524 13,559
---------------- -------------- ----------------
Increase in cash and cash equivalents 30,735 3,891 16,572
Cash and cash equivalents at beginning of year 24,950 21,059 4,487
---------------- -------------- ----------------
Cash and cash equivalents at end of year $ 55,685 $ 24,950 $ 21,059
================ ================= ================
Supplemental disclosure of cash flows information:
Cash paid for interest $ 62 $ 129 $ 207
Cash paid for income taxes $ 669 $ 355 $ 111
Tax benefit realized from the exercise of stock options $ 8,266 $ -- $ --
Supplemental schedule of non-cash financing activities:
Lease obligations $ -- $ 547 $ 276
</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, based in Shelton, Connecticut, 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 subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Reclassification
Certain prior year amounts have been reclassified to conform with the
current year's presentation.
Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Cash equivalents
amounted to $44,391 and $13,736 at December 31, 1999 and 1998,
respectively, and consist of certificates of deposit, U.S. Treasury Bills,
commercial paper and U.S. Agency notes.
Investments
The Company's investments comprise U.S. Treasury Bills, commercial paper,
and corporate debt securities. Investments with maturities of less than one
year are considered short-term. Long-term investments consist of the same
mix of securities with maturity dates greater 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.
Fair Value of Financial Instruments
The carrying amounts for cash and cash equivalents, short-term investments,
accounts receivables and accounts payable approximate fair value because of
their short maturities. The fair values of investments are determined using
quoted market prices for those securities or similar financial instruments.
F-7
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
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 using the greater of the amount computed
using the ratio that current gross revenues for a product bear to the total
of current and anticipated future gross revenues for that product, or the
straight-line method over three to five years.
Subsequent to a product license's acquisition, the Company continually
evaluates whether events and circumstances have occurred that indicate the
remaining estimated useful life of the product license may warrant revision
or that the remaining balance of the product license may not be
recoverable. When factors indicate that a product license should be
evaluated for possible impairment, the Company uses an estimate of the
related product licenses' undiscounted future cash flows over the remaining
life of the asset in measuring whether the product license is recoverable.
Any impairment is measured against discounted cash flows.
Revenue Recognition
Sales of product are recognized upon shipment to distributors and original
equipment manufacturers. Sales to certain distributors are made under
distributor agreements which provide the distributor with certain price
protection and return and allowance rights. Revenues are reduced for
estimated price protection and returns based upon historical experience.
Revenues from development contracts are derived from agreements with third
parties. These agreements provide for payments to the Company for the
development of new products and reimbursement for expenses incurred based
on the achievement of certain milestones. Revenues are recognized as the
related costs are incurred over the term of the agreement. The Company
primarily retains exclusive ownership of technology developed in connection
with the design of semiconductors. Technology developed in connection with
customized computer boards generally transfers to third parties.
F-8
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
Concentrations of Credit Risk
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.
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 are charged to cost of revenues.
Research and Development Costs
Research and development costs are expensed as incurred.
Software Development Costs
Software development costs, which are required to be capitalized pursuant
to Statement of Financial Accounting Standards (SFAS) No. 86, "Accounting
for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed," have not been material to the Company to date.
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.
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 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.
F-9
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
Foreign Currency Translation
All of the Company's international subsidiaries use their local currency as
their functional currency. Therefore, assets and liabilities of
international subsidiaries are translated at exchange rates in effect at
the balance sheet date and income and expense accounts are translated at
average exchange rates during the year. The resulting translation
adjustments are recorded in accumulated other comprehensive income (loss).
Use of Estimates
The preparation of financial statements in conforming with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts of assets and liabilities in the
financial statements and accompanying notes. Actual results could differ
from those estimates.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS No.
133). 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 will adopt SFAS No. 133, as amended,
beginning January 1, 2001. The Company has not yet made a determination of
the impact of this accounting standard on its financial position or results
of operations.
The Securities and Exchange Commission (SEC) released Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements," on
December 3, 1999, SAB No. 101A on March 24, 2000 and SAB No. 101B on June
26, 2000. SAB No. 101 sets forth the views of the staff of the SEC on
revenue recognition issues, including conceptual issues as well as
industry-specific guidance.
The Company is required to report the impact of SAB No. 101, as amended by
SAB No. 101A and SAB No. 101B, no later than the fourth fiscal quarter of
the fiscal year 2000. The effect of the change would be recognized as a
cumulative effect of a change in accounting principle as of January 1,
2000. Prior year financial statements will not be restated.
(2) Business Combinations
In May 2000, the Company completed its combination with Easics NV, in which
Easics NV became a wholly-owned subsidiary of the Company. The Company
issued 505,382 shares of common stock in exchange for all the outstanding
stock of Easics NV. The combination was accounted for under the
F-10
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
pooling-of-interests method of accounting and, accordingly, the
accompanying financial statements and footnotes have been restated to
include the operations of Easics NV for all periods presented.
The results of operations previously reported by the separate enterprises
and the combined amounts presented in the accompanying consolidated
financial statements are summarized below:
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------
1999 1998 1997
--------- --------- ----------
<S> <C> <C> <C>
Revenues:
TranSwitch $ 71,407 $ 44,169 $ 27,084
Easics NV 2,126 1,824 1,718
--------- --------- ----------
Combined $ 73,533 $ 45,993 $ 28,802
========== ========= =========
Net income (loss):
TranSwitch $ 25,154 $ 6,003 $ (1,873)
Easics NV 180 154 151
--------- --------- ----------
Combined $ 25,334 $ 6,157 $ (1,722)
========== ========= =========
</TABLE>
Royalties from the Company to Easics NV in the amount of $68, $79 and $70
have been eliminated in the consolidated financial statements for the years
ended December 31, 1999, 1998 and 1997, respectively.
Accounts payable from the Company to Easics NV in the amount of $40 have
been eliminated as of December 31, 1999 and 1998. There were no other
significant transactions between TranSwitch and Easics NV prior to the
combination.
On August 1, 2000, the Company acquired all of the outstanding stock of
Alacrity Communications, Inc. (Alacrity) for 266,836 shares of the
Company's Common Stock and the assumption of a loan in the amount of
approximately $1.3 million, for a total purchase price of $11.1 million.
Alacrity specializes in the development and marketing of high-capacity VLSI
switching devices for telecommunications and data communications
applications. The transaction will be accounted for using the purchase
method of accounting, commencing upon the date of acquisition. Accordingly,
this acquisition has not been reflected in the accompanying consolidated
financial statements of the Company.
F-11
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
(3) Investments
The following table summarizes the Company's investment in securities at
December 31, 1999:
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Fair
cost gains (losses) value
--------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Money market & certificates of deposit $ 5,756 $ 6 $ -- $ 5,762
U.S government & agency obligations 12,343 -- (75) 12,268
Corporate bonds & commercial paper 82,412 -- (255) 82,157
--------- ---------- ----------- --------
Total $ 100,511 $ 6 $ (330) $100,187
========= ========== ========== ========
Reported as:
Cash equivalents $ 44,391
Short-term investments 20,117
Long-term investments 36,003
---------
Total $ 100,511
=========
</TABLE>
(4) Inventories
The components of inventories at December 31, 1999 and 1998 follow:
<TABLE>
<CAPTION>
December 31,
--------------
1999 1998
------ ------
<S> <C> <C>
Raw materials $1,017 $ 947
Work in process 1,121 809
Finished goods 5,762 3,720
------ ------
Total inventories $7,900 $5,476
====== ======
</TABLE>
F-12
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
(5) Property and Equipment, Net
The components of property and equipment, net at December 31, 1999 and 1998
follow:
<TABLE>
<CAPTION>
Estimated
useful December 31,
---------------------
lives 1999 1998
---------- --------- ---------
<S> <C> <C> <C>
Purchased computer software 3 years $ 6,902 $ 5,131
Equipment 3-7 years 8,187 6,094
Semiconductor tooling 3 years 1,077 998
Furniture 3-7 years 1,651 1,175
Leasehold improvements Lease term 563 196
Construction in progress 321 353
--------- ---------
Gross property, plant and equipment 18,701 13,947
Less accumulated depreciation
and amortization (11,138) (8,292)
--------- ---------
Property and equipment, net $ 7,563 $ 5,655
========= =========
</TABLE>
(6) Product Licenses, Net
From time to time, the Company will acquire the rights to certain
technology for use in the manufacture of new products. During 1999 and
1998, the Company capitalized $1000 and $550, respectively, in connection
with the acquisition of selected technologies.
Amortization of product licenses amounted to $485 and $408 in 1999 and
1998, respectively.
(7) 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 its 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, the Company has one segment: Communication Semiconductor Products.
F-13
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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. Substantially all foreign revenues are
exported from the United States and are denominated in U.S. dollars.
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------------------
1999 1998 1997
---------------- ---------------- -----------------
<S> <C> <C> <C>
Revenues:
United States $ 50,334 $ 23,803 $ 18,064
Israel 2,937 5,961 517
China 2,358 7,175 1,831
Other areas 17,904 9,054 8,390
---------------- ---------------- -----------------
Total revenues $ 73,533 $ 45,993 $ 28,802
================ ================ =================
</TABLE>
Foreign revenues represented 32%, 48% and 37% of total revenues in 1999,
1998 and 1997, respectively.
Long-lived assets of the Company are located in the following areas at
December 31, 1999, 1998, and 1997, respectively:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Long lived assets:
United States $ 6,616 $ 4,677 $ 3,499
Foreign countries 947 978 744
----------- ----------- -----------
Total long-lived assets $ 7,563 $ 5,655 $ 4,243
=========== =========== ===========
</TABLE>
F-14
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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, 1999, 1998 and 1997 follow:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Insight Electronics, Inc. (1) 33% 19% 39%
Coltek Technology (1) * 14% *
Tellabs Operations, Inc. (1)(2)(3) 13% 20% 15%
Repton Electronics Inc. (2) * * 15%
Arrow Electronics, Inc. (2) 18% 16% *
Lucent Technologies, Inc. (1)(3)(4) 16% * *
Nortel Networks
Corporation (2)(3) 13% * *
</TABLE>
(1) Insight Electronics and Coltek Technology (formerly Columbia
Technology) are distributors of the Company's products to various end-
users, none of which comprised more than 10% of the Company's total
revenues during 1998 and 1997. In 1999, a portion of Lucent
Technologies' purchases were shipped through Insight Electronics.
(2) The Company's sales to Tellabs Operations during 1999 were made
through Arrow Electronics, which also shipped products to Nortel
Networks. Sales to Tellabs Operations through Arrow Electronics during
1998 represented 16% of the Company's total revenues. During 1998,
sales to Tellabs Operations were made through Reptron Electronics and
Arrow Electronics, both Tellab Operations' designated distributors.
The Company's sales to Tellabs Operations during 1997 were made
through Reptron Electronics, Tellabs Operations' designated
distributor.
(3) Represents total shipments, including those made directly and those
made through distributors.
(4) Includes sales to Ascend Communications, which was acquired by Lucent
Technologies during 1999. This percentage represents total shipments,
including those made directly and those made through distributors.
* Revenues were less than 10% of the Company's total revenues in these
years.
F-15
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
(8) Income Taxes
The components of 1999 and 1998 income before income taxes are as follows:
Years ended December 31,
-------------------------
1999 1998
------------ ----------
Domestic income $ 22,262 $ 6,287
Foreign income 260 257
----------- ----------
Income before income taxes $ 22,522 $ 6,544
=========== ==========
The provision (benefit) for income taxes is comprised of the following:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------------
1999 1998 1997
------------------ ------------------ -----------------
<S> <C> <C> <C>
Federal income taxes
Current $ 1,581 $ 161 $ --
Deferred (4,682) (161) --
State income taxes
Current 434 252 --
Deferred (263) -- --
Foreign income taxes
Current 216 141 81
Deferred (98) (6) 20
------------------ ------------------ -----------------
Income taxes $ (2,812) $ 387 $ 101
================== ================== =================
</TABLE>
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 years ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------
1999 1998
------------- -----------
<S> <C> <C>
U.S federal statutory tax rate 35.0% 34.0%
State taxes 0.8 4.0
Utilization of NOL -- (34.4)
Change in valuation allowance (48.2) --
Permanent differences and other (0.1) 2.3
------------ -----------
Effective income tax rate (12.5)% 5.9%
============ ===========
</TABLE>
F-16
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
The difference between the statutory federal income tax rate and the
Company's effective tax rate for the year ended December 31, 1997 is
principally due to net operating losses.
The tax effect of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31, 1999 and 1998 are
presented below:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Deferred tax assets:
Property and equipment $ 295 $ 160
Nondeductible reserves 2,332 1,710
Net operating losses 9,215 10,333
Research and development credit 2,599 2,429
Other 412 366
---------- -----------
Total gross deferred tax assets 14,853 14,998
Less valuation allowance (833) (14,825)
---------- -----------
Net deferred tax assets 14,020 173
---------- -----------
Deferred tax liabilities:
Product license (62) (125)
Other -- (39)
---------- -----------
Total gross deferred tax liabilities (62) (164)
---------- -----------
Total deferred taxes, net of valuation allowance $ 13,958 $ 9
========== ===========
</TABLE>
The net change in the total valuation allowance for the year ended December
31, 1999 was a net decrease of approximately $14,000. During 1999, the
Company concluded that it is more likely than not that substantially all of
its net deferred tax assets will be realized due to the Company's
continuing profitability and forecasts of taxable income. Of the $14,000
valuation allowance reversal, approximately $12,000 was recorded as a tax
benefit in the statement of operations, and approximately $2,000 as an
increase in additional paid in capital, which represents the amount of
deferred tax assets generated from the exercise of stock options. Of the
remaining valuation allowance of $833, subsequently recognized tax
benefits, if any, in the amount of $833 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. The deferred tax asset at December 31, 1999 is
recorded as both current and non-current in the amounts of $2,334 and
$11,624, respectively. The current portion is recorded in other assets.
At December 31, 1999, the Company had available, for federal income tax
purposes, NOL carryforwards of approximately $23,948 and research and
development tax credit carryforwards of approximately $2,599 expiring in
varying amounts from 2003 through 2019.
F-17
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
Certain transactions involving beneficial ownership of the Company have
occurred which resulted in a stock ownership change for purposes of Section
382 of the Internal Revenue Code of 1986, as amended. Consequently,
approximately $21,852 of the Company's NOL carryforward and $1,410 of the
Company's research and development tax credit carryforward are subject to
these limitations. However, management believes it is more likely than not
that the NOL and research and development tax credits will be utilized.
(9) Stockholders' Equity
Convertible Preferred Stock
The Company has authorized 1,000,000 shares of Preferred Stock, $.01 par
value per share. There are no shares issued or outstanding at December 31,
1999 or 1998. 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 7,104,490 shares of Common Stock.
Common Stock
On February 9, 1999 and March 16, 1999, the Company completed a follow-on
public offering of 8,797,500 shares of Common Stock for net proceeds, after
issuance costs, of $68,181.
Share and per-share data reflect the three-for-two stock split effective
June 8, 1999, the three-for-two stock split effective January 10, 2000, and
the two-for-one stock split effective August 10, 2000. All share and per
share amounts have been retroactively restated for these stock splits.
F-18
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
The Company, in connection with its May 2000 annual shareholders meeting,
received shareholder approval to increase its authorized shares to
300,000,000.
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 300,000 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 May 27, 1998. The Stock Plan currently
provides for the issuance of a maximum of 15,600,000 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 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, 1999 and 1998, 4,643,428 and 1,459,800 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 1,050,000 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 37,500 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
28,800 shares which vest fully after one year.
F-19
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
The Director Plan will be 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 Weighted average
of options option price
--------------- ----------------
<S> <C> <C>
Outstanding at December 31, 1996 8,105,910 $ 1.07
Granted 6,024,600 1.62
Exercised (1,710,810) 0.33
Canceled (2,653,278) 1.86
--------------- ----------------
Outstanding at December 31, 1997 9,766,422 1.27
Granted 7,250,686 3.11
Exercised (3,414,888) 1.09
Canceled (692,790) 1.75
--------------- ----------------
Outstanding at December 31, 1998 12,909,430 2.65
Granted 5,470,116 11.54
Exercised (3,643,948) 1.83
Canceled (915,526) 4.54
--------------- ----------------
Outstanding at December 31, 1999 13,820,072 $ 8.76
=============== ================
</TABLE>
Options outstanding and exercisable at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
----------------------------------------------------- --------------------------------
Weighted
average Weighted Weighted
Range of Number remaining average Number average
exercise prices outstanding contractual life exercise price exercisable exercise price
---------------------- --------------- ----------------- ---------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
$ 0.27 to 1.92 2,379,978 6.60 1.28 1,069,122 $ 1.26
2.03 to 2.66 2,529,160 7.81 2.30 722,236 2.28
2.81 to 4.24 3,098,584 8.60 3.28 587,714 3.32
4.39 to 8.66 1,725,300 8.99 7.50 114,948 7.36
8.70 to 10.11 2,154,900 6.97 9.41 -- --
10.53 14.67 617,550 8.01 12.48 12,500 10.53
15.00 to 16.34 789,000 6.77 15.77 8,000 15.00
16.35 to 21.01 525,600 6.27 18.08 -- --
---------- ------- -------------- ----------------- ---------------- ------------- -----------------
$ 0.27 to 21.01 13,820,072 7.50 $ 8.76 2,514,520 $ 6.63
========== ======= ============== ================= ================ ============= =================
</TABLE>
F-20
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
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, 1999, 1998 and 1997, the Company recorded compensation expense
of $77, $155, and $155, respectively, for these options. The value of the
deferred compensation is fully amortized as of December 31, 1999.
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>
Year ended December 31,
---------------------------
1999 1998 1997
--------- ------ --------
<S> <C> <C> <C>
Net income (loss) - as reported $ 25,334 $6,157 $(1,722)
Net income (loss) - pro forma 13,029 744 (4,166)
Basic earnings (loss) per share - as reported 0.33 0.10 (0.03)
Basic earnings (loss) per share - pro forma 0.17 0.01 (0.08)
Diluted earnings (loss) per share - as reported 0.31 0.09 (0.03)
Diluted earnings (loss) per share - pro forma 0.16 0.01 (0.08)
</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.
As reflected in the pro forma amounts in the preceding table, the average
fair value of each option granted in 1999, 1998 and 1997 was $6.16, $3.82,
and $1.88, 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:
1999 1998 1997
----- ----- -----
Risk-free interest rate 6.7% 5.2% 5.7%
Expected life in years 7.5 8.1 7.7
Expected volatility 73.0% 68.9% 66.0%
Expected dividend yield -- -- --
F-21
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
For the years ended December 31, 1999, 1998 and 1997, the Company
recognized additional compensation expense of $56, $229 and $225,
respectively, as required by SFAS No. 123, relating to stock options
granted to non-employees.
Warrants
Warrants to purchase Common Stock were granted to the original investors in
the Company 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 at a rate of one share of
Common Stock for each warrant to purchase Common Stock. The Company did not
issue any warrants during the year ended December 31, 1999.
<TABLE>
<CAPTION>
Warrants - common stock
-------------------------------------------------------------
Number of Price per Expiration
warrants share date
------------------ ----------------- -----------------
<S> <C> <C> <C>
Outstanding at
December 31, 1996 20,868 $ .20-.50 12/96-11/98
Exercised (16,076) -- 12/96-11/98
------------------ ----------------- -----------------
Outstanding at
December 31, 1997 4,792 .20-.50 12/96-11/98
Expired (4,792) --
------------------ ----------------- -----------------
Outstanding at
December 31, 1998 -- -- --
------------------ ----------------- -----------------
Outstanding at
December 31, 1999 -- $ -- --
================== ================= =================
</TABLE>
(10) Earnings Per Share
The basic earnings (loss) per share for the years ended December 31, 1999,
1998 and 1997 follows:
<TABLE>
<CAPTION> Year ended December 31,
---------------------------------------------------
1999 1998 1997
-------------- -------------- ---------------
<S> <C> <C> <C>
Net income (loss) 25,334 $ 6,157 $ (1,722)
Weighted average shares (in
thousands) 76,676 63,174 55,190
Basic earnings (loss) per share 0.33 $ 0.10 $ (0.03)
</TABLE>
F-22
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
Diluted earnings per share for the years ended December 31, 1999 and 1998
follows:
<TABLE>
<CAPTION>
Years ended
December 31,
-------------------------
1999 1998
--------- ---------
<S> <C> <C>
Net income $ 25,334 $ 6,157
========= =========
Weighted average common shares outstanding
for the period (in thousands) 76,676 63,174
Stock options, net of assumed
treasury share repurchases (in thousands) 4,920 4,308
--------- ---------
Adjusted weighted average shares outstanding
for the period (in thousands) 81,596 67,482
========= =========
Diluted earnings per share $ 0.31 $ 0.09
========= =========
</TABLE>
Diluted loss per share amount is not presented for the year ended December
31, 1997 as it is the same as basic. Because the Company recorded a net
loss in this year, the assumed exercise of dilutive securities would be
antidilutive.
The weighted average shares of dilutive securities that would have been
used to calculate diluted earnings per share had their effect not been
antidilutive for the year ended December 31, 1997 are as follows:
Stock options 2,856,904
Warrants 8,794
Convertible preferred stock 1,713,138
------------------
Total 4,578,836
==================
(11) 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 1999, the maximum contribution was 20% of pre-tax income
subject to IRS limitations. The Company provides matching contributions
equal to 50% of the employees' deferred compensation, up to a maximum of
6%. The Company's contribution expense amounted to, $307, $230 and $188 for
1999, 1998 and 1997, respectively.
F-23
<PAGE>
TRANSWITCH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
(12) Commitments and Contingencies
Line of Credit
In July 1999, the Company extended the time frame of its line of credit
agreement with Silicon Valley Bank which allows the Company access up to
$8,000 for working capital purposes, bearing interest at prime +3/4% due on
July 8, 2000, and $2,000 for equipment purchases, bearing interest at prime
+1% due on May 31, 2002. The line is unsecured. The Company has a pledge
that it will seek Silicon Valley Bank's approval prior to allowing another
party to secure the Company's assets.
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, 1999 and 1998, no amounts were outstanding under this
agreement.
Development Agreements
From time to time, the Company has entered into agreements with third
parties for the development and/or licensing of products for its
manufacture and sale, or the licensing of technology that the Company may
use in the manufacture of products, for which royalties are paid based upon
actual sales of these products. The Company recognized royalty expense of
$612, $594 and $758 in 1999, 1998 and 1997, 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
$1,153, $838 and $774 during 1999, 1998 and 1997, respectively. Future
minimum operating lease commitments that have remaining, non-cancelable
lease terms in excess of one year at December 31, 1999 follow:
2000 $ 784
2001 631
2002 595
2003 597
2004 584
Thereafter 1,488
----------
$ 4,679
==========
F-24
