-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Gem8KVQlF3CKkS9ePRcss6Jc5DdqRi5GnTC0kzkkwule9aK2z15w8c4e0bETD1yL Cb8lNyIVx2K5g0QqqF/lQw== 0000927016-00-001064.txt : 20000331 0000927016-00-001064.hdr.sgml : 20000331 ACCESSION NUMBER: 0000927016-00-001064 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRANSWITCH CORP /DE CENTRAL INDEX KEY: 0000944739 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 061236189 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-25996 FILM NUMBER: 585476 BUSINESS ADDRESS: STREET 1: THREE ENTERPRISE DRIVE CITY: SHELTON STATE: CT ZIP: 06484 BUSINESS PHONE: 2039298810 MAIL ADDRESS: STREET 1: THREE ENTERPRISE DRIVE CITY: SHELTON STATE: CT ZIP: 06484 10-K 1 FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 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) 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 29, 2000, as reported on the Nasdaq National Market, was approximately $4,040,739,460. 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 29, 2000: 39,947,163 DOCUMENTS INCORPORATED BY REFERENCE Parts of the following document are incorporated by reference in Part III of this Form 10-K Report: Proxy Statement for Registrant's 2000 Annual Meeting of Shareholders--Items 10, 11, 12 and 13. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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" and "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. Management's 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: the 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 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 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 for 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 target 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 believes that its 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 2 large number of VLSI blocks that operate under the demanding requirements of the telecommunications and data communications industry. These blocks have been designed using standard VLSI-oriented programming languages such as VHDL and M (a C-like language) to create new devices that meet expanding customer requirements. Availability of these blocks and ability to access higher density manufacturing processes allow the Company to develop a device to execute multiple functions that were previously available only from a combination of discrete devices. TranSwitch has also developed proprietary toolsets called "Test Benches," which facilitate on-time development of products and help assure that 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 premise 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, 3 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. 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 all of which are denominated in US dollars, represented 30%, 46% and 33% of total revenues during 1999, 1998 and 1997, respectively. The following revenues from customers is based on the geographic location of the Company's customers. All sales to foreign customers are exported from the United States and are denominated in U.S. dollars.
Year ended December 31, ---------------------------------------- Country 1999 1998 1997 ------- ------------- ------------ ------------ (in millions) (in millions) (in millions) United States..................... $49.8 $23.7 $18.1 Israel............................ 2.9 5.8 .5 China............................. 2.4 7.2 1.8 Other countries................... 16.3 7.5 6.7 ----- ----- ----- Total revenues.................. $71.4 $44.2 $27.1 The following table sets forth for the periods indicated, the percentage of the Company's total revenues derived from its significant distributors and customers listed below: Year ended December 31, ---------------------------------------- Distributors 1999 1998 1997 ------------ ------------- ------------ ------------ Insight Electronics, Inc. (1)..... 34% 20% 41% Arrow Electronics, Inc. (2)....... 19% 17% * Columbia Technology (1)........... * 15% * Customers 1999 1998 1997 --------- ------------- ------------ ------------ Lucent Technologies, Inc. (3)..... 16% * * Tellabs Operations, Inc. (2)...... 13% 21% 16% Nortel Communications (4)......... 13% * *
- -------- * Below 10% of the Company's total revenues. (1) Columbia Technology and Insight Electronics are distributors of our products to various end-users, none of which comprised more than 10% of the Company's total revenues during the periods 1998 and 1997. In 1999 a portion of the Lucent Technologies products were shipped through Insight Electronics, Inc. (2) The Company's sales to Tellabs during 1999 were made through Arrow which also shipped products to Nortel Communications, Inc. Sales to Tellabs through Arrow during 1998 represented 17% of the Company's total revenues. During 1998, sales to Tellabs were made through Reptron Electronics, Inc. and Arrow both Tellabs' designated distributors. The Company's sales to Tellabs during 1997 were made through Reptron, Tellabs' designated distributor. (3) 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. (4) This represents total shipments including those made directly and those made through distributors. 4 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, 1999, the Company had 105 full-time employees engaged in research and development efforts. The Company believes that its research and development staffing will only moderately increase in 2000. Expenditures for research and development in 1999, 1998 and 1997 were approximately $14.0 million, $11.1 million and $9.2 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 it products. The Company invests in establishing and enhancing its design process, tools, methodology and proprietary Tests Benches. From time to time, the Company acquires rights to intellectual property from third parties to enhance its product lines. The Company's internal research and development organization thoroughly reviews the external development processes and the design of these products as part of its quality assurance process. Patents and Licenses The Company has 28 patents issued and 15 patent applications pending in the U.S. Of the 28 issued patents, one is co-owned by ECI Telecom Ltd. and one is co-owned by Siemens Telecommunications Systems Ltd. The Company has four patents issued and 18 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 five patents pending in the People's Republic of China and one patent pending in Hong Kong. The Company has 13 patent applications pending in selected countries in the European Patent Office (EPO), two patents issued in France, Germany, and the U.K., one patent issued in France, Germany, Italy and the U.K., and one patent issued in Belgium, France, Germany, Italy, Spain, Sweden and the U.K. in addition, the Company has five patent applications pending in Japan, and seven patents issued and three patents pending in Israel. Further, the Company has two patent applications 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 almost eight 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 11 trade or service marks in the U.S., and it has nine more U.S. applications for trademarks awaiting approval. The Company has also obtained three trademark registrations and has one trademark awaiting approval under the European Trademark (ECT) procedure. 5 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, Inc. patents. The Company sells its products into the telecommunications industry, an industry whose products are subject to various standards which are agreed upon by recognized industry standards committees. Where applicable, the Company designs its product to be in conformity with these standards. The Company has received and expects to continue to receive, in the normal course of business, communications from third parties stating that if certain of TranSwitch's products meet a particular standard, these products may infringe one or more patents of that third party. After a review of the circumstances of each communication, the Company in its discretion and upon the advice of counsel has taken or may take in the future one of the following courses of action: the Company may negotiate payment for a license under the patent or patents that may be infringed; the Company may use its technology and/or patents to negotiate a cross-license with the third party; or the Company may decline to obtain a license on the basis that it does not infringe the claimant's patent or patents, or that such patents are not valid or other 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 three foundries, two of which are located in the U.S. and the third in Taiwan, to process its wafers: Texas Instruments Incorporated (TI), LSI Logic Corporation (including Symbios Logic Inc., which it acquired) 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. 6 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 2004, and in return the Company has agreed to purchase unutilized commitment below an agreed minimum level. See also "Note 11 to 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 manufacture of integrated circuits is a highly complex and technologically demanding process. Although the Company has undertaken to diversify its sources of semiconductor device supply and works closely with all its foundries to minimize the likelihood of reduced manufacturing yields, the Company's foundries have from time to time experienced lower than anticipated manufacturing yields, particularly in connection with the introduction of new products and the installation and start up of new process technologies. Reduced yields have at times adversely affected the Company's operating results. Competition The semiconductor industry is intensely competitive and is characterized by the following: -- price erosion; -- rapid technological change; -- shortage in fabrication capacity; -- heightened international competition in many markets; and -- unforeseen manufacturing yield problems. The communications and data communications industries, which are the primary target markets for TranSwitch, are also 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, 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, Conexant Systems Inc., 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. 7 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. 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, 1999, the Company's backlog was $21.7 million, as compared to $14.0 million as of December 31, 1998. 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, 1999, the Company had 203 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. 8 ITEM 2. PROPERTIES Facilities The Company's headquarters are located in a suburban office park in Shelton, Connecticut, where it leases approximately 60,000 square feet in a four-story office building. Product development and all final inspection, 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 2000. The lease is due to expire in November 2007. The Company also leases approximately 1,200 square feet in Raleigh, 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 5,000 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, 1999. 9 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 sale information for the Company's Common Stock as reported on the Nasdaq National Market:
High Low Sale(1) Sale(1) ------- ------- 1998 First Quarter................................................ $ 5.56 $ 3.33 Second Quarter............................................... 6.83 4.78 Third Quarter................................................ 8.89 5.72 Fourth Quarter............................................... 20.11 4.89 1999 First Quarter................................................ $21.22 $13.22 Second Quarter............................................... 31.75 15.56 Third Quarter................................................ 43.33 26.83 Fourth Quarter............................................... 48.41 24.79
- -------- (1) Prices adjusted to reflect a 3 for 2 stock split in the form of a dividend on June 8, 1999 and a 3 for 2 stock split in the form of a dividend on January 11, 2000. As of February 29, 2000, there were approximately 222 holders of record and approximately 20,000 of beneficial shareholders 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. 10 ITEM 6. SELECTED FINANCIAL DATA The selected data presented below under the captions, "Selected Statement of Earnings Data" and Selected Balance Sheet Data" are as of the end of each of the years in the five year period ended December 31, 1999, are derived from the Consolidated Financial Statements of the Company which financial statements have been audited by KPMG LLP, independent certified public accountants. The consolidated financial statements as of December 31, 1999 and 1998 and for each of the years in the three year period ended December 31, 1999 and the reports thereon are included elsewhere in this document.
Year Ended December 31, -------------------------------------- 1999 1998 1997 1996 1995 ------- ------ ------ ------- ------ Amounts presented in thousands, except per share data Selected Statement of Earnings Data: Total revenues........................ $71,407 44,169 27,084 19,650 17,466 Gross profit.......................... 46,964 27,524 15,830 5,844 10,071 Net income (loss) (3)................. 25,154 6,003 (1,873) (10,077) (1,773) Diluted income (loss) per share (1) (2) (3).............................. $ .62 .18 (.07) (.38) (.08) Shares used in calculation of diluted income (loss) per share.............. 40,545 33,488 27,342 26,440 22,640
December 31, ------------------------------------ 1999 1998 1997 1996 1995 -------- ------ ------ ------ ------ Selected Balance Sheet Data: Cash, cash equivalents and short term investments............................. $ 75,317 27,196 21,618 12,688 17,250 Working capital.......................... 91,803 33,758 25,648 14,650 21,811 Total assets............................. 159,894 47,809 36,589 23,311 32,670 Stockholders' equity..................... $151,193 40,354 30,161 17,299 26,706
- -------- (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. (2) 1995 through 1999 revised to reflect a 3 for 2 stock split in the form of a dividend on June 8, 1999 and a 3 for 2 stock split in the form of a dividend on January 11, 2000. (3) 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 the valuation allowance for those deferred tax assets, which resulted in the recording of a net tax benefit of $2.9 million for the year ended December 31, 1999. 11 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" and "'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 ten 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. The Company's devices are compliant with established standards in these markets, including SONET/SDH, asynchronous and ATM. The Company derives its revenues from product sales principally to domestic and international telecommunications and data communications equipment OEMs and to distributors. Revenues are recognized on product shipment. Agreements with certain distributors provide price protection and return and allowance rights. In certain cases, the Company works with network equipment OEMs during their system design phase with the goal of having TranSwitch'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 to the start of volume shipments. The Company incurs product research and development expenses well before the generation of substantial revenues from product sales to OEMs. A significant portion of the Company's total revenues has been, and is anticipated to be, derived from foreign sales. All foreign sales are currently denominated in U.S. dollars. The Company's cost of revenues consists primarily of the purchase cost of finished VLSI devices produced by third party semiconductor manufacturers and amortization of product licenses. The Company intends to continue to outsource all of its VLSI device fabrication requirements. As of December 31, 1999, the Company had retained earnings of $1.2 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; 12 --the introduction of products and technologies by the Company's competitors; --the timing of the Company's investments in research and development; --whether TranSwitch's customers 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, 1999, 1998 and 1997 Total Revenues. In 1999, the Company reported revenues of $71.4 million an increase of 61.5% over 1998. The increase was driven by the strength in the Company's Asynchronous and ATM product lines. In 1998, the Company reported revenues of $44.2 million, an increase of 63.1% over 1997 where revenues were $27.1 million. The increase was primarily driven by the strength in the Company's SONET product lines. The Company did not derive any revenue in 1999 or 1998 attributable to product license and royalty fees. In 1999, Insight Electronics, Inc. and Arrow Electronics, distributors for the Company accounted for 34% and 19% of revenue, respectively. End users Lucent Technologies, Inc. Tellabs Operations, Inc., and Nortel Communications accounted for 16%, 13% and 13% of total revenues, respectively in 1999. In 1998, Insight Electronics, Inc., Columbia Technology (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. Foreign sales, consisting primarily of sales to customers in Europe, the Middle East and the Far East, constituted 30%, 46% and 33% of total revenues in 1999, 1998 and 1997, respectively. Gross profit. Gross margin in 1999 increased to 65.8% from 62.3% in 1998. The increase in gross margin from 1998 is primarily a result of the continued reduction in costs of products achieved by meeting higher volume milestones established by its foundries. Gross margin in 1998 increased to 62.3% from 58.4% in 1997. The increase in gross margin from 1998 is primarily a result of the reduction in costs of products, achieved by meeting higher volume milestones established by its foundries. In 1999, gross profit increased to $47.0 million from $27.5 million in 1998, a function of the continued increase in overall volume and the improvement in the gross margin. In 1998, gross profit increased to $27.5 million from $15.8 million in 1997, a function of the increase in overall volume and the improvement in the gross margin over 1997. Research and development. In 1999, research and development expenses were $14.0 million, or 19.6% of total revenues, an increase of 26.8% over 1998 expenditures. In 1998, research and development expenses were $11.1 million, or 25.0% of total revenues, an increase of 20.2% over 1997 expenditures of $9.2 million or 33.9% of total revenues. The increases were primarily attributable to increases in staff and in non-recurring engineering charges related to the introduction of new products during 1999 and 1998. The Company believes that the continued introduction of new products is essential to its competitiveness and is committed to continuing its 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 1999, marketing and sales expenses increased 37.9% to $12.0 million, and represented 16.8% of total revenues. In 1998, marketing and sales expenses increased 30.2% to $8.7 million or 19.7% of total revenues over 1997 expenses of $6.7 million or 24.7% of total revenues. The increases were the 13 result of the increase in variable cost of commissions on the increased total revenues and additional staff in 1999 and 1998. 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. General and administrative. In 1999, general and administrative expenses increased 34.1% over 1998 to $3.4 million, or 4.7% of total revenues. In 1998, general and administrative expenses increased 10.0% over 1997 to $2.5 million, or 5.7% of total revenues over 1997 expenses of $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 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, which contributed to the resulting of a net tax benefit of $2.9 million for the year ended December 31, 1999. The resulting 1999 effective tax rate of (13%) compares to a 4.5% tax rate for 1998. The 1998 tax rate was attributable primarily to state taxes. For 2000, the Company expects the effective tax rate to approximate 38%. 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. On February 9, 1999 and March 16, 1999, the Company completed a follow-on public offering and raised $68.4 million, net of commissions, and issued 4,398,750 million shares of its common stock (adjusted for a 3 for 2 stock split on June 8, 1999 and a 3 for 2 stock split on January 11, 2000). The Company's principal sources of liquidity as of December 31, 1999 consisted of $75.3 million in cash, cash equivalents and short-term investments, $36.0 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 December 31, 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 assets or granting additional security interests in such assets. In 1999, the Company generated $17.3 million in cash from its operations, the result of net income of $25.2 million, $3.2 million of depreciation and amortization and $0.1 million of non-cash expense, offset by a net increase of $4.9 million in deferred income taxes and $6.2 million in working capital. In 1998, the Company generated $6.7 million in cash from operating activities, the result of a net income of $6.0 million, $2.4 million for depreciation and amortization and non-cash expense of $0.4 million, offset by an increase in working capital of $2.1 million. Net cash provided by financing activities consists of proceeds from the exercise of stock options and warrants of $7.1, $3.9 and $0.7 million in 1999, 1998 and 1997, respectively, and net proceeds from the issuance of preferred stock of $13.7 million in 1997 and a follow on public offering in 1999 of $68.4 million, net of commissions. 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 through the end of 2000. 14 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. 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" 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 total revenues, 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 three 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 for 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. 15 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 will therefore be subject to risks associated with foreign sales. 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 update. To date the Company has not experienced any disruptions either internally or externally from its suppliers, service providers or customers that could be attributed to the Year 2000 computer issues. Total expenditures, exclusive of software and systems that are being replaced or upgraded in the normal course of business, was approximately $120,000, which is consistent with prior estimates. 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 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, 1999. 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 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, 1999. 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, 1999. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 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, 1999. 17 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, 1999 and December 31, 1998. Consolidated Statements of Operations for each of the years in the three year period ended December 31, 1999. Consolidated Statements of Stockholders' Equity (Deficit) for each of the years in the three year period ended December 31, 1999. Consolidated Statements of Cash Flows for each of the years in the three year period ended December 31, 1999. 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. 18 3. Exhibits
Exhibit Number Description ------- ----------- 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 10.1* 1989 Stock Option Plan 10.2++ Third Amended and Restated 1995 Stock Plan as amended 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++++ Silicon Valley Bank Sixth Loan Modification Agreement 10.26++++ Silicon Valley Bank Negative Pledge Agreement 21.1++++ Subsidiaries of the Company 23.1** Consent of KPMG LLP 27.1** Financial Data Schedule
- -------- # 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. 19 + 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 26, 1999 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. ++++ Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 and incorporated by reference. ** Filed herewith. *** 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 of 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 and incorporated herein by reference. (b) Reports on Form 8-K No reports on Form 8-K were filed by the Company during the fourth quarter ended December 31, 1999. (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. 20 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 29, 2000 TranSwitch Corporation /s/ Dr. Santanu Das By: _________________________________ Dr. Santanu Das 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.
Name and Signature Title(s) Date ------------------ -------- ---- /s/ Dr. Santanu Das Chairman of the Board, March 29, 2000 ______________________________________ President, and Chief Dr. Santanu Das Executive Officer (principal executive officer) /s/ Michael F. Stauff Senior Vice President, March 29, 2000 ______________________________________ Chief Financial Officer Michael F. Stauff and Treasurer (principal financial and accounting officer) /s/ Alfred R. Boschulte Director March 29, 2000 ______________________________________ Alfred R. Boschulte /s/ Dr. Steward S. Flaschen Director March 29, 2000 ______________________________________ Dr. Steward S. Flaschen /s/ Dr. Ljubomir Micic Director March 29, 2000 ______________________________________ Dr. Ljubomir Micic
21
Name and Signature Title(s) Date ------------------ -------- ---- /s/ James M. Pagos Director March 29, 2000 ______________________________________ James M. Pagos /s/ Dr. Albert E. Paladino Director March 29, 2000 ______________________________________ Dr. Albert E. Paladino /s/ Erik van der Kaay Director March 29, 2000 ______________________________________ Erik van der Kaay
22 SCHEDULE II TranSwitch Corporation Valuation and Qualifying Accounts (in thousands)
Additions ------------------- Balance Balance at Changes to Charges at End Beginning Costs and to Other of Description of Period Expenses Accounts Deductions Period - ----------- ---------- ---------- -------- ---------- ------- Year ended December 31, 1999: Allowance for losses on: Accounts receivable....... $ 261 $ 47 $-- $ (14) $ 294 Inventory................. 1,543 539 -- (563) 1,519 Deferred tax valuation allowance.................. 14,825 -- -- (13,992) 833 ------- ------ ---- -------- ------- $16,629 $ 586 $-- $(14,569) $ 2,646 ======= ====== ==== ======== ======= Year ended December 31, 1998: 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 ======= ====== ==== ======== ======= Year ended December 31, 1997: 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 ======= ====== ==== ======== =======
23 TRANSWITCH CORPORATION AND SUBSIDIARIES TABLE OF CONTENTS
Page ---- 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
F-1 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 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, 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 generally accepted accounting principles. Stamford, Connecticut January 27, 2000 F-2 TRANSWITCH CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets (in thousands, except share data) December 31, 1999 and 1998
1999 1998 -------- ------- ASSETS ------ Current assets: Cash and cash equivalents.................................. $ 55,264 24,243 Short-term investments..................................... 20,053 2,953 Accounts receivable, less allowance for doubtful accounts of $294 in 1999 and $261 in 1998.......................... 12,368 7,624 Inventories................................................ 7,900 5,476 Prepaid expenses and other current assets.................. 4,919 917 -------- ------- Total current assets..................................... 100,504 41,213 Investments.................................................. 36,003 -- Property and equipment, net.................................. 7,118 5,143 Deferred taxes--non-current.................................. 11,567 -- Product licenses, net........................................ 1,657 1,142 Other assets................................................. 3,045 311 -------- ------- Total assets............................................. $159,894 47,809 ======== ======= LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Accounts payable........................................... $ 3,700 2,858 Accrued expenses........................................... 1,454 1,218 Accrued compensation....................................... 1,628 1,366 Sales allowance reserve.................................... 1,494 1,049 Warranty reserve........................................... 425 661 Product license fee payable, current portion............... -- 303 -------- ------- Total current liabilities................................ 8,701 7,455 Commitments and contingencies (note 11) Stockholders' equity: Common stock $.001 par value; authorized 100,000,000 shares; issued and outstanding 39,266,465 shares in 1999; and 33,026,696 shares in 1998............................. 39 33 Additional paid-in capital................................. 149,958 64,279 Retained earnings (accumulated deficit).................... 1,196 (23,958) -------- ------- Total stockholders' equity............................... 151,193 40,354 -------- ------- Total liabilities and stockholders' equity............... $159,894 47,809 ======== =======
See accompanying notes to consolidated financial statements. F-3 TRANSWITCH CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations (in thousands, except per share amounts)
Year ended December 31, ----------------------- 1999 1998 1997 ------- ------ ------ Revenues: Product revenues, net................................ $71,407 44,169 26,930 Research and development contracts................... -- -- 154 ------- ------ ------ Total revenues..................................... 71,407 44,169 27,084 Cost of revenues....................................... 24,443 16,645 11,254 ------- ------ ------ Gross profit........................................... 46,964 27,524 15,830 ------- ------ ------ Operating expenses: Research and development............................. 14,014 11,053 9,194 Marketing and sales.................................. 11,979 8,699 6,681 General and administrative........................... 3,374 2,516 2,288 ------- ------ ------ Total operating expenses........................... 29,367 22,268 18,163 ------- ------ ------ Operating income (loss)................................ 17,597 5,256 (2,333) ------- ------ ------ Interest income (expense): Interest income...................................... 4,667 1,121 641 Interest expense..................................... (2) (90) (181) ------- ------ ------ Interest income, net............................... 4,665 1,031 460 ------- ------ ------ Income (loss) before income taxes...................... 22,262 6,287 (1,873) Income tax (benefit) expense........................... (2,892) 284 -- ------- ------ ------ Net income (loss)...................................... $25,154 6,003 (1,873) ======= ====== ====== Basic earnings (loss) per share (note 9)............... $ 0.66 0.19 (0.07) ======= ====== ====== Diluted earnings (loss) per share (note 9)............. $ 0.62 0.18 (0.07) ======= ====== ======
See accompanying notes to consolidated financial statements. F-4 TRANSWITCH CORPORATION AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity (in thousands, except share data)
Retained Common stock Convertible Additional earnings ----------------- preferred paid-in (accumulated Shares Amount stock capital deficit) Total ---------- ------ ----------- ---------- ------------ -------- Balance at December 31, 1996................... 26,803,094 $ 27 $ -- $ 45,360 $(28,088) $ 17,299 Shares of common stock issued in connection with the exercise of stock options and warrants, and the stock purchase plan.......... 913,017 -- -- 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................... 27,716,111 27 14,357 45,738 (29,961) 30,161 Shares of common stock issued in connection with the exercise of stock options and the stock purchase plan.... 1,758,341 2 -- 3,877 -- 3,879 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..... 3,552,245 4 (14,500) 14,498 -- 2 Compensation related to issuance of stock options................ -- -- -- 384 -- 384 Net income.............. -- -- -- -- 6,003 6,003 ---------- ---- ------- -------- -------- -------- Balance at December 31, 1998................... 33,026,696 33 -- 64,279 (23,958) 40,354 Shares of common stock issued in connection with the exercise of stock options and the stock purchase plan.... 1,841,019 2 -- 7,103 -- 7,105 Shares of common stock issued in connection with follow-on public offering............... 4,398,750 4 -- 68,177 -- 68,181 Tax benefits on stock options................ -- -- -- 8,266 -- 8,266 Reversal of deferred tax asset valuation allowance relating to tax benefits on stock options................ -- -- -- 2,000 -- 2,000 Compensation related to issuance of stock options................ -- -- -- 133 -- 133 Net income.............. -- -- -- -- 25,154 25,154 ---------- ---- ------- -------- -------- -------- Balance at December 31, 1999................... 39,266,465 $ 39 $ -- $149,958 $ 1,196 $151,193 ========== ==== ======= ======== ======== ======== ===
See accompanying notes to consolidated financial statements. F-5 TRANSWITCH CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows (in thousands)
Years ended December 31, -------------------------- 1999 1998 1997 -------- ------- ------- Cash flows from operating activities: Net income (loss)................................ $ 25,154 $ 6,003 $(1,873) -------- ------- ------- Adjustments required to reconcile net income (loss) to cash flows from operating activities: Depreciation and amortization.................. 3,204 2,445 1,807 Deferred income taxes.......................... (4,945) -- -- Stock compensation expense..................... 133 384 380 Changes in assets and liabilities: (Increase) in accounts receivable.............. (4,744) (3,096) (1,635) (Increase) in inventories...................... (2,424) (664) (1,288) (Increase) in prepaids and other current assets........................................ (1,903) (413) (510) Increase (decrease) in accounts payable........ 842 1,508 (455) Increase in accrued expenses and other current liabilities................................... 2,016 564 1,598 -------- ------- ------- Total adjustments............................ (7,821) 728 (103) -------- ------- ------- Net cash provided by (used in) operating activities.................................. 17,333 6,731 (1,976) -------- ------- ------- Cash flows from investing activities: Purchases of product licenses.................... (1,000) (550) (3) Capital expenditures............................. (4,694) (3,364) (2,719) Purchase of other investment..................... (2,499) -- -- Purchases of held to maturity investments........ (98,790) (6,405) (8,615) Proceeds from maturities of investments.......... 45,688 4,562 16,282 -------- ------- ------- Net cash provided by (used in) investing activities.................................. (61,295) (5,757) 4,945 -------- ------- ------- 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 3,881 699 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.......... -- (75) 13,656 -------- ------- ------- Net cash provided by financing activities.... 74,983 2,761 13,628 -------- ------- ------- Increase in cash and cash equivalents.............. 31,021 3,735 16,597 Cash and cash equivalents at beginning of year..... 24,243 20,508 3,911 -------- ------- ------- Cash and cash equivalents at end of year........... $ 55,264 $24,243 $20,508 ======== ======= ======= Supplemental disclosure of cash flows information: Cash paid for interest........................... $ 33 $ 109 $ 181 Cash paid for income taxes....................... $ 453 $ 214 $ 30 Tax benefit realized from exercise of stock options......................................... $ 8,266 $ -- $ --
See accompanying notes to consolidated financial statements. F-6 TRANSWITCH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share amounts) December 31, 1999 and 1998 (1) Summary of Significant Accounting Policies Description of Business TranSwitch Corporation (the "Company") was incorporated in Delaware on April 26, 1988. The Company has three wholly-owned subsidiaries: TranSwitch Europe N.V./S.A. in Brussels, Belgium, TranSwitch India Private Limited in New Delhi, India and TranSwitch S.A. in Lausanne, Switzerland. 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 $44,119 and $13,262 at December 31, 1999 and 1998, 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. 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, and accounts receivables, net, approximate fair value because of the short maturities of these instruments. 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, F-7 TRANSWITCH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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 estimated 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. Amortization expense is included in cost of revenues. 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 license's 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. 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. 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. F-8 TRANSWITCH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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 enacted tax 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. Share and per-share data reflect the three-for-two stock split effective June 8, 1999 and the three-for-two stock split effective January 10, 2000. All amounts have been retroactively restated for both stock splits. Foreign Currency Translation Adjustment All of the Company's international subsidiaries use their local currency as their functional currency. Therefore, assets and liabilities are translated at exchange rates in effect at the balance sheet date and income and expense accounts at average exchange rates during the year. Resulting translation adjustments have been immaterial. 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 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. We 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. (2) Investments Long-term investments are carried at cost. 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. F-9 TRANSWITCH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table summarizes the Company's investment in securities at December 31, 1999:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value --------- ---------- ---------- ------- Money market & CD's................ $ 5,561 $ 6 $ -- $ 5,567 U.S Gov. & agency obligations...... 12,265 -- (74) 12,191 Corporate bonds & commercial paper............................. 82,349 -- (255) 82,094 -------- ---- ----- ------- Total.......................... $100,175 $ 6 $(330) $99,851 ======== ==== ===== ======= Reported as : Cash Equivalents................. $ 44,119 Short--term investments.......... 20,053 Long--term investments........... 36,003 -------- Total.......................... $100,175 ========
(3) Inventories The components of inventories at December 31, 1999 and 1998 follow:
1999 1998 ------ ----- Raw materials............................................... $1,017 947 Work in process............................................. 1,121 809 Finished goods.............................................. 5,762 3,720 ------ ----- Total inventories......................................... $7,900 5,476 ====== =====
(4) Property and Equipment, Net The components of property and equipment, net, at December 31, 1999 and 1998 follow:
Estimated useful lives 1999 1998 ---------- -------- ------ Purchased computer software............... 3 years $ 6,467 4,732 Equipment................................. 3-7 years 7,439 5,383 Semiconductor tooling..................... 3 years 1,077 998 Furniture................................. 3-7 years 1,596 1,120 Leasehold improvements.................... Lease term 563 196 Construction in progress.................. 321 353 -------- ------ 17,463 12,782 Less accumulated depreciation and amortization............................. (10,345) (7,639) -------- ------ Property and equipment, net............... $ 7,118 5,143 ======== ======
(5) 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 $1,000 and $550, respectively, in connection with the acquisition of selected technologies. F-10 TRANSWITCH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Product licenses, net, amounted to $1,657 and $1,142 at December 31, 1999 and 1998, respectively. Amortization of product licenses amounted to $485, $408, and $257 in 1999, 1998 and 1997, 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. Products and Services TranSwitch products are Very Large Scale Integrated (VLSI) semiconductor solutions that provide core functionality for 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 product sales to foreign customers are exported from the United States and are denominated in U.S. dollars.
Years Ended December 31, --------------------- 1999 1998 1997 ------- ------ ------ Revenues: United States....................................... $49,763 23,689 18,059 Israel.............................................. 2,934 5,772 517 China............................................... 2,358 7,175 1,831 Other areas......................................... 16,352 7,533 6,677 ------- ------ ------ Total revenues.................................... $71,407 44,169 27,084 ======= ====== ====== Export revenues represented 30%, 46% and 33% 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: December 31, --------------------- 1999 1998 1997 ------- ------ ------ Long-lived assets: United States....................................... $6,516 4,677 3,499 Foreign countries................................... 502 466 317 ------- ------ ------ Total long-lived assets........................... $7,118 5,143 3,816 ======= ====== ======
F-11 TRANSWITCH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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:
Years Ended December 31, ------------------------------ 1999 1998 1997 -------- -------- -------- Insight Electronics, Inc.(1)................ 34% 20% 41% Columbia Technologies(1)........ * 15% * Tellabs Operations, Inc.(2)................ 13% 21% 16% Lucent Technologies(3).. 16% * * Northern Telecom(3)..... 13% * *
- -------- (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 1999 were made through Arrow Electronics, Inc., Tellabs' designated distributor. In 1998, sales to Tellabs 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. (3) The Company's sales to Lucent Technologies and Northern Telecom consist of direct sales and sales through third party distributors. * Revenues were less than 10% of the Company's total revenues in these years. (7) Income Taxes The components of 1999 and 1998 income before income taxes are as follows:
Years Ended December 31, -------------- 1999 1998 ------- ------ Domestic income.............................................. $22,174 $6,212 Foreign income............................................... 88 75 ------- ------ Income before income taxes................................... $22,262 $6,287 ======= ======
The provision (benefit) for income taxes is comprised of the following:
Years Ended December 31, ----------------------------- 1999 1998 1997 ---------- -------- -------- Federal income taxes Current....................................... $ 1,581 161 -- Deferred...................................... (4,682) (161) -- State income taxes Current....................................... 434 252 -- Deferred...................................... (263) -- -- Foreign income taxes Current....................................... 38 32 -- Deferred...................................... -- -- -- ---------- ------- ------ Income taxes.................................... $ (2,892) 284 -- ========== ======= ======
F-12 TRANSWITCH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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:
Years Ended December 31, ------------------ 1999 1998 -------- ------- 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......................... (0.6) 0.9 -------- ------- Effective income tax rate............................... (13.0)% 4.5% ======== ======= 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: Years Ended December 31, ------------------ 1999 1998 -------- ------- 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................................................. 354 366 -------- ------- Total gross deferred tax assets......................... 14,795 14,998 Less: valuation allowance............................... (833) (14,825) -------- ------- Net deferred tax assets................................. 13,963 173 -------- ------- Deferred tax liability--product license................. (62) (125) -------- ------- Total deferred taxes, net of valuation allowance........ $ 13,901 48 ======== =======
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 is recorded as both current and non-current in the amounts of $2,334 and $11,567, respectively. The current portion is recorded in other assets. At December 31, 1999, the Company had available, for federal income tax purposes, net operating loss (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-13 TRANSWITCH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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. (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 3,552,199 shares of Common Stock. Common Stock On February 9, 1999, the Company completed a follow-on public offering of 4,398,750 shares of Common Stock for net proceeds, after issuance costs, of $68,181. As previously stated, the Company announced a 3-for-2 stock split which became effective June 8, 1999, as well as a second three-for-two stock split which became effective January 10, 2000. All share and per share amounts reflect both stock splits retroactively. The Company, in connection with its May 1999 annual shareholders meeting, received shareholder approval to increase its authorized shares to 100,000,000. 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 F-14 TRANSWITCH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) purchase of the Company's Common Stock. The Company has reserved 150,000 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 7,800,000 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, 2,321,714 and 729,900 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 525,000 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 18,750 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 14,400 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. F-15 TRANSWITCH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Stock Option Information Information regarding the Company's stock options is set forth as follows:
Number of Weighted average options option price ---------- ---------------- Outstanding at December 31, 1996................ 4,052,955 $ 2.14 Granted....................................... 3,012,300 3.23 Exercised..................................... (855,405) 0.66 Canceled...................................... (1,326,639) 3.72 ---------- ------- Outstanding at December 31, 1997................ 4,883,211 2.54 Granted....................................... 3,625,343 6.21 Exercised..................................... (1,707,444) 2.17 Canceled...................................... (346,395) 3.49 ---------- ------- Outstanding at December 31, 1998................ 6,454,715 5.29 Granted....................................... 2,735,058 23.07 Exercised..................................... (1,821,974) 3.65 Canceled...................................... (457,763) 9.08 ---------- ------- Outstanding at December 31, 1999................ 6,910,036 $ 17.52 ========== =======
Options outstanding and exercisable at December 31, 1999 are as follows:
Options outstanding Options exercisable ---------------------------------------------- ---------------------------- Weighted Range of Number Average remaining Weighted average Number Weighted average exercise prices outstanding Contractual life exercise price Exercisable exercise price - ------------------- ----------- ----------------- ---------------- ----------- ---------------- $ 0.53 to 3.83 1,189,989 6.60 $ 2.56 534,561 $ 2.51 4.06 to 5.31 1,264,580 7.81 4.60 361,118 4.55 5.61 to 8.47 1,549,292 8.60 6.56 293,857 6.63 8.78 to 17.31 862,650 8.99 15.00 57,474 14.72 17.39 to 20.22 1,077,450 6.97 18.82 -- -- 21.06 to 29.33 308,775 8.01 24.95 6,250 21.06 30.00 to 32.67 394,500 6.77 31.53 4,000 30.00 32.69 to 42.02 262,800 6.27 36.16 -- -- - ------ ------ --------- ---- ------ --------- ------ $ 0.53 to 42.02 6,910,036 7.50 $17.52 1,257,260 $13.25 ====== ====== ========= ==== ====== ========= ======
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. F-16 TRANSWITCH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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 Company's Common 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:
Years Ended December 31, ---------------------- 1999 1998 1997 ------- ------ ------- Net income (loss)--as reported...................... $25,154 $6,003 $(1,873) Net income (loss)--pro forma........................ 12,849 590 (4,317) Basic earnings (loss) per share--as reported........ 0.66 0.19 (0.07) Basic earnings (loss) per share--pro forma.......... 0.34 0.04 (0.15) Diluted earnings (loss) per share--as reported...... 0.62 0.18 (0.07) Diluted earnings (loss) per share--pro forma........ 0.32 0.03 (0.15)
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 $12.31, $7.64, and $3.76, 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..................................... 7.2 8.1 7.7 Expected volatility........................................ 73.0% 68.9% 66.0% Expected dividend yield.................................... -- -- --
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 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.
Warrants--Common Stock ------------------------------- Number of Price per Expiration warrants share date --------- --------- ----------- 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............. -- $ -- -- ====== ========= ===========
F-17 TRANSWITCH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company did not issue any warrants during the year ended December 31, 1999. (9) Earnings Per Share The basic earnings (loss) per share for the years ended December 31, 1999, 1998 and 1997 follows:
Years Ended December 31, --------------------- 1999 1998 1997 ------- ------ ------ Net income (loss)..................................... $25,154 6,003 (1,873) Average shares (in thousands)......................... 38,085 31,334 27,342 Basic earnings (loss) per share....................... $ 0.66 0.19 (0.07)
Diluted earnings per share for the years ended December 31, 1999 and 1998 follows:
Years Ended December 31, --------------- 1999 1998 ------- ------- Net income................................................. $25,154 $ 6,003 ======= ======= Average common shares outstanding for the period (in thousands)................................................ 38,085 31,334 Stock options, net of assumed treasury share repurchases (in thousands)............................................ 2,460 2,154 ------- ------- Adjusted average shares outstanding for the period (in thousands)................................................ 40,545 33,488 ======= ======= Diluted earnings per share................................. $ 0.62 $ 0.18 ======= =======
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 EPS had their effect not been anti-dilutive for the year ended December 31, 1997 are as follows: Stock options...................................................... 1,428,452 Warrants........................................................... 4,397 Convertible preferred stock........................................ 856,569 --------- Total............................................................ 2,289,418 =========
(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 1999, the maximum contribution was 20% of pre-tax income subject to IRS limitations. In 1996, the Company began providing 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-18 TRANSWITCH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (11) 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 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 $680, $673 and $829 in 1999, 1998 and 1997, respectively, under these agreements. These amounts are included in cost of revenues in the consolidated statements of operations. Lease Agreements Total rental expense under all operating lease agreements aggregated $1,113, $797 and $745 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 ======
(12) Subsequent Events 3-for-2 Stock Split On January 10, 2000, the Company issued Common Stock under a stock split declared in December 1999 for holders of record on December 29, 1999. This stock split has been reflected in the per share and outstanding common share amounts. F-19 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS 12-MOS DEC-31-1999 DEC-31-1999 OCT-01-1999 JAN-01-1999 DEC-31-1999 DEC-31-1999 11,144 11,144 100,175 100,175 12,663 12,663 294 294 7,902 7,902 100,504 100,504 17,472 17,472 10,354 10,354 159,896 159,896 8,705 8,705 0 0 26 26 0 0 0 0 151,166 151,166 159,896 159,896 22,289 71,407 22,289 71,407 7,282 24,443 8,477 29,367 0 0 0 0 0 0 8,004 22,262 590 (2,892) 2,501 25,154 0 0 0 0 0 0 7,414 25,154 $0.28 $0.99 $0.27 $0.93
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