10-K405/A 1 d10k405a.txt AMENDMENT NO. 1 TO FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10 - K/A (Amendment No. 1) [x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Fiscal Year Ended December 31, 2000 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. [x] 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 28, 2001, as reported on the Nasdaq National Market, was approximately $1,595,572,812 Shares of Common Stock held by each executive officer and director and by each person who to the Company's knowledge owns 5% or more of the outstanding voting stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. Common Stock, par value $.001 per share, outstanding at February 28, 2001: 84,855,227 4 1/2% Convertible Notes due 2005, outstanding at February 28, 2001: $460,000,000 DOCUMENTS INCORPORATED BY REFERENCE Parts of the following document are incorporated by reference in Part III of this Form 10-K Report: (1) Proxy Statement for Registrant's 2001 Annual Meeting of Shareholders-- Items 10, 11, 12 and 13. ================================================================================ AMENDED FILING OF FORM 10-K TO CORRECT CERTAIN INFORMATION This amendment is being filed for the sole purpose of correcting information contained in Schedule II Valuation and Qualifying Accounts provided as a schedule to Part IV, Item 14 in our Annual Report on Form 10-K for the year ended December 31, 2000 and Exhibit 21.1 Subsidiaries of the Company. The text of Item 14 is replaced in its entirety and the amended Schedule II Valuation and Qualifying Accounts, Independent Auditor's Report, Exhibit 23.1, consent of KPMG LLP, and Exhibit 21.1 Subsidiaries of the Company are filed herewith. 2 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, 2000 and December 31, 1999 Consolidated Statements of Income for each of the years in the three- year period ended December 31, 2000 Consolidated Statements of Stockholders' Equity and Comprehensive Income for each of the years in the three-year period ended December 31, 2000 Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2000. 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 either not applicable, not required or because the information is included in the Consolidated Financial Statements 3. Exhibits 2.1 Agreement and Plan of Reorganization, dated July 25, 2000, by and among TranSwitch, TXC Acquisition Corporation and the Alacrity Stockholders (previously filed as an exhibit to the TranSwitch's Registration Statement on Form S-3 (File No. 333-44040) and incorporated herein by reference). 2.2 Escrow Agreement, dated August 1, 2000, by and among TranSwitch, the Alacrity Stockholders and the other parties thereto (previously filed as an exhibit to the TranSwitch's Registration Statement on Form S-3 (File No. 333-44040) and incorporated herein by reference). 2.3 Share for Share Exchange Agreement, dated May 9, 2000, by and among TranSwitch and the Easics Stockholders (previously filed as an exhibit to the TranSwitch's Registration Statement on Form S-3 (File No. 333- 38318) and incorporated herein by reference). 2.4 Escrow Agreement, dated May 9, 2000, by and among TranSwitch, the Easics Stockholders and the other parties thereto (previously filed as an exhibit to the TranSwitch's Registration Statement on Form S-3 (File No. 333-38318) and incorporated herein by reference). 3 3.1 Amended and Restated Certificate of Incorporation of the Company, as amended (previously filed as Exhibit 3.1 to the TranSwitch's quarterly report on Form 10-Q for the quarter ended June 30, 2000 and incorporated herein by reference. 3.2 By-Laws, as amended and restated, of the Company (previously filed as an exhibit to the TranSwitch's Registration Statement on Form S-1 (File No. 33-91694) and incorporated herein by reference). 4.1 Specimen certificate representing the Common Stock of the Company (previously filed as an exhibit to the TranSwitch's Registration Statement on Form S-1 (File No. 33-91694) and incorporated herein by reference). 4.2 Registration Rights Agreement, dated August 1, 2000, by and among TranSwitch and the Alacrity Stockholders (previously filed as an exhibit to the TranSwitch's Registration Statement on Form S-3 (File No. 333-44040) and incorporated herein by reference). 4.3 Purchase Agreement, dated August 1, 2000, by and among TranSwitch, Alacrity, TXC Acquisition Corporation, Triophy Investments, Ltd. and Current Ventures II, Ltd. (previously filed as an exhibit to the TranSwitch's Registration Statement on Form S-3 (File No. 333-44040) and incorporated herein by reference). 4.4 Registration Rights Agreement, dated May 9, 2000, by and among TranSwitch and the Easics Stockholders (previously filed as an exhibit to the TranSwitch's Registration Statement on Form S-3 (File No. 333- 38318) and incorporated herein by reference). 4.5 Indenture dated September 12, 2000, by and between TranSwitch and State Street Bank and Trust Company, including the forms of the 4 1/2% convertible promissory notes (previously filed as Exhibit 4.1 to the TranSwitch's quarterly report on Form 10-Q for the quarter ended September 30, 2000 and incorporated herein by reference). 4.6 Registration Rights Agreement dated September 12, 2000, by and among TranSwitch and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Robertson Stephens, Inc. and Banc of America Securities LLC (previously filed as Exhibit 4.2 to the TranSwitch's quarterly report on Form 10-Q for the quarterly ended September 30, 2000 and incorporated herein by reference). 4.7 1995 Stock Plan of Alacrity Communications, Inc. (previously filed as Exhibit 4.2 of the TranSwitch's Registration Statement on Form S-8 (File No. 333-44032) and incorporated herein by reference). 4.8 Form of Stock Option Agreement under the 1995 Stock Plan of Alacrity Communications, Inc. (previously filed as Exhibit 4.3 to the TranSwitch's Registration Statement on Form S-8 (File No. 333-44032) and incorporated herein by reference). 10.1 Third Amended and Restated 1995 Stock Option Plan as amended (previously filed as an exhibit to the TranSwitch's Definitive Proxy Statement on Schedule 14A dated April 26, 1999 and incorporated herein by reference). 10.2 1995 Employee Stock Purchase Plan (previously filed as an exhibit to the TranSwitch's Registration Statement on Form S-1 (File No. 33-91694) and incorporated herein by reference). 10.3 1995 Non-Employee Director Stock Option Plan, as amended (previously filed as an exhibit to the TranSwitch's Definitive Proxy Statement on Schedule 14A dated April 26, 1999 and incorporated herein by reference). 10.4 Form of Incentive Stock Option Agreement under the 1995 Stock Plan of the Company (previously 4 filed as an exhibit to the TranSwitch's Registration Statement on Form S-8 (File No. 33-94324) and incorporated herein by reference). 10.5 Form of Non-Qualified Stock Option Agreement under the 1995 Stock Plan of the Company (previously filed as an exhibit to the TranSwitch's Registration Statement on Form S-8 (File No. 33-94324) and incorporated herein by reference). 10.6 1995 Employee Stock Purchase Plan Enrollment/Authorization Form of the Company (previously filed as an exhibit to the TranSwitch's Registration Statement on Form S-8 (File No. 33-94324) and incorporated herein by reference). 10.7 Form of Non-Qualified Stock Option Agreement under the 1995 Non- Employee Director Stock Option Plan of the Company (previously filed as an exhibit to the TranSwitch's Registration Statement on Form S-8 (File No. 33-94324) and incorporated herein by reference). #10.8 Agreement with Texas Instruments Incorporated (previously filed as an exhibit to the TranSwitch's Registration Statement on Form S-1 (File No. 33-91694) and incorporated herein by reference). 10.9 Authorized Distributor Agreement with Insight Electronics, Inc. (previously filed as an exhibit to the TranSwitch's Registration Statement on Form S-1 (File No. 33-91694) and incorporated herein by reference). 10.10 Lease Agreement, as amended, with Robert D. Scinto (previously filed as an exhibit to the TranSwitch's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 and incorporated herein by reference). 10.11 Amended and Restated Promissory Note (Working Capital Line of Credit) with Silicon Valley Bank (filed herewith). 10.12 Amended and Restated Promissory Note (Equipment Line of Credit) (filed herewith). 10.13 Commitment Letter, as amended, from Silicon Valley Bank (previously filed as an exhibit to the TranSwitch's Registration Statement on Form S-1 (File No. 33-91694) and incorporated herein by reference). 10.14 Security Agreement with Silicon Valley Bank (previously filed as an exhibit to the TranSwitch's Registration Statement on Form S-1 (File No. 33-91694) and incorporated herein by reference). 10.15 Development and License Agreement with Adaptive Corporation (previously filed as an exhibit to the TranSwitch's Registration Statement on Form S-1 (File No. 33-91694) and incorporated herein by reference). 10.16 OEM Agreement for Acquisition of IBM Products with International Business Machines Corporation (previously filed as an exhibit to the TranSwitch's Registration Statement on Form S-1 (File No. 33-91694) and incorporated herein by reference). #10.17 License Agreement with StrataCom, Inc. (previously filed as an exhibit to the TranSwitch's Registration Statement on Form S-1 (File No. 33- 91694) and incorporated herein by reference). #10.18 Agreement with Texas Instruments Incorporated (previously filed as an exhibit to the TranSwitch's Annual Report of Form 10-K for the fiscal year ended December 31, 1995). 5 #10.19 Integrated Circuit Foundry Agreement with Texas Instruments Incorporated (previously filed as an exhibit to the TranSwitch's Annual Report of Form 10-K for the fiscal year ended December 31, 1995) 10.20 Silicon Valley Bank Eighth Loan Modification Agreement (filed herewith). 10.21 Purchase Agreement dated as of September 6, 2000, by and among TranSwitch, Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith, Incorporated, FleetBoston Robertson Stephens, Inc. and Banc of America Securities LLC as representatives of the several initial purchasers (previously filed as Exhibit 10 to the TranSwitch's quarterly report on Form 10-Q to the TranSwitch's quarterly report on Form 10-Q for the quarter ended September 30, 2000 and incorporated herein by reference). 21.1 Subsidiaries of the Company (filed herewith). 23.1 Consent of KPMG LLP (filed herewith). ______________ # Confidential treatment obtained as to certain portions. (b) Reports on Form 8-K. We filed no reports on Form 8-K during the fourth quarter ended December 31, 2000. (c) Exhibits We hereby file as exhibits to this Form 10-K, those exhibits listed in Item 14 (a) (3) above. (d) Financial Statement Schedule TranSwitch files as a financial statement schedule to this Form 10-K, the financial statement schedule listed in Item 14(a) (2) above. 6 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, TranSwitch has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. August 24, 2001 TRANSWITCH CORPORATION by: /s/ Dr. Santanu Das --------------------- 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/ Santanu Das Chairman of the Board, President, August 24, 2001 ---------------------- Dr. Santanu Das and Chief Executive Officer (principal executive officer) /s/Peter S. Tallian Senior Vice President, Chief Financial August 24, 2001 ---------------------- Peter S. Tallian Officer and Treasurer (principal financial and accounting officer) * Director August 24, 2001 ---------------------- Alfred R. Boschulte * Director August 24, 2001 ---------------------- Gerald Montry * Director August 24, 2001 ---------------------- James M. Pagos * Director August 24, 2001 ---------------------- Dr. Albert E. Paladino * Director August 24, 2001 ---------------------- Erik Van Der Kaay
* By: /s/ Santanu Das --------------------- Santanu Das Attorney-in-fact TRANSWITCH CORPORATION AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Independent Auditors' Report................................................................................ F-2 Consolidated Balance Sheets as of December 31, 2000 and 1999................................................ F-3 Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2000........................................................................................ F-4 Consolidated Statements of Stockholders' Equity and Comprehensive Income for each of the years in the three-year period ended December 31, 2000................................................... F-5 Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2000........................................................................................ F-6 Notes to Consolidated Financial Statements.................................................................. F-7
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, 2000 and 1999, and the related consolidated statements of income, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Stamford, Connecticut January 18, 2001 TRANSWITCH CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
December 31, -------------------------- 2000 1999 ------ ------ ASSETS Current assets: Cash and cash equivalents........................................................... $ 507,552 $ 55,685 Short-term investments.............................................................. 56,572 20,117 Accounts receivable, net of allowances of $604 in 2000 and $294 in 1999............. 28,443 13,208 Inventories......................................................................... 14,898 7,900 Prepaid expenses and other current assets........................................... 9,360 5,242 --------- --------- Total current assets........................................................... 616,825 102,152 Long-term investments............................................................... 54,183 36,003 Property and equipment, net......................................................... 13,464 7,563 Deferred tax assets................................................................. 22,019 11,624 Goodwill and purchased intangible assets, net....................................... 8,447 -- Deferred financing costs............................................................ 15,219 -- Other assets........................................................................ 11,473 4,725 --------- --------- Total assets................................................................... $ 741,630 $ 162,067 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.................................................................... $ 8,393 $ 4,297 Accrued expenses.................................................................... 1,599 664 Accrued compensation................................................................ 3,247 1,628 Sales returns reserve............................................................... 2,600 1,494 Accrued interest.................................................................... 6,207 -- Other current liabilities........................................................... 1,600 1,630 --------- --------- Total current liabilities...................................................... 23,646 9,713 Long-term lease obligations.............................................................. 245 216 Convertible notes........................................................................ 460,000 -- Commitments and contingencies (note 12).................................................. --------- --------- Total liabilities........................................................................ 483,891 9,929 --------- --------- Stockholders' equity: Common stock $.001 par value; authorized 300,000,000 shares at December 31, 2000 and 100,000,000 shares at December 31, 1999; issued and outstanding 83,500,125 shares at December 31, 2000 and 79,038,312 shares at December 31, 1999 ............................................................................ 84 79 Additional paid-in capital.......................................................... 217,455 150,151 Accumulated other comprehensive loss................................................ (225) (162) Retained earnings................................................................... 40,425 2,070 --------- --------- Total stockholders' equity..................................................... 257,739 152,138 --------- --------- Total liabilities and stockholders' equity..................................... $ 741,630 $ 162,067 ========= =========
See accompanying notes to consolidated financial statements. F-3 TRANSWITCH CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share amounts)
Years ended December 31, ---------------------------------- 2000 1999 1998 --------- --------- --------- Net revenues ................................................................ $ 155,083 $ 73,533 $ 45,993 Cost of revenues............................................................. 46,147 25,210 17,274 --------- --------- --------- Gross profit. 108,936 48,323 28,719 --------- --------- --------- Operating expenses: Research and development................................................ 24,221 14,543 11,500 Marketing and sales..................................................... 20,518 12,098 8,824 General and administrative.............................................. 5,634 3,865 2,875 Amortization of goodwill and Purchased intangible assets................ 384 -- -- In-process research and development..................................... 2,800 -- -- Merger cost............................................................. 1,163 -- -- --------- --------- --------- Total operating expenses........................................... 54,720 30,506 23,199 --------- --------- --------- Operating income............................................................. 54,216 17,817 5,520 Interest income (expense): Interest income......................................................... 15,994 4,740 1,167 Interest expense........................................................ (7,472) (35) (143) --------- --------- --------- Interest income, net............................................... 8,522 4,705 1,024 --------- --------- --------- Income before income taxes................................................... 62,738 22,522 6,544 Income tax expense (benefit)................................................. 24,383 (2,812) 387 --------- --------- --------- Net income.. $ 38,355 $ 25,334 $ 6,157 ========= ========= ========= Basic earnings per share (note 11)........................................... $ 0.47 $ 0.33 $ 0.10 ========= ========= ========= Diluted earnings per share (note 11)......................................... $ 0.44 $ 0.31 $ 0.09 ========= ========= =========
See accompanying notes to consolidated financial statements. F-4 TRANSWITCH CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (in thousands, except share data)
Accumulated Retained ----------- -------- Convertible Additional other earnings ----------- ---------- ----- -------- preferred paid-in comprehensive (accumulated --------- ------- ------------- ------------ Common stock stock capital income (loss) deficit) Total -------------------- ----- ------- ------------- -------- --------- Shares Amount ---------- -------- Balance at December 31, 1997................... 55,937,604 $ 56 $ 14,357 $ 45,942 $ (80) $ (29,421) $ 30,854 Comprehensive income: Net income................................... 6,157 6,157 Currency translation adjustment.............. 54 54 --------- ---------- Total comprehensive income................. 6,211 ---------- Shares of Common stock issued under stock option and stock purchase plans.............. 3,516,680 3 3,876 -- 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................ 7,104,490 7 (14,500) 14,495 -- 2 Compensation related to issuance of stock options...................................... -- -- -- 384 -- 384 ---------- -------- --------- ----------- --------- ---------- ---------- Balance at December 31, 1998................... 66,558,774 66 -- 64,479 (26) (23,264) 41,255 ---------- Comprehensive income: Net income................................... 25,334 25,334 Currency translation adjustment.............. (136) (136) --------- ---------- Total comprehensive income................. 25,198 ---------- Shares of Common stock issued under stock option and stock purchase plans.............. 3,682,038 4 -- 7,101 -- 7,105 Shares of Common stock issued in connection with follow-on public offering, net of issuance costs........................ 8,797,500 9 -- 68,172 -- 68,181 Tax benefit from employee 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 ---------- -------- --------- ----------- --------- ---------- ---------- Balance at December 31, 1999................... 79,038,312 79 -- 150,151 (162) 2,070 152,138 Comprehensive income: Net income................................... 38,355 38,355 Currency translation adjustment.............. (63) (63) --------- ---------- Total comprehensive income................. 38,292 ---------- Shares of Common stock issued under stock option and stock purchase plans.............. 4,194,977 5 -- 21,418 -- 21,423 Shares of Common stock issued to acquire Alacrity Communications, Inc................. 266,836 -- 10,657 -- -- 10,657 Tax benefit from exercise of employee stock options...................................... -- -- -- 35,229 -- 35,229 ---------- -------- --------- ----------- --------- ---------- ---------- Balance at December 31, 2000................... 83,500,125 $ 84 $ -- $ 217,455 $ (225) $ 40,425 $ 257,739 ========== ======== ========= =========== ========= ========== ==========
See accompanying notes to consolidated financial statements. F-5 TRANSWITCH CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Years ended December 31, ----------------------------- 2000 1999 1998 ----------- --------- ---------- Cash flows from operating activities: Net income.................................................................... $ 38,355 $ 25,334 $ 6,157 Adjustments required to reconcile net income to cash flows provided by operating activities, net of effects of purchase of Alacrity: Depreciation and amortization............................................ 6,496 3,494 2,702 Bad debt expense......................................................... 500 47 50 Deferred income taxes.................................................... 1,274 (5,043) (167) Other non-cash items..................................................... 165 -- -- Stock compensation expense............................................... 65 133 384 Purchased in-process research and development............................ 2,800 -- -- Changes in assets and liabilities: (Increase) in accounts receivable................................... (15,735) (5,239) (3,161) (Increase) in inventories........................................... (6,998) (2,424) (664) (Increase) in prepaid expenses and other assets..................... (2,634) (1,541) (873) Increase in accounts payable........................................ 3,661 1,294 1,530 Increase in accrued expenses and other liabilities.................. 31,112 1,753 859 ---------- --------- --------- Total adjustments.............................................. 20,706 (7,526) 660 ---------- --------- --------- Net cash provided by operating activities...................... 59,061 17,808 6,817 ---------- --------- --------- Cash flows from investing activities: Purchase of product licenses.................................................. (500) (1,000) (550) Capital expenditures.......................................................... (10,481) (5,053) (3,057) Purchases of other investments................................................ (6,505) (2,499) -- Purchases of held-to-maturity investments..................................... (256,858) (98,855) (6,405) Proceeds from maturity of investments......................................... 202,223 45,688 4,562 Cash acquired in acquisition.................................................. 90 -- -- ---------- --------- --------- Net cash (used in) investing activities........................ (72,031) (61,719) (5,450) ---------- --------- --------- Cash flows from financing activities: Proceeds from issuance of convertible debt, net of issuance costs............. 443,694 -- -- Payments on product license obligations....................................... -- (303) (1,045) Proceeds from the exercise of stock options................................... 21,423 7,105 3,879 Payments on lease obligations................................................. (280) (337) (237) Proceeds from the issuance of common stock, net of issuance costs............. -- 68,181 -- Issuance costs in connection with convertible preferred stock offering........ -- -- (73) ---------- --------- --------- Net cash provided by financing activities...................... 464,837 74,646 2,524 ---------- --------- --------- Increase (decrease) in cash and cash equivalents................................... 451,867 30,735 3,891 Cash and cash equivalents at beginning of year..................................... 55,685 24,950 21,059 ---------- --------- --------- Cash and cash equivalents at end of year........................................... $ 507,552 $ 55,685 $ 24,950 ========== ========= =========
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) (1) Summary of Significant Accounting Policies Description of Business We were incorporated in Delaware on April 26, 1988. Our company, based in Shelton, Connecticut, designs, develops, markets and supports highly integrated digital and mixed-signal semiconductor devices for the telecommunications and data communications markets. Basis of Presentation The consolidated financial statements include our accounts and the accounts of our subsidiaries. All significant intercompany accounts and transactions have been eliminated. Operations of businesses acquired and accounted for as purchases are consolidated as of the date of acquisition. In May 2000, we completed our merger with Easics NV. This merger was accounted for as a pooling of interests and, accordingly, our historical consolidated financial statements have been restated to include the financial position, results of operations, and cash flows of Easics NV for all periods presented. Use of Estimates The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the period reported. Actual results could differ from those estimates. Estimates are used in accounting for, among other things, allowances for uncollectable receivables, inventory obsolescence, product warranty, depreciation, taxes, and contingencies. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the Consolidated Financial Statements in the period they are determined to be necessary. Cash Equivalents We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash equivalents amounted to $470,717 at December 31, 2000 and $44,391 at December 31, 1999 and consist of certificates of deposit, U.S. Treasury Bills, commercial paper and U.S. Agency notes. Investments Investments are comprised of marketable securities, primarily U.S. Treasury Bills, commercial paper, and corporate debt securities. Investments with remaining maturities of less than one year as of the date of the balance sheet 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. At December 31, 2000 and 1999, all of our marketable securities are classified as held-to-maturity. Held-to-maturity securities are those securities in which we have the ability and intent to hold the securities to maturity. These securities are recorded at amortized cost. F-7 TRANSWITCH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share and per share amounts) Fair Value of Financial Instruments The carrying amounts for cash and cash equivalents, short-term investments, accounts receivable, and accounts payable approximate fair value because of their short maturities. The fair values of investments and convertible notes are determined using quoted market prices for those securities or similar financial instruments. The fair value of our convertible notes at December 31, 2000 was approximately $400 million. Inventories Inventories are carried at the lower of cost (on a first-in, first-out basis) or estimated net realizable value. Product Licenses Product licenses are amortized using the greater of the amount computed using the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product, or the straight-line method over the estimated useful life of the asset, generally three to five years. We capitalized $500 in 2000 and $1,000 in 1999 in connection with the acquisition of selected technologies. Amortization of product licenses amounted to $412 in 2000, $485 in 1999 and $408 in 1998. Product licenses, net, is included in Other Assets on the Consolidated Balance Sheets. Property and Equipment Property and equipment are carried at cost less accumulated depreciation. Depreciation of property and equipment is provided on the half-year convention method based on the related assets' estimated useful lives, ranging from three to seven years. Depreciation of semiconductor tooling costs is provided on the straight-line method using the lesser of three years or the life of the related semiconductor it produces. Repairs and maintenance are charged to operations as incurred. Goodwill and Purchased Intangible Assets Goodwill and purchased intangible assets, which arose from our acquisition of Alacrity Communications, Inc., are carried at cost less accumulated amortization, and are being amortized over the economic lives of the respective assets, generally five to ten years. Accumulated amortization for goodwill and purchased intangible assets amounted to $384 in 2000 and $0 in 1999 and 1998. We review our goodwill for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. When factors indicate that goodwill should be evaluated for possible impairment, we use an estimate of the related business' future revenue over the remaining useful life. F-8 TRANSWITCH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share and per share amounts) Impairment of Long-Lived Assets We review our long-lived assets and certain identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When factors indicate that a long-lived asset should be evaluated for possible impairment, we use an estimate of the related asset's undiscounted future cash flows over the remaining life of the asset in measuring whether the carrying value is recoverable. Any impairment is measured based upon the excess of the carrying value of the asset in excess of its estimated fair value which is generally based on an estimate of future discounted cash flows. Investments in Non-Public Companies We have certain minority investments in non-publicly traded companies in which we have less than 20 percent of the voting rights and in which we do not exercise significant influence. These investments are included in Other Assets on our Consolidated Balance Sheets and are carried at cost. We monitor these investments for impairment and make appropriate reductions in carrying values when necessary. Revenue Recognition Revenues from product sales are recognized upon shipment to distributors and original equipment manufacturers. Sales to certain distributors are made under agreements which provide the distributor with certain price protection and return and allowance rights. Revenues are reduced at time of shipment for estimated price protection and returns based upon historical experience. Concentrations of Credit Risk Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash and cash equivalents, marketable securities, and trade receivables. We maintain our cash, cash equivalents, and marketable securities in investment grade financial instruments with high-quality financial institutions, thereby reducing credit risk concentrations. In addition, we limit the amount of credit exposure to any one financial institution and any one type of investment. At December 31, 2000, approximately 26%, 25%, 16% and 14% of accounts receivable represented amounts due from each of four of our distributors, respectively. We believe that this concentration and the concentration of credit risk resulting from trade receivables owing from high-technology industry customers is substantially mitigated by our credit evaluation process and relatively short collection terms. We generally do not require collateral security for outstanding amounts. We establish an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. Product Warranties We provide for expected costs to be incurred under our product warranties based on historical experience. Estimated warranty costs are accrued as products are sold and are charged to cost of revenues. F-9 TRANSWITCH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share and per share amounts) Research and Development Costs Research and development costs are expensed as incurred. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. To the extent that it is more likely than not that we will not be able to utilize deferred tax assets in the future, we establish a valuation allowance. 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 notes into common stock at the beginning of the period or the date of issuance, if later, unless they are antidilutive. Foreign Currency Translation All of our foreign subsidiaries use their local currency as their functional currency. Therefore, assets and liabilities of foreign subsidiaries are translated at exchange rates in effect at the balance sheet date and revenue and expense accounts are translated at average exchange rates during the year. The resulting translation adjustments are recorded in accumulated other comprehensive income or loss. Gains and losses related to monetary assets and liabilities denominated in a currency different than a subsidiary's functional currency are included in the Consolidated Statement of Income. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133), and in June 2000 issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of FASB Statement No. 133" (SFAS No. 138). SFAS No. 133, as amended by SFAS No. 138, 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 are required to adopt SFAS No. 133, as amended by SFAS No. 138, beginning January 1, 2001. The adoption of this accounting standard will have no material impact on our financial position or results of operations. The Securities and Exchange Commission (SEC) released Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements," on December 3, 1999, SAB No. 101A on March 24, 2000, SAB No. 101B on June 26, 2000 and a document issued on October 12, 2000 responding to frequently asked questions regarding accounting standards related to revenue recognition and SAB No. 101. SAB No. 101 sets forth the views of the staff of the SEC on revenue recognition issues, including conceptual issues as well as certain industry- specific guidance. We adopted SAB No. 101, as amended, in the fourth quarter of 2000. The adoption of this accounting guidance did not have a material impact on our financial position or results of operations. F-10 TRANSWITCH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share and per share amounts) (2) Business Combinations Merger with Easics NV In May 2000, we completed our combination with Easics NV, a Belgian communications semiconductor design service provider, in which Easics NV became our wholly-owned subsidiary. We issued 505,382 shares of common stock in exchange for all of the outstanding stock of Easics NV. The transaction was accounted for as a pooling-of-interests and, accordingly, our historical consolidated financial statements have been restated to include the financial position, results of operations, and cash flows of Easics NV for all periods presented. During the quarter ended June 30, 2000, we recorded merger-related transaction costs of $1.2 million related to the combination with Easics NV, which have been included under merger costs in the Consolidated Statements of Income. Our historical results of operations and the historical results of operations of Easics NV prior to the consummation of the merger are summarized below:
Four months Years ended ----------- ----------- ended April 30, December 31, --------------- ------------ 2000 1999 1998 ----------- ----------- ----------- (unaudited) Net revenues: TranSwitch................................ $ 37,743 $ 71,407 $ 44,169 Easics NV................................. 635 2,126 1,824 ----------- ----------- ----------- Combined............................. $ 38,378 $ 73,533 $ 45,993 Net income: TranSwitch................................ $ 9,353 $ 25,154 $ 6,003 Easics NV................................. 62 180 154 ----------- ----------- ----------- Combined............................. $ 9,415 $ 25,334 $ 6,157
There were no significant adjustments required to the accounting policies of Easics NV. Royalties from TranSwitch to Easics NV in the amount of $79 for the four months ended April 30, 2000, $68 for the year ended December 31, 1999, and $79 for the year ended December 31, 1998 have been eliminated in the consolidated financial statements. Accounts payable from TranSwitch to Easics NV in the amount of $229 as of December 31, 2000 and $40 as of December 31, 1999 have been eliminated in the consolidated financial statements. There were no other significant transactions between TranSwitch and Easics NV prior to the combination. Acquisition of Alacrity Communications, Inc. On August 1, 2000, we acquired all of the outstanding stock of Alacrity Communications, Inc. (Alacrity) for 266,836 shares of our common stock, which includes the conversion of stock options to purchase 5,756 shares of common stock, valued, in the aggregate, at approximately $10.7 million. The total purchase price of approximately $11.3 million also includes professional fees and other direct costs of the acquisition totaling $600. Alacrity specializes in the development and marketing of high-capacity VLSI switching devices for telecommunications and data communications applications. F-11 TRANSWITCH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share and per share amounts) The acquisition was accounted for using the purchase method of accounting and, accordingly, the results of operations of Alacrity have been included in our consolidated financial statements from August 1, 2000. The allocation of purchase price among tangible and intangible assets acquired and liabilities assumed was as follows: Tangible assets........................................................................... $ 359 Intangible assets: Goodwill.................................................................................. 8,477 Assembled workforce....................................................................... 350 In process research and development (IPR&D)............................................... 2,800 Liabilities............................................................................... (697) -------- Total purchase price...................................................................... $ 11,289 ========
The amount allocated to IPR&D of $2.8 million was expensed upon acquisition , as it was determined that the underlying project had not reached technological feasibility, had no alternative future use and successful development was uncertain. The charge for IPR&D was based on a methodology that focused on the present value of after-tax cash flows attributable to the in-process project combined with the consideration of the stage of completion of the individual research and development project at the date of acquisition. The significant assumptions used in determining the valuation of the IPR&D are as follows: . Net cash inflows are anticipated to commence in 2002; . Risk adjusted discount rate applied to cash flows of 30%; and . No anticipated material changes from historical pricing margin and expense elevels. To date, there have been no shipments related to this product or changes in development that would require an adjustment to the valuation. The following unaudited pro-forma financial information presents our results of operations combined with the results of operations of Alacrity as if the acquisition had occurred as of January 1, 1999. The pro-forma information does not necessarily reflect the results from operations that would have occurred had Alacrity and we constituted a single entity during such periods. Alacrity did not generate any revenues for the full years ended 2000 or 1999. The unaudited pro-forma information for the years ended December 31, 2000 and 1999 is as follows (in thousands, except for per share amounts):
2000 1999 ---------- ------- Net income............................................................ $ 36,300 21,771 Basic earnings per share.............................................. $ 0.44 0.28 Diluted earnings per share............................................ $ 0.41 0.27
F-12 TRANSWITCH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share and per share amounts) (3) Investments The following table summarizes our investments in securities at December 31, 2000 and 1999:
Gross ----- Amortized urealized --------- --------- cost (losses) Fair value ---- -------- ---------- Money market & certificates of deposit.......................... $ 748 $ -- $ 748 U.S. government & agency obligations............................ 499,420 (502) 498,918 Corporate bonds & commercial paper.............................. 81,304 (167) 81,137 --------- ------ --------- Total at December 31, 2000............................ $ 581,472 $ (669) $ 580,803 ========= ====== ========= Reported as: Cash equivalents........................................... $ 470,717 Short-term investments..................................... 56,572 Long-term investments...................................... 54,183 --------- Total at December 31, 2000............................ $ 581,472 =========
Gross Gross ----- ----- Amortized Unrealized Unrealized Fair --------- ---------- ---------- ----- Cost Gains (Losses) Value ----- ----- -------- ----- Money market & certificates of deposit...................... $ 5,756 $ 6 $ -- $ 5,762 U.S. government & agency obligations........................ 12,343 -- (75) 12,268 Corporate bonds & commercial paper.......................... 82,412 -- (255) 82,157 --------- ------- ------- --------- Total at December 31, 1999........................ $ 100,511 $ 6 $ (330) $ 100,187 ========= ======= ======= ========= Reported as: Cash equivalents....................................... $ 44,391 Short-term investments................................. 20,117 Long-term investments.................................. 36,003 --------- Total at December 31, 1999................... $ 100,511 =========
(4) Inventories The components of inventories at December 31, 2000 and 1999 follow:
December 31, ------------------ 2000 1999 -------- -------- Raw materials............................................... $ 1,414 $ 1,017 Work in process............................................. 4,130 1,121 Finished goods.............................................. 9,354 5,762 -------- -------- Total inventories........................................... $ 14,898 $ 7,900 ======== ========
F-13 TRANSWITCH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share and per share amounts) (5) Property and Equipment, Net The components of property and equipment, net at December 31, 2000 and 1999 follow:
Estimated --------- Useful ------ Lives December 31, ------- ---------------- 2000 1999 1998 ---------- ------- ------- Purchased computer software....................................... 3 years $ 10,071 $ 6,902 Equipment......................................................... 3-7 years 13,221 8,187 Semiconductor tooling............................................. 3 years 1,232 1,077 Furniture......................................................... 3-7 years 2,741 1,651 Leasehold improvements............................................ Lease term* 1,394 563 Construction in progress.......................................... 737 321 --------- --------- Gross property and equipment...................................... 29,396 18,701 Less accumulated depreciation and amortization.................... (15,932) (11,138) --------- --------- Property and equipment, net....................................... $ 13,464 $ 7,563 ========= =========
. Shorter of estimated useful life or lease term. (6) Segment Information and Major Customers Under SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," we are required to use the "management" approach to reporting segments. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. SFAS No. 131 also requires disclosures about products and services, geographic areas, and major customers. Under SFAS No. 131, we have one segment: Communication semiconductor products. Products and Services Our products are Very Large Scale Integrated (VLSI) semiconductor devices that provide core functionality of communications network equipment. The integration of various technologies and standards in these devices result in a homogeneous product line for management and measurement purposes. F-14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share and per share amounts) Enterprise-wide Information Enterprise-wide information provided on geographic net revenues is based on the ordering location of our customer. Long-lived asset information is based on the physical location of the assets. The following tables present net revenues and long-lived assets information for geographic areas:
Years ended December 31, ------------------------ 2000 1999 1998 -------- ------- ------- Net revenues: United States................................... $84,517 $50,334 $23,803 Israel.......................................... 7,520 2,937 5,961 China........................................... 15,150 2,358 7,175 Other areas..................................... 47,896 17,904 9,054 -------- ------- ------- Total...................................... $155,083 $73,533 $45,993 ======== ======= ======= December 31, ------------ 2000 1999 1998 -------- ------- ------- Long-lived assets: United States................................... $ 28,524 $ 8,841 $ 4,926 Foreign countries............................... 3,093 1,767 1,040 -------- ------- ------- Total...................................... $ 31,617 $10,608 $ 5,966 ======== ======= =======
Information about Major Customers The percentage of net revenues attributable to our significant customers and distributors for the years ended December 31, 2000, 1999 and 1998 follow:
Years ended December 31, ------------------------ 2000 1999 1998 ---- ---- ---- Insight Electronics, Inc.(1)(2).................................... 32% 33% 19% Coltek Technology(1)............................................... * * 14% Tellabs Operations, Inc.(1)(2)(3).................................. 16% 13% 20% Lucent Technologies, Inc.(1)(3)(4)................................. 11% 16% * Nortel Networks Corporation(2)(3).................................. * 13% * Unique Memec(1).................................................... 16% * * Arrow Electronics, Inc.(2)......................................... * 18% 16%
__________ (1) Insight Electronics, Coltek Technology (formerly Columbia Technology) and Unique Memec are distributors of our products to various end-users. In 2000 and 1999, a portion of Lucent Technologies' purchases were shipped through Insight Electronics. In 2000, a portion of Tellabs Operations' purchases were shipped through Insight Electronics. (2) Our sales to Tellabs Operations during 2000 and 1999 were made through Arrow Electronics and Insight Electronics, both of which also shipped products to Nortel Networks. Sales to Tellabs Operations through Arrow Electronics during 1998 represented 16% of our net revenues. During 1998, sales to Tellabs Operations were made through Reptron Electronics and Arrow Electronics, both Tellabs Operations' designated distributors. (3) Represents total shipments, including those made directly and those made through distributors. (4) Includes sales to Ascend Communications, which was acquired by Lucent Technologies during 1999. This percentage represents total shipments, including those made directly and those made through distributors. * Revenues were less than 10% of our net revenues in these years. F-15 TRANSWITCH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share and per share amounts) (7) Income Taxes The components of 2000, 1999 and 1998 income before income taxes are as follows:
Years ended December 31, ------------------------ 2000 1999 1998 ------- ------- ------ U.S. domestic income........................................ $62,085 $22,262 $6,287 Foreign income.............................................. 653 260 257 ------- ------- ------ Income before income taxes.................................. $62,738 $22,522 $6,544 ======= ======= ======
The provision (benefit) for income taxes is comprised of the following:
Years ended December 31, ------------------------ 2000 1999 1998 ------- ------- ------ Federal income taxes Current........................................... $19,638 $ 1,581 $161 Deferred.......................................... 1,184 (4,682) (161) State income taxes Current........................................... 3,210 434 252 Deferred.......................................... 90 (263) -- Foreign income taxes Current........................................... 261 216 141 Deferred.......................................... -- (98) (6) ------- ------- ---- Income taxes........................................... $24,383 $(2,812) $387 ======= ======= ====
The following table summarizes the differences between the U.S. federal statutory rate and our effective tax rate for financial statement purposes for the years ended December 31, 2000, 1999 and 1998:
Years ended December 31, ------------------------ 2000 1999 1998 ---- ---- ---- U.S. federal statutory tax rate.................................. 35.0 % 35.0 % 34.0 % State taxes...................................................... 3.4 0.8 4.0 Utilization of net operating losses (NOL)........................ -- -- (34.4) In-process research and development.............................. 1.6 -- -- Foreign sales corporation benefit................................ (1.9) -- -- Change in valuation allowance.................................... -- (48.2) -- Permanent differences and other.................................. 0.8 (0.1) 2.3 ----- ------ ----- Effective income tax rate........................................ 38.9 % (12.5) % 5.9 % ===== ====== =====
The tax effect of temporary differences that give rise to deferred tax assets and deferred tax liabilities at December 31, 2000 and 1999 are presented below: F-16 TRANSWITCH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share and per share amounts)
2000 1999 --------- ------- Deferred tax assets: Property and equipment..................................................... $ 302 $ 295 Nondeductible reserves..................................................... 3,776 2,332 Net operating losses....................................................... 19,306 9,215 Research and development credit............................................ 3,158 2,599 Other...................................................................... 64 412 --------- ------- Total gross deferred tax assets............................................ 26,606 14,853 Less valuation allowance................................................... (833) (833) --------- ------- Net deferred tax assets.................................................... 25,773 14,020 --------- ------- Deferred tax liabilities: Product license....................................................... (62) (62) Other................................................................. 0 0 --------- ------- Total gross deferred tax liabilities....................................... (62) (62) Total deferred taxes, net of valuation allowance........................... $ 25,711 $13,958 ========= =======
There was no change in the deferred tax valuation allowance between December 31, 2000 and December 31, 1999. The valuation allowance relates to state tax net operating losses which management believes it is more likely than not will expire unutilized. Of the valuation allowance of $833, subsequently recognized tax benefits, if any, in the amount of $833 will be applied directly to contributed capital. Of the total deferred tax assets at December 31, 2000, $3,692 is recorded as current and $22,019 is recorded as non-current. The current portion is recorded in other current assets. At December 31, 2000, we had available, for federal income tax purposes, NOL carryforwards of approximately $50,155 and research and development tax credit carryforwards of approximately $3,157 expiring in varying amounts from 2003 through 2020. Certain transactions involving our beneficial ownership 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 our NOL carryforward and $1,410 of our research and development tax credit carryforward are subject to these limitations. However, we believe it is more likely than not that the NOL and research and development tax credits will be utilized. (8) Stockholders' Equity Authorized Shares In connection with our May 2000 annual shareholders' meeting, we received shareholder approval to increase the authorized number of shares of common stock from 100,000,000 to 300,000,000 shares. Follow-on Common Stock Offering On February 9, 1999 and March 16, 1999, we completed a follow-on public offering of 8,797,500 shares of our common stock for net proceeds, after issuance costs, of $68,181. F-17 TRANSWITCH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share and per share amounts) Stock Splits In June 1999 and January 2000, we effected three-for-two splits, and in August 2000, we effected a two-for-one split of our common stock paid in the form of a stock dividend. All share and per share data for all periods presented have been adjusted to reflect these stock splits. (9) Employee Benefit Plans Employee Stock Purchase Plan To provide employees with an opportunity to purchase our common stock through payroll deductions, we established the 1995 Employee Stock Purchase Plan (the "Purchase Plan"), under which 300,000 shares of common stock have been reserved for issuance. Under the Purchase Plan, eligible employees may purchase a limited number of shares of common stock at 85% of the fair market value at either the date of enrollment or the date of purchase, whichever is less. Under the Purchase Plan, 10,340 shares were issued in 2000, 25,305 shares were issued in 1999 and 77,535 shares were issued in 1998. At December 31, 2000, 138,127 shares remained available for future issuance. Stock Option Plans We have three main stock options plans: the 1995 Stock Plan, as amended (the "1995 Plan"); the 1995 Non-Employee Director Stock Option Plan (the "Director Plan"); and the 2000 Stock Option Plan (the "2000 Plan"). With respect to the 1995 Plan, in connection with our May 2000 annual shareholders meeting, we received shareholder approval to increase the maximum number of shares reserved and authorized for issuance to 31,400,000 shares of our 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 our common stock to our employees, consultants, directors and executive officers. The terms of the options granted are subject to the provisions of the 1995 Plan as determined by the Compensation Committee of the Board of Directors. The 1995 Plan will terminate ten years after its adoption unless earlier terminated by the Board of Directors. As of December 31, 2000, 9,268,696 shares were available for grant under the 1995 Plan. The 2000 Plan was adopted by the Board of Directors on July 14, 2000, and provides for the grant of non-qualified options to purchase shares of common stock, up to an aggregate of 8,000,000 shares, to our employees and consultants. No member of the Board of Directors or executive officers as appointed by the Board shall be eligible for grants of options under the 2000 Plan. The terms of the options granted are subject to the provisions of the 2000 Plan as determined by the Compensation Committee of the Board of Directors. The non-qualified stock option shall either be fully exercisable on the date of grant or shall become exercisable thereafter in such installments as the Board may specify. The 2000 Plan will terminate ten years after its adoption. No option granted under the 2000 Plan may be exercised after the expiration of seven years from the date of grant. The exercise price of options under the 2000 Plan must be equal to the fair market value of the Common Stock on the date of grant. Options granted under the 2000 Plan are generally nontransferable. As of December 31, 2000, 5,562,850 shares were available for grant under the 2000 Plan. F-18 TRANSWITCH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share and per share amounts) The Director Plan provides for the automatic grant of options to purchase shares of common stock, up to an aggregate of 1,050,000 shares, to our non- employee directors on the anniversary date of each individual board member joining the Board of Directors. Upon joining our Board, Directors are granted an option to purchase 37,500 shares, one-third of which vest immediately, one-third after the first year, and the remaining one-third after the second year. Annually thereafter, Directors are granted an option to purchase 28,800 shares, which vest fully after one year. 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. As of December 31, 2000, 269,176 shares were available for grant under the Director Plan. Information regarding our stock options is set forth as follows:
Number Weighted average ----- ---------------- of options exercise price ---------- -------------- outstanding per share ------------- --------- Outstanding at December 31, 1997................................ 9,766,422 $ 1.27 Granted.................................................... 7,250,686 3.11 Exercised.................................................. (3,414,888) 1.09 Canceled................................................... (692,790) 1.75 ---------- --------- Outstanding at December 31, 1998................................ 12,909,430 $ 2.65 Granted.................................................... 5,470,116 11.54 Exercised.................................................. (3,643,948) 1.83 Canceled................................................... (915,526) 4.54 ---------- --------- Outstanding at December 31, 1999................................ 13,820,072 $ 8.76 Granted and assumed........................................ 6,442,610 33.55 Exercised.................................................. (4,173,771) 5.04 Canceled................................................... (255,034) 13.64 ---------- --------- Outstanding at December 31, 2000................................ 15,833,877 $ 25.45 ========== =========
The Company has, in connection with the acquisitions of various companies, assumed the stock option plans of each acquired company, and the related options are included in the preceding table. F-19 TRANSWITCH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share and per share amounts) Options outstanding and exercisable at December 31, 2000 are as follows:
Options outstanding Options exercisable ------------------- ------------------- Weighted -------- average Weighted Weighted ------- -------- -------- remaining average average --------- ------- ------- Range of Number contractual exercise Number exercise -------- ------ ----------- -------- ------ -------- exercise prices outstanding life price exercisable price ----------------- ------------ ---- ----- ------------ ----- $ 0.92 to 1.90............... 964,745 6.14 $ 1.33 848,453 $ 1.32 2.06 to 3.92............... 3,692,178 6.98 2.86 2,143,434 2.79 4.02 to 7.48............... 617,453 7.49 5.79 209,363 5.47 8.18 to 12.92............... 2,863,533 7.53 9.36 860,016 9.49 13.90 to 16.76............... 1,118,112 5.71 15.51 227,562 15.45 16.92 to 19.92............... 1,837,656 5.70 19.53 445,327 19.38 20.26 to 24.88............... 330,550 5.77 21.62 43,200 21.02 27.44 to 32.94............... 1,302,850 6.33 29.56 24,250 30.61 33.08 to 39.94............... 1,453,800 6.45 36.86 -- -- 40.26 to 49.75............... 631,700 6.36 43.32 -- -- 50.08 to 59.44............... 956,000 6.62 52.69 -- -- 61.88 to 74.31............... 65,3000 6.77 66.96 -- -- ---------- ---- -------- --------- -------- $ 0.92 to 74.31............... 15,833,877 6.49 $ 25.45 4,801,605 $ 13.19 ========== ==== ======== ========= ========
Stock options expire five, seven or ten years from the date of grant and are generally exercisable ratably over four years from the date of grant. Stock-Based Compensation In accordance with the provisions of SFAS No. 123, "Accounting for Stock- Based Compensation" (SFAS No. 123), we apply APB 25 and related interpretations in accounting for our stock-based awards. Under APB 25, no compensation expense is recognized in our financial statements for employee stock options because the exercise price of the option equals the market price of the underlying stock on the date of grant. Pro forma information regarding net income and net income per share is required by SFAS No. 123 for awards granted or modified after December 31, 1994 as if we had accounted for our stock-based awards to employees under the fair value method defined in SFAS No. 123. The fair value of our stock-based awards to employees was estimated using the Black-Scholes option pricing model with the following weighted average assumptions for the years ended December 31:
2000 1999 1998 ---- ---- ---- Risk-free interest rate...................................... 5.1% 6.7% 5.2% Expected life in years....................................... 3.0 3.2 4.1 Expected volatility.......................................... 85.8% 73.0% 68.9% Expected dividend yield...................................... -- -- --
The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected volatility of the stock price. Because our stock-based awards have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock-based awards to employees. F-20 TRANSWITCH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share and per share amounts) The weighted average fair value of our stock options granted, calculated using the Black-Scholes option-pricing model, is $19.03 for the year-ended December 31, 2000, $6.16 for the year-ended December 31, 1999 and $3.82 for the year-ended December 31, 1998. For purposes of pro forma disclosures, the estimated fair value of the above stock-based awards is amortized to expense over the awards' vesting period. Our pro forma information is as follows:
Years ended December 31, ----------------------------- 2000 1999 1998 -------- -------- -------- Net income--pro forma................................................ $ (4,113) $ 13,254 $ 1,338 Basic earnings (loss) per share--pro forma........................... (0.05) 0.17 0.02 Diluted earnings (loss) per share--pro forma......................... (0.05) 0.16 0.02
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. In connection with stock options granted from January 1, 1995 through March 31, 1995, we 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. We recorded compensation expense over the applicable vesting periods (primarily four years). We recorded compensation expense for these options of $77 for the year ended December 31, 1999 and $155 for the year ended December 31, 1998. The value of the deferred compensation was fully amortized as of December 31, 1999. As required by SFAS No. 123, we recognized additional compensation expense relating to stock options granted to non-employees of $57 in 2000, $56 in 1999 and $229 in 1998. Employee 401(k) Plan We sponsor a 401(k) plan known as the TranSwitch Corporation 401(k) Retirement Plan (the "Plan"). The Plan provides tax-deferred salary deductions for eligible employees. Employees may contribute from 1% to 20% of their annual compensation to the Plan, limited to an annual maximum amount as set periodically by the Internal Revenue Service. We provide matching contributions equal to 50% of the employees' deferred compensation, up to a maximum of 6%. All matching contributions vest immediately. Our contribution expense related to the Plan amounted to $434 for 2000, $307 for 1999 and $230 for 1998. F-21 TRANSWITCH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share and per share amounts) (10) Convertible Notes In September 2000, we issued $460 million of 4.5% convertible notes due September 12, 2005, and received proceeds of $444 million, net of debt issuance costs. The notes are convertible, at the option of the holder, at any time on or prior to maturity into shares of our common stock at a conversion price of $61.93 per share. The notes are unsecured and unsubordinated obligations and rank on a parity in right of payment with all our existing and future unsecured and unsubordinated indebtedness. We may redeem the notes, in whole or in part, at any time on or prior to September 12, 2003 at a redemption price equal to 100 percent of the principal amount of notes to be redeemed plus accrued and unpaid interest, if any, to the date of redemption if the closing price of our common stock has exceeded 150 percent of the conversion price then in effect for at least 20 trading days within a period of 30 consecutive trading days ("Provisional Redemption"). Upon any Provisional Redemption, we will make an additional payment with respect to the notes called for redemption in an amount equal to $135 per $1,000 principal amount of notes, less the amount of any interest actually paid on the notes before the provisional redemption date. We will make these additional payments, at each holder's option, either in cash or our common stock or a combination of both. (11) Earnings Per Share Basic earnings per share for the years ended December 31, 2000, 1999 and 1998 follows:
Years ended December 31, ------------------------ 2000 1999 1998 -------- -------- -------- Net income......................................................... $ 38,355 $ 25,334 $ 6,157 Weighted average shares (in thousands)............................. 81,681 76,676 63,174 Basic earnings per share........................................... $ 0.47 $ 0.33 $ 0.10
Diluted earnings per share for the years ended December 31, 2000, 1999, and 1998 follows:
Years ended December 31, ------------------------ 2000 1999 1998 -------- -------- -------- Net income.................................................................. $ 38,355 $ 25,334 $ 6,157 ======== ======== ======== Weighted average common shares outstanding for the period (in thousands)........................................................... 81,681 76,676 63,174 Stock options, net of assumed treasury share repurchases (in thousands)............................................................... 5,878 4,920 4,308 -------- -------- -------- Adjusted weighted average shares outstanding for the period (in thousands)........................................................... 87,559 81,596 67,482 ======== ======== ======== Diluted earnings per share.................................................. $ 0.44 $ 0.31 $ 0.09 ======== ======== ========
For purposes of calulating the dilutive earnings per share for the year-ended December 31, 2000, the assumed conversion of convertible debt is not taken into consideration as it is anti-dilutive. Had the assumed conversion of convertible debt been considered for purposes of calculating diluted earnings per share, $3,786 of interest expense (after tax) would have been added to net income and 2,476,000 additional shares of common stock would have been assumed outstanding for the year-ended December 31, 2000. F-22 TRANSWITCH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share and per share amounts) (12) Commitments and Contingencies Line of Credit In July 2000, we extended the time frame of our line of credit agreement with Silicon Valley Bank which allows us access up to $8,000 for working capital purposes, bearing interest at prime +3/4% due on July 13, 2001, and $2,000 for equipment purchases, bearing interest at prime +1% due on July 13, 2001. The line is secured by our accounts receivable. We have a pledge that we will seek Silicon Valley Bank's approval prior to allowing another party to secure our 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, 2000 and 1999, no amounts were outstanding under this agreement. Development Agreements From time to time, we have 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 we may use in the manufacture of products, for which royalties are paid based upon actual sales of these products. We recognized royalty expense of $185 in 2000, $612 in 1999 and $594 in 1998 under these agreements. These amounts are included in Cost of Revenues in the Consolidated Statements of Income. Lease Agreements Total rental expense under all operating lease agreements aggregated $1,284 in 2000, $1,153 in 1999 and $838 in 1998. Future minimum operating lease commitments that have remaining, non-cancelable lease terms in excess of one year at December 31, 2000 follow: 2001.............................................................. $2,305 2002.............................................................. 2,270 2003.............................................................. 1,875 2004.............................................................. 983 2005.............................................................. 874 Thereafter........................................................ 947 ------ $9,254 ====== F-23 TRANSWITCH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share and per share amounts) (13) Supplemental Cash Flow Information The following represents supplemental cash flow information:
2000 1999 1998 -------- -------- -------- Cash paid for interest............................................................. $ 24 62 129 Cash paid for income taxes......................................................... $ 1,276 669 355
The following represents a supplemental schedule of non-cash investing and financing activities:
2000 1999 1998 -------- -------- -------- Tax benefit realized from the exercise of stock options............................ $ 35,229 8,266 -- Capital lease obligations in connection with property and equipment................ $ 340 -- 547
(14) Quarterly Information (Unaudited)
First Second Third Fourth ----- ------ ----- ------ Quarter Quarter Quarter Quarter Year ------- ------- ------- ------- ---- Year ended December 31, 2000 Net revenues...................................... $ 27,359 34,072 42,600 51,052 155,083 Cost of revenues.................................. 8,777 10,412 12,506 14,452 46,147 Net income........................................ 6,478 7,949 9,135 14,793 38,355 Net income per common share: Basic........................................ $ 0.08 0.10 0.11 0.18 0.47 Diluted...................................... $ 0.07 0.09 0.11 0.17 0.44 Common dividends per share........................ -- -- -- -- -- Market price of common stock High......................................... $ 67.25 48.75 67.86 74.69 74.69 Low.......................................... $ 19.21 22.56 33.19 24.50 19.21 Year ended December 31, 1999 Net revenues...................................... $ 14,933 16,459 19,044 23,097 73,533 Cost of revenues.................................. 5,371 5,796 6,516 7,527 25,210 Net income........................................ 3,259 4,566 9,957 7,552 25,334 Net income per common share: Basic........................................ $ 0.04 0.06 0.13 0.10 0.33 Diluted...................................... $ 0.04 0.05 0.12 0.09 0.31 Common dividends per share........................ -- -- -- -- -- Market price of common stock High......................................... $ 10.61 15.88 21.67 24.20 24.20 Low.......................................... $ 6.61 7.78 13.42 12.40 6.61
F-24 The Board of Directors TranSwitch Corporation: The audits referred to in our report dated January 18, 2001 included the related financial statement schedule for each of the years in the three-year period ended December 31, 2000, included in the TranSwitch Corporation 2000 Annual Report on Form 10-K. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG LLP March 30, 2001 Schedule II TranSwitch Corporation Valuation and Qualifying Accounts (in thousands)
Additions --------- Balance at Charges to Charges Balance Beginning Costs and to Other at End Description of Period Expenses Accounts Deductions of Period ----------- --------- -------- -------- ---------- --------- Year ended December 31, 2000 Allowance for losses on: Accounts receivable $ 294 $ 500 $ - $ (190) $ 604 Inventory 1,519 825 - (553) 1,791 Sales returns and allowance 1,494 9,017 (1,275) (8,186) 1,050 Stock rotation - 2,839 1,275 (2,564) 1,550 Warranty 425 200 - (121) 504 Deferred tax valuation allowance 833 - - - 833 ------------ ------------ ------------ ------------ ------------ $ 4,565 $ 13,381 $ - $ (11,614) $ 6,332 ============ ============ ============ ============ ============ Year ended December 31,1999: Allowance for losses on: Accounts receivable $ 261 $ 47 $ - $ (14) $ 294 Inventory 1,543 539 - (563) 1,519 Sales returns and allowance 1,049 5,977 - (5,532) 1,494 Warranty 661 61 - (297) 425 Deferred tax valuation allowance 14,825 - - (13,992) 833 ------------ ------------ ------------ ------------ ------------ $ 18,339 $ 6,624 $ - $ (20,398) $ 4,565 ============ ============ ============ ============ ============ Year ended December 31,1998: Allowance for losses on: Accounts receivable $ 218 $ 50 $ - $ (7) $ 261 Inventory 1,278 503 - (238) 1,543 Sales returns and allowance 649 2,053 - (1,653) 1,049 Warranty 532 628 - (499) 661 Deferred tax valuation allowance 14,867 - - (42) 14,825 ------------ ------------ ------------ ------------ ------------ $ 17,544 $ 3,234 $ - $ (2,439) $ 18,339 ============ ============ ============ ============ ============
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