-----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, G5GaDTQ62j/3MVqMCVGb4AuEHgefJ+p2l+nZRTskHqMcNamjw2VWsFcqupAx47os oAwj+o3NUrWYQdFZSLpzow== 0000950109-98-002371.txt : 19980401 0000950109-98-002371.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950109-98-002371 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD 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: 98583732 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, 1997 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 28, 1998, as reported on the Nasdaq National Market, was approximately $127,681,803 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, 1998: 13,283,117 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 1998 Annual Meeting of Shareholders-- Items 10, 11, 12 and 13. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS 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 semiconductor solutions for the telecommunications and data communications markets. The Company's customers are original equipment manufacturers (OEM's) who serve three communications market segments: worldwide public network infrastructure, including cable television (CATV), internet infrastructure and corporate wide area networks (WAN). TranSwitch's VLSI devices are compliant with asynchronous (called PDH in Europe), synchronous optical network (SONET, SDH in Europe) and asynchronous transfer mode (ATM) data and telecommunications transmission standards and are designed to transparently integrate these standards. The Company's mixed- signal and digital design capability, in conjunction with its telecommunications systems expertise, enables the Company to determine and implement optimal combinations of design elements for desired analog and digital 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 and greater reliability relative to competing discrete solutions, while reducing system size and cost. Statements in this Form 10-K which are not historical facts, so-called "forward looking statements," are made pursuant to the safe harbor provisions of Section 21 E of the Securities Exchange Act of 1934, as amended. Investors are cautioned that all forward looking statements involve risks and uncertainties, including those detailed in the Company's filings with the Securities and Exchange Commission. See also "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations--Certain Factors That May Affect Future Results." PRODUCTS AND APPLICATIONS TranSwitch supplies high-speed (broadband) VLSI devices to systems vendors of public network equipment, such as multiplexers and DACS (Digital Access Cross-connect Systems); ISP's (Internet Service Providers) and CATV systems equipment; and local area networks (LAN) and WAN equipment, such as routers, bridges and hubs. The Company's core competencies as a systems innovation leader include an in-depth understanding of relevant asynchronous/PDH, SONET/SDH and ATM standards and associated nuances, the ability to design complex mixed-signal high-speed VLSI devices, and the capability to verify the design against customers' requirements and standards' requirements through analysis, simulation and certification. 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. Systems vendors can mix and match TranSwitch's VLSI devices to optimally configure a specific system. The Company's products utilizing three technologies can be grouped synergistically, providing seamless integration of asynchronous/PDH, SONET/SDH and ATM applications. The prices for the Company's products typically range from $15 to $300 depending on volume, complexity and functionality. Asynchronous/PDH Products TranSwitch's asynchronous products provide high bandwidth connections and can be used to configure transmission products for use in the public network, to ease the management burden of public networks and to enable CPE (Customer Premises Equipment) products like hubs and routers LANs and WANs to access the public network for communication with similar products in other locations. 1 The Company's asynchronous VLSI products include devices that provide physical interfaces for DS-series and E-series standards. This product line also includes multiplexers, 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 a defined bit stream, permitting a system to recognize other bits. 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" bridge the interconnection between SONET/SDH equipment and asynchronous equipment, allowing DS-series and E-series transmission lines to be connected with SONET/SDH lines. Asynchronous signals can therefore be transported across the SONET/SDH network transparently. TranSwitch's SONET/SDH products are used in Add/Drop multiplexers (ADM), DACS and other telecommunications and data communications equipment. The SONET/SDH products also have applications in CPE products such as routers and LAN-switches, as well as in microwave transmission products. CATV vendors are now using optical fiber technology based on SONET/SDH standards to upgrade their infrastructure and provide new value-added services. ATM Products In the ATM area, TranSwitch offers devices that convert data communications packets (such as those on LANs and WANs) into the cell format needed for transmission on ATM networks, along with devices that provide ATM interfaces to both asynchronous and SONET/SDH transmission links. 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 engineering organization. The group possesses substantial telecommunications and data communications design experience, as well as extensive knowledge of relevant standards. A key aspect of "know-how" includes not only a thorough understanding of the actual written standards promulgated, but also an awareness of and appreciation for the nuances associated with these standards necessary for assuring that device designs are fully compliant. The Company's telecommunications and data communications experience and participation in the standards development and promulgation process provide it with significant advantages in designing semiconductor devices meeting the evolving needs of its customers. Complementing the Company's accumulated communications industry expertise is its VLSI design competence. The Company's VLSI design staff has extensive experience in designing analog and mixed-signal devices, which require a sophisticated understanding of complex technology, as well as the specifics of manufacturing processes and their resulting impact on device performance. TranSwitch has also developed a large number of VLSI blocks that operate under the demanding requirements of the telecommunications and data communications industry. These blocks have been designed to be merged using standard programming languages such as VHDL and M (a C-like language) to create new devices that meet expanding customer requirements. TranSwitch has also developed a proprietary toolset called the "Test Bench," which facilitates on-time development of products and ensures that products meet customer and standards requirements. TranSwitch has also developed a large library of reusable portable cells. In addition to standard logic functions, the cell library consists of a large number of analog cells such as clock-recovery functions, phase-locked-loops, and equalizers. The library also includes key asynchronous, SONET/SDH and ATM functions. The Company is investing significant resources in developing an architecture which allows increased programmability. Programmability provides accelerated time-to-market by decoupling hardware and software verification. In addition, 2 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. SALES AND MARKETING TranSwitch's sales and marketing 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, CPE, 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, Brazil, Canada, Finland, France, Germany, Israel, Italy, Japan, Korea, People's Republic of China, Spain, Sweden, Switzerland, Taiwan and the United Kingdom. The Company also sells its products through a domestic distributor and a network of domestic sales representatives. The Company has regional sales/technical support capabilities in Boston, Ma., Sunnyvale, Ca., Morristown, N.J., Great Falls, Va., 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 300 customers. The Company's customers include: public network systems suppliers that incorporate the Company's products into telecommunications systems; LAN and WAN equipment suppliers; ISP's; communications test and performance measurement equipment suppliers; and government, university and private laboratories that use the Company's products in advanced public network and LAN/WAN developments. In 1997, Insight Electronics, Inc. (a distributor selling to various end users, none of which comprise more than 10% of the Company's total revenues) and Tellabs Operations accounted for 41% and 16% of total revenues, respectively. In 1996, ECI Telecom Ltd, Insight Electronics, Inc. and Tellabs Operations, Inc. accounted for 22%, 16% and 14% of total revenues, respectively. In 1995, Tellabs Operations, Inc. and Insight Electronics, Inc. accounted for 17% and 16% of total revenues, respectively. No other customer accounted for 10% or more of revenues during 1997, 1996, and 1995. Export revenues represented 33%, 46%, and 38% of total revenues in 1997, 1996 and 1995, respectively. See "Note 12 of Notes to Consolidated Financial Statements." 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, 1997, the Company had 56 full-time employees engaged in research and development efforts. The Company currently anticipates only slight increases in its research and development staffing in 1998. Expenditures for research and development in 1997, 1996 and 1995 were approximately $9.2 million, $8.9 million and $6.5 million, respectively. Currently, the Company's major development programs include new SONET/SDH products, new ATM products and new Asynchronous/PDH products which are targeted at end markets in the public network transmission structure, the Internet infrastructure and the corporate wide area network (WAN). 3 PATENTS AND LICENSES The Company has 24 patents issued and seven patent applications pending in the U.S. Of the 24 issued patents, one is co-owned by ECI Telecom Ltd and one is co-owned by Siemens Telecommunications Systems Ltd.. The Company has three patents issued and 15 patent applications pending in Canada. The Company has six patents issued in Taiwan, with one patent being co-owned by Siemens Telecommunications Systems Ltd. The Company has three patents issued and four patents pending in the People's Republic of China. The Company has 14 patent applications pending in selected countries in the European Patent Office (EPO), and one patent issued in France, Germany, and the U.K. In addition, the Company has seven patent applications pending in Japan and four patents issued in Israel. Further, the Company has two patent applications pending under the Patent Cooperation Treaty (PCT) with the possibility of filing one PCT application in the EPO, Canada, Japan and Israel and one PCT application in Canada, the EPO and Japan. None of the Company's domestic and foreign patents that have issued will expire in the near future. The Company's oldest patent is not scheduled to expire for more than seven years. There can be no assurance, however, that the claims allowed in any of the Company's existing or future patents will provide competitive advantages for the Company's products, will not be successfully challenged or circumvented by competitors or that pending patent applications will ultimately issue as patents. Under current law, patent applications in the United States are maintained in secrecy until patents are issued and patent applications in foreign countries are maintained in secrecy for a period after filing. The right to a patent in the United States is attributable to the first to invent, not the first to file a patent application. The Company cannot be sure that its product 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. 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. There can be no assurance 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 six trade or service marks in the U.S., and it has eight more U.S. applications for trademarks awaiting approval. The Company has also filed three trademark applications under the European Trademark (ECT) procedure. The Company's ability to compete depends upon its ability to protect its proprietary information through various means, including ownership of patents, copyrights, mask work registrations and trademarks. While no intellectual property right of the Company has been invalidated or declared unenforceable, there can be no assurance that such rights will be upheld in the future. The Company believes that, in view of the rapid pace of technological change in the semiconductor industry, the technical experience and creative skills of its engineers and other personnel are the most important factors in determining the Company's future technological success. TranSwitch has entered into various license agreements for product or technology exchange. The purpose of these licenses has, in general, been to obtain second sources for standard products or to convey or receive rights to certain proprietary or patented cores, cells or other technology. In March 1995, the Company entered into an agreement with StrataCom, Inc., whereby the Company obtained the right to use intellectual property covered by two StrataCom, Inc. patents. The Company entered into an OEM relationship with IBM Corporation in 1994, whereby it was granted the right to purchase and resell two ATM line interface products. 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 4 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. There can be no assurance that licenses for any of these patents will be available to the Company on reasonable terms, or that the Company would prevail in any litigation seeking damages or expenses from the Company or to enjoin the Company from selling its products on the basis of any of the alleged infringements. MANUFACTURING AND QUALITY TranSwitch's manufacturing objective is to produce reliable, high quality devices cost-competitively. To this end, the Company seeks to differentiate itself by maximizing the reliability and quality of its products, achieving on-time delivery of its products to its customers, minimizing capital and other resource requirements by subcontracting capital-intensive manufacturing and achieving a gross margin commensurate with the value of its products. Effective June 25, 1997, the Company was registered by TUV Rheinland of North America, Inc. as complying with the requirements of ISO-9001. All of the Company's VLSI devices are manufactured by established independent foundries. This approach permits the Company to focus on its design strengths, minimize fixed costs and capital expenditures and access diverse manufacturing technologies. Currently, the Company utilizes four foundries to process its wafers: Texas Instruments Incorporated (TI), Symbios Logic Inc. and LSI Logic Corporation in the U.S. and Taiwan Semiconductor Manufacturing Company Limited (TSMC) in Taiwan. Foundries are required to have qualified and reliable processes, high-frequency test capability, ISO-9002 qualification and quick turnaround prototyping. The selection of a foundry for a specific device is based on availability of the required process technology and the foundry's capability to support the particular set of tools used by TranSwitch for that device. Currently, TI manufactures all of the Company's BiCMOS devices. The Company entered into a foundry agreement with TI in December 1995, pursuant to which the Company received access to TI's process technology through 2000. The Company also has an agreement with TSMC that guarantees the Company a minimum capacity level for four years, through 1999, and in return the Company has agreed to purchase unutilized commitment below an agreed minimum level. See also "Note 13 of Notes to Consolidated Financial Statements." There are certain significant risks associated with the Company's reliance on outside foundries, including the lack of assured wafer supply and control over delivery schedules, the unavailability of or delays in obtaining access to key process technologies and limited control over quality assurance, manufacturing yields and production costs. In addition, the 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. Such reduced yields have at times adversely affected the Company's operating results. There can be no assurance that the Company's foundries will not experience lower than expected manufacturing yields in the future, which could materially and adversely affect the Company's business, financial condition and operating results. COMPETITION The semiconductor industry is intensely competitive and is characterized by price erosion, rapid technological change, shortage in fabrication capacity, heightened international competition in many markets, and unforeseen manufacturing yield problems. The telecommunications and data communications industries, which are the primary target markets for TranSwitch, are also becoming intensely competitive because of deregulation and heightened international competition. This heightened competition is likely to result in pricing 5 pressures on the Company's products, which could materially and adversely affect the Company's business, financial condition and operating results. TranSwitch believes that the principal bases of competition in the semiconductor industry include product definition, product design, test capabilities, reliability, functionality, time-to-market, reputation and price. 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. Although the Company believes that it competes favorably on the basis of functionality, reliability and price, there is no assurance that the Company will be able to compete successfully in the future. 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 like Lucent Technologies, IBM Corporation, NEC Corporation and Siemens Corporation. 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/PDH and SONET/SDH areas are AMCC Corporation, Crystal Semiconductor, Inc., Dallas Semiconductor Corp., EXAR Corporation, Integrated Telecom Technology, Inc., Lucent Technologies, National Semiconductor Corporation, PMC Sierra Corporation, Texas Instruments, Inc., Triquint Semiconductor Inc., Vitesse Semiconductor Corp. and VLSI Technology. In addition, there are a number of ASIC vendors, including AMI Industries, Inc., LSI Logic Corp., and SGS-Thompson Microelectronics, Inc. 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 AMD Corporation, MMC Networks, Inc. and IDT. Numerous other domestic and international vendors have announced plans to enter this market. BACKLOG As of December 31, 1997, the Company's backlog was $9.4 million, as compared to $4.9 million as of December 31, 1996. 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, 1997, the Company had 115 full time employees. The Company's employees are not represented by any collective bargaining agreement and the Company has never experienced a work stoppage. The Company believes that its employee relationships are good. ITEM 2. PROPERTIES 6 FACILITIES The Company's headquarters are located in a suburban office park in Shelton, Connecticut where it leases approximately 40,000 square feet in a four story office building. Product development and all final inspection and shipping, marketing and administration activities are located at this facility. Approximately 80% of the existing space is fully utilized and the Company believes its current space to be adequate to meet its needs for the next 12 months, although there can be no assurance that the space will be adequate or that the Company will be able to obtain additional space on commercially reasonable terms, if necessary. The lease is due to expire in November, 2007. The Company also leases approximately 1,100 square feet in Research Triangle Park, North Carolina where additional product development efforts take place. In September, 1997 the Company leased approximately 3,200 square feet in Stoneham, Massachusetts for product development and sales support. The Company leases a 1,100 square foot sales and support facility in Sunnyvale, California. The Company also maintains a small sales office in Brussels, Belgium. In February 1996, the Company opened a new leased facility of 2,000 square feet in Taipei, Taiwan for product development and sales support. 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, 1997. 7 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock has been quoted on the Nasdaq National Market tier of The Nasdaq Stock Market under the symbol "TXCC" since its initial public offering on June 14, 1995. The following table sets forth, for the periods indicated, the range of quarterly high and low bid information for the Company's Common Stock as reported on the Nasdaq National Market:
HIGH BID LOW BID -------- ------- 1996 First Quarter............................................... $13.75 $ 7.88 Second Quarter.............................................. 21.63 12.44 Third Quarter............................................... 13.25 5.50 Fourth Quarter.............................................. 7.00 3.63 1997 First Quarter............................................... $ 7.63 $ 4.63 Second Quarter.............................................. 9.88 4.00 Third Quarter............................................... 12.38 8.25 Fourth Quarter.............................................. 14.25 6.82
On October 10, 1997, the Company issued 14,500 shares of Series A Convertible Preferred Stock ("Series A Stock") to eleven accredited investors in a private placement transaction exempt from registration under Rule 506 of Regulation D under the Securities Act of 1933, as amended. The aggregate consideration received by the Company for the Series A Stock was $14.5 million in cash, or $1,000 per share. Each share of Series A Stock is convertible into shares of Common Stock at any time at the option of the stockholder holding such Series A Stock, subject to certain limitations, at the lesser of (i) $10.58 per share and (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; provided, however, that, in no event shall the conversion price per share of Series A Stock be less than $4.86 per share. Unless converted sooner at the option of the holders of Series A Stock, all shares of Series A Stock will convert to Common Stock on October 10, 2002 if, at that time, the Company's Registration Statement on Form S-3 (Registration No. 333-40897) is in force and effect and the Company is in compliance with the terms of the Series A Stock. As of February 28, 1998, there were approximately 238 holders of record of the Company's Common Stock and at least 3,000 beneficial holders, based on information obtained from the Company's transfer agent. 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. 8 ITEM 6. SELECTED FINANCIAL DATA The following table includes selected consolidated financial data for each of the five years ended December 31, 1997 which are derived from and more fully described in the consolidated financial statements and notes included in this report at Item 14. Amounts presented in thousands, except per share data
YEAR ENDED DECEMBER 31, ------------------------------------------ 1997 1996 1995 1994 1993 ------- ------- ------ ------- ------- CONSOLIDATED STATEMENT OF OPERA- TIONS DATA: Total revenues.................... $27,084 19,650 17,466 12,101 12,018 Gross profit...................... 15,830 5,844 10,071 6,185 6,006 Net loss.......................... (1,873) (10,077) (1,773) (3,937) (1,094) Basic loss per share (1)(2)(3).... $ (.15) ( .86) (.18) (.48) Shares used in calculation of basic loss per share............ 12,152 11,751 10,062 8,178 DECEMBER 31, ------------------------------------------ 1997 1996 1995 1994 1993 ------- ------- ------ ------- ------- CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and short term investments................. $21,618 12,688 17,250 3,352 6,702 Working capital................... 25,648 14,650 21,811 3,656 7,634 Total assets...................... 36,589 23,311 32,670 8,969 10,994 Note payable to bank.............. -- -- -- 1,191 128 Mandatorily redeemable convertible preferred stock.................. -- -- -- 20,252 20,211 Stockholders' equity (deficit).... $30,161 17,299 26,706 (15,324) (11,445)
- -------- (1)See Note 1 of Note to Consolidated Financial Statements included in this Report at Item 14. (2) Gives effect to the mandatory conversion of all then outstanding Preferred Stock into 7,009,742 shares of Common Stock on completion of the Company's initial public offering in June, 1995. 1994 per share amount based on pro- forma weighted average shares outstanding for 1994. (3)Net loss per share amounts prior to 1994 are not meaningful. 9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following 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, the Company has designed, sourced and marketed high-speed VLSI devices for public and private network applications worldwide. The Company shipped its first product in 1990 and has increased its volume of shipments over the last eight years. The Company's product development efforts have been focused on devices that meet the needs of public and private network telecommunications and data communications equipment providers and are compliant with established standards in these markets, including asynchronous/PDH, SONET/SDH and the emerging ATM standards. The Company's products are generally incorporated into original equipment manufacturer's (OEM's) products at the design stage, which often requires significant expenditures by the Company well in advance of substantial orders from the customer. The Company has not been profitable, on a yearly basis, since its inception. As of December 31, 1997, the Company had an accumulated deficit of $30.0 million and there can be no assurance the Company will achieve profitability in the future. The Company's operating results are subject to quarterly and annual fluctuations as a result of a wide variety of factors that could materially and adversely affect profitability, including but not limited to competitive pressures on selling prices, availability and cost of semiconductor foundry capacity and materials, fluctuations in yields, changes in product mix, the Company's ability to introduce new products and technologies on a timely basis, market acceptance of products of both the Company and its customers, scheduling of orders by its customers, decisions by customers to withhold or delay orders, fluctuations of inventory cycles in the industry, foreign sales and currency fluctuations, the level of orders that are received and can be shipped in a quarter and whether the Company's customers buy through a distributor or directly from the Company. See "Certain Factors that May Affect Future Results." The Company recognizes product revenues upon shipment to customers. Sales to certain distributors are made under distributor agreements which provide certain price protection and return and allowance rights to the distributor. RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 Total Revenues. The Company derives its revenues principally from the sales of its products. In 1997, the Company reported revenues of $27.1 million, an increase of 38.0% over 1996. The increase was primarily in product revenues as this was the Company's focus. The Company did not derive any revenue in 1997 attributable to product license and royalty fees. In December 1995, the Company repurchased from Texas Instruments its license agreement (the "TI License") which was the sole source of license and royalty fees in 1995. In 1996, the Company reported revenues of $19.7 million, an increase of 13.0% over 1995. This increase was primarily due to the continued increase of product revenues which grew to 97.9% of total revenues in 1996. In 1997, Insight Electronics, Inc. (a distributor selling to various end users, none of which comprise more than 10% of the Company's total revenues) and Tellabs Operations, Inc. accounted for 41% and 16% of total revenues, respectively. In 1996, ECI Telecom, Ltd., Insight Electronics, Inc. and Tellabs Operations, Inc. accounted for 22%, 16% and 14% of total revenues, respectively. In 1995, Tellabs Operations, Inc. and Insight Electronics, Inc. accounted for 17% and 16% of total revenues, respectively. No other customer accounted for more than 10.0% of the Company's total revenues during these periods. 10 Foreign sales, primarily consisting of sales to customers in Europe, the Middle East and the Far East, constituted 33%, 46% and 38% of total revenues in 1997, 1996 and 1995, respectively. All sales are denominated in U.S. dollars. The Company anticipates that international revenues will continue to represent a significant portion of total revenues, particularly as the Company opens direct sales offices in foreign countries. The Company maintains a sales support office in Europe and one in the Far East. A significant portion of the Company's total revenues may be subject to risks associated with foreign sales, including unexpected changes in legal and regulatory requirements and policy changes affecting the telecommunications and data communications markets, changes in tariffs, exchange rates and other barriers, political and economic instability, and potentially adverse tax consequences. In particular, sales to Korea and other Pacific Rim countries may be impacted by the current financial instability plaguing these nations. The currency fluctuations and difficulty of obtaining loans from unstable banking and other financial institutions in the Far East may cause the Company's customers in that region to delay or reduce their orders. Product revenues, net. In 1997, product revenues grew 40.1% to $26.9 million from $19.2 million in 1996. This growth was driven by a broad strength across all of the Company's product lines. In 1996, product revenues grew 16.8% to $19.2 million from $16.5 million in 1995. This growth was primarily driven by increased sales of SONET/SDH products. Revenues from ATM products as a portion of total product revenues grew significantly both in absolute dollars and as a percentage of total revenues during 1995 as systems manufacturers designed products incorporating the new ATM standard and the Company introduced new ATM VLSI devices. Gross profit. Gross profit is derived from product sales. Cost of products sold includes the costs of production of finished semiconductors produced by third-party vendors, direct and indirect costs associated with procurement, testing and other quality assurance procedures followed by the Company, product royalty fees and the amortization of product licenses. Gross margin in 1997 increased to 58.4%. The increase was due to the lack of the TI License expense recognized in 1996 and the growth in total volumes. Gross margin in 1996 decreased to 29.7% of total revenues from 57.6% in 1995 due primarily to the write down of the TI License in the fourth quarter of 1996. The TI License was written down to its net realizable value as the incremental revenue which was originally forecast did not materialize. In 1997, gross profit increased to $15.8 million, a function of the increase in overall volume and the lack of the TI License expense recognized in 1996. In 1996, product gross profit decreased to $5.8 million from $9.6 million in 1995, as the Company recognized $3.1 million of the cost of repurchasing the TI License in cost of sales. In the fourth quarter of 1996, the Company reviewed the drop in product revenue that occurred in the third and fourth quarters and as a result determined that the originally forecasted revenues were not going to materialize. Also in the cost of sales is the write down of approximately $600 thousand of ATM product inventory which was primarily related to those specific products for which there was a significant decline in revenue the last two quarters of the year. Research and development. In 1997, research and development expenditures were $9.2 million, or 33.9% of total revenues, an increase of 3.3% over 1996. In 1996, research and development expenditures were $8.9 million, or 45.3% of total revenues, an increase of 34.0% over 1995. The increase was primarily attributable to increases in staff and in non-recurring engineering charges related to the introduction of new products during 1996. The Company believes that the continued introduction of new products is essential to its competitiveness and is committed to continued investment in research and development. The Company believes that its research and development expenses will increase in absolute dollars in the future as it continues to add products to all of its product lines. Marketing and sales. In 1997, marketing and sales expense increased 22.5% to $6.7 million or 24.7% of total revenues compared to 1996. The increase is the result of the increase in variable commissions on the increased volume as well as an increase in staff in this area. In 1996, marketing and sales expense increased 26.0% to $5.5 million or 27.8% of total revenues, from $4.3 million, or 24.8% of total revenues in 1995. During 1995, the Company added new staff in this area, opened a new sales office in Sunnyvale, California and Taipei, Taiwan, and expanded its manufacturing representative coverage. The Company anticipates that it will 11 continue to incur higher marketing and sales expenses in absolute dollars as it expands its marketing and sales efforts. General and administrative. In 1997, general and administrative expenses increased 2.6% to $2.3 million over 1996 or 8.5% of total revenues. In 1996, general and administrative expenses increased 51.4% to $2.2 million or 11.2% of total revenues from $1.5 million or 8.0% of total revenues in 1995. Included in the 1997 and 1996 expense is $225 thousand and $195 thousand, respectively of non-cash expense related to the recognition of compensation expense under SFAS No. 123 using a fair value approach to non-employee stock option grants, and the remaining increase is attributed to the legal and investor relations expenses required by the Company's being public for the full year in 1996 versus 1995, in which the Company was a public company for approximately six months. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations and met its capital requirements since incorporation in 1988 primarily through cash generated from its operations, private placements of preferred stock, and borrowings under a working capital line of credit, and equipment financing line of credit from Silicon Valley Bank. The Company completed an initial public offering by July 13, 1995 and raised a total of $24.0 million, including $3.1 million from the exercise of an over-allotment option of 375,000 shares granted to the Underwriters of the initial public offering. On October 10, 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. The Company's principal sources of liquidity as of December 31, 1997 consisted of $21.6 million in cash and short-term investments and $8.0 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, 1997 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 1997, the Company used $2.0 million in cash for operating activities, the result of a loss of $1.9 million, inclusive of non-cash charges of $1.8 million for depreciation and amortization, an increase of $2.9 million in accounts receivable and inventory and a corresponding increase of $1.6 million in accrued expenses. In 1996, the Company used $2.2 million in cash for operating activities, the result of a loss of $10.1 million, offset by non- cash charges of $2.2 million for depreciation and amortization, $3.1 million write-down of the TI License, a decrease of $2.5 million in accounts receivables and the remainder in other working capital items. In 1995 the Company used $4.9 million of cash for operating activities to finance an increase of $3.1 million in accounts receivable, a result of the growth in total revenues, as well as a $1.4 million increase in inventories to support the growth in shipments of products, while it sustained a loss of $1.8 million. The increase of $0.7 million in accounts payable was primarily due to the increase in inventory. In 1997, 1996 and 1995, the Company paid $0.7 million, $0.4 million and $2.1 million to Texas Instruments. The Company will make a minimum cash payment of $1,250,000 to Texas Instruments in 1998 under the TI License, in addition to incremental royalties based upon exceeding certain level of sales volume. The Company anticipates that it will fund such payment from existing cash and short term investments. See "Note 13 of Notes to Consolidated Financial Statements." Capital expenditures, including purchases of computer equipment, test equipment, furniture and fixtures and software, were $2.7 million in 1997, $1.9 million in 1996 and $1.3 million in 1995. In 1997, they were funded from existing cash and short term investments. In 1996 and 1995, they were funded from existing cash and by funds generated in the initial public offering. Net cash provided by financing activities consists primarily of proceeds from the exercise of stock options and warrants of $0.7, $0.3 and $0.3 million in 1997, 1996 and 1995, respectively, the gross proceeds from the issuance of common stock for $24.0 million in 1995 and the gross proceeds from the issuance of preferred stock of $14.5 million in 1997. In June 1995, the Company repaid all outstanding notes payable of $1.2 million to Silicon Valley Bank. 12 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 1998. 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 which are not historical facts, so-called "forward-looking statements," which involve risks and uncertainties. Such forward-looking statements are made pursuant to the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended. 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 anticipated levels of contract revenues and license and royalty fees, the anticipated level of foreign sales, anticipated increases in research and development and sales and marketing expenses, and the availability of capital for working capital and for the purchase of capital equipment, may be forward-looking statements. The Company's actual future results may differ significantly from those stated in any forward-looking statements. Factors that may cause such differences include, but are not limited to, the factors discussed below. Each of these factors, and others, are discussed from time to time in the Company's filings with the Securities and Exchange Commission. The Company's future results are subject to substantial risks and uncertainties. The Company currently relies on four third-party VLSI fabrication foundries to manufacture its products. There are significant risks associated with this reliance on outside foundries, including the lack of assured water 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, among others. Also, the Company relies on certain intellectual property protections to preserve its intellectual property rights. Any invalidation of the Company's intellectual property rights or lengthy and expensive defense of those rights could have a material adverse affect on the Company. The development of new technologies, commercialization of those technologies into products, and market acceptance and customer demand for those products are critical to the Company's success. Successful product development and introduction depend upon a number of factors, including accurate new product definition, timely completion and introduction of new product designs, availability of foundry capacity, achievement of manufacturing yields, market acceptance of the Company's products and its customers' products, the ability to continue to attract, retain and motivate key management and technical personnel, such as experienced circuit designers and systems applications engineers, and the ability to accurately specify and certify the conformance of its products to applicable standards and to develop its products in conformance with customer standards. The Company believes that factors affecting its ability to achieve market acceptance of its products include product performance, time to market, price and other factors. The semiconductor industry is intensely competitive and is characterized by price erosion, rapid technological change, shortage in fabrication capacity, heightened international competition, and unforeseen manufacturing yield problems. The telecommunications and data communications markets, which are the Company's primary target markets, are also becoming intensely competitive. Certain current and potential competitors of the Company are more established, benefit from greater market recognition, and have substantially greater financial, development, manufacturing and marketing resources than the Company. Competitive pressures or other factors could result in significant price erosion that could have a material adverse effect on the Company's results of operations. The Company derives a significant 13 portion of its total revenues from foreign sales. Foreign sales are subject to significant risks, including unexpected changes in legal and regulatory requirements and policy changes affecting the Company's markets, changes in tariffs, exchange rates and other barriers, political and economic instability, difficulties in accounts receivable collection, difficulties in managing distributors and representatives, difficulties in staffing and managing foreign operations, difficulties in protecting the Company's intellectual property and potentially adverse tax consequences. In particular, sales to Korea and other Pacific Rim countries may be impacted by the current financial instability plaguing these nations. The currency fluctuations and difficulty of obtaining loans from unstable banking and other financial institutions in the Far East may cause the Company's customers in that region to delay or reduce their orders. Historically, a relatively small number of customers have accounted for a significant portion of the Company's total revenues. Loss of, or a decrease in orders from any one or more of the Company's customers could have a material adverse effect on the Company's results of operations. The Company has created a committee to study the Year 2000 issue and take actions to understand the nature and extent of work required to make its products, systems and infrastructure Year 2000 compliant. The Company uses a number of computer software programs and operating systems in its internal operations, including applications in manufacturing, material planning, product development, financial business systems and various administrative functions. To the extent that these software applications contain source code that is unable to appropriately interpret the upcoming year "2000", some level of modification or possibly replacement of such source code or applications will be necessary. The Company continues to evaluate the estimated costs associated with these efforts based on actual experience. While these efforts will involve some additional costs, the Company believes, based on available information, that it will be able to manage its total Year 2000 transition without material adverse effect on its business, financial condition or operating results. The Company's quarterly and annual operating results are affected by a wide variety of factors that could materially adversely affect revenues and profitability, including: competitive pressures on selling prices; the timing and cancellation of customer orders; the timing and provision of pricing protections and returns from certain distributors; availability of foundry capacity and raw materials; fluctuations in yields; changes in product mix; the Company's ability to introduce new products and technologies on a timely basis; introduction of products and technologies by the Company's competitors; market acceptance of the Company's and its customers' products; the level of orders received that can be shipped in a quarter; the amount and timing of recognition of non-recurring engineering revenue; the timing of investments in research and development, including tooling expenses associated with product development and pre-production; and whether the Company's customers buy directly from the Company or from a distributor. Sudden shortages of raw materials or production capacity constraints can lead producers to allocate available supplies or capacity to customers with resources greater than those of the Company, which could interrupt the Company's ability to meet its production obligations. Historically, average selling prices in the semiconductor industry have decreased over the life of a product, and as a result, the average selling prices of the Company's products may be subject to significant pricing pressures in the future. The Company's business is characterized by short-term orders and shipment schedules, and customer orders typically can be canceled or rescheduled without significant penalty to the customer. Due to the absence of substantial noncancellable backlog, the Company typically plans its production and inventory levels based on internal forecasts of customer demand, which are highly unpredictable and can fluctuate substantially. Because the Company is continuing to increase its operating expenses for personnel and new product development and for inventory in anticipation of increasing sales levels, operating results would be adversely affected if increased sales are not achieved. In addition, the Company is limited in its ability to reduce costs quickly in response to any revenue shortfalls. From time to time, in response to anticipated long lead times to obtain inventory and materials from its foundries, the Company may order in advance of anticipated customer demand, which might result in excess inventory levels if expected orders fail to materialize or other factors render the customer's product less marketable. As a result of the foregoing and other factors, the Company may experience material fluctuations in future operating results on a quarterly or annual basis which could materially and adversely affect its business, financial condition and operating results. 14 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. 15 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, 1997. 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, 1997. 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, 1997. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. 16 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, 1997 and December 31, 1996 Consolidated Statements of Operations for each of the years in the three year period ended December 31, 1997. Consolidated Statements of Stockholders' Equity (Deficit) for each of the years in the three year period ended December 31, 1997. Consolidated Statements of Cash Flows for each of the years in the three year period ended December 31, 1997. 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. 3. Exhibits
EXHIBIT NUMBER DESCRIPTION -------- ----------- 3.2* Amended and Restated Certificate of Incorporation of the Company 3.3* By-laws, as amended and restated, of the Company 4.1* Specimen certificate representing the Common Stock 4.2* Fourth Amended and Restated Registration Rights Agreement 4.3+ Certificate of Designations, Preferences and Rights of Series A Preferred Stock 4.4+ Form of Stock Purchase Agreement, dated October 10, 1997 among the Company and the purchasers of Series A Convertible Preferred Stock 10.1* 1989 Stock Option Plan 10.2++ Second Amended and Restated 1995 Stock Plan 10.3* 1995 Employee Stock Purchase Plan 10.4* 1995 Non-Employee Director Stock Option Plan 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
17
EXHIBIT NUMBER DESCRIPTION ------- ----------- 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 21.1** Subsidiary of the Company 23.1** Consent of KPMG Peat Marwick 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. + 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 Form 10-K for the year ended December 31, 1996 and incorporated herein by reference. +++ Previously filed as an exhibit to the Company's Form 10-Q for the quarter ended September 30, 1997 and incorporated herein by reference. ** Filed herewith. *** 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 (b) Reports on Form 8-K No reports on Form 8-K were filed by the Company during the fourth quarter ended December 31, 1997. On February 13, 1998, the Company filed a Form 8-K reporting its unaudited financial results for its fourth quarter and the fiscal year ended December 31, 1997. (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. 18 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 27, 1998 TranSwitch Corporation /s/ Dr. Santanu Das By: _________________________________ Name: Dr. Santanu Das Title: Chairman of the Board President and Chief Executive Officer POWER OF ATTORNEY AND SIGNATURES WE, THE UNDERSIGNED OFFICERS AND DIRECTORS OF TRANSWITCH CORPORATION, HEREBY SEVERALLY CONSTITUTE AND APPOINT SANTANU DAS AND MICHAEL MCCOY, AND EACH OF THEM SINGLY, OUR TRUE AND LAWFUL ATTORNEYS, WITH FULL POWER TO THEM AND EACH OF THEM SINGLY, TO SIGN FOR US IN OUR NAMES IN THE CAPACITIES INDICATED BELOW, ALL AMENDMENTS TO THIS REPORT, AND GENERALLY TO DO ALL THINGS IN OUR NAMES AND ON OUR BEHALF IN SUCH CAPACITIES TO ENABLE TRANSWITCH CORPORATION TO COMPLY WITH THE PROVISIONS OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED AND ALL REQUIREMENTS OF THE SECURITIES AND EXCHANGE COMMISSION. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE COMPANY AND IN THE CAPACITIES AND ON THE DATES INDICATED.
NAME AND SIGNATURE TITLE(S) DATE ------------------ -------- ---- /s/ Dr. Santanu Das Chairman of the Board, March 27, 1998 ____________________________________ President, and Chief DR. SANTANU DAS Executive Officer (principal executive officer) /s/ Michael F. Stauff Senior Vice President, Chief March 27, 1998 ____________________________________ Financial Officer and MICHAEL F. STAUFF Treasurer (principal financial and accounting officer) /s/ Dr. Steward S. Flaschen Director March 27, 1998 ____________________________________ DR. STEWARD S. FLASCHEN /s/ Dr. Charles Lee Director March 27, 1998 ____________________________________ DR. CHARLES LEE
19
NAME AND SIGNATURE TITLE(S) DATE ------------------ -------- ---- /s/ Dr. Ljubomir Micic Director March 27, 1998 ____________________________________ DR. LJUBOMIR MICIC /s/ Dr. Albert E. Paladino Director March 27, 1998 ____________________________________ DR. ALBERT E. PALADINO /s/ Erik van der Kaay Director March 27, 1998 ____________________________________ ERIK VAN DER KAAY
20 TRANSWITCH CORPORATION AND SUBSIDIARY INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Independent Auditors........................................... F-2 Consolidated Balance Sheets as of December 31, 1997 and 1996............. F-3 Consolidated Statements of Operations for each of the years in the three- year period ended December 31, 1997....................................................... F-4 Consolidated Statements of Stockholders' Equity for each of the years in the three-year period ended December 31, 1997........................... F-5 Consolidated Statements of Cash Flows for each of the years in the three- year period ended December 31, 1997..................................... F-6 Notes to Consolidated Financial Statements............................... F-7
F-1 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders TranSwitch Corporation: We have audited the accompanying consolidated balance sheets of TranSwitch Corporation and subsidiary as of December 31, 1997 and 1996, 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, 1997. 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 subsidiary as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three- year period ended December 31, 1997, in conformity with generally accepted accounting principles. Stamford, Connecticut February 4, 1998 F-2 TRANSWITCH CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, ------------------ 1997 1996 -------- -------- ASSETS Current assets: Cash and cash equivalents................................ $ 20,508 $ 3,911 Short-term investments................................... 1,110 8,777 Accounts receivable, less allowance for doubtful accounts of $218 in 1997 and $140 in 1996........................ 4,528 2,893 Inventories, net......................................... 4,812 3,524 Prepaid expenses and other current assets................ 815 305 -------- -------- Total current assets................................... 31,773 19,410 Property and equipment, net................................ 3,816 2,647 Product licenses, net...................................... 1,000 1,254 -------- -------- Total assets........................................... $ 36,589 $ 23,311 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable......................................... $ 1,350 $ 1,805 Accrued expenses......................................... 1,235 724 Accrued compensation..................................... 993 535 Warranty reserve......................................... 532 286 Sales allowance reserve.................................. 649 356 Royalty payable.......................................... 299 209 Product license fee payable, current portion............. 1,067 845 -------- -------- Total current liabilities.............................. 6,125 4,760 Product license fee payable, less current portion.......... 303 1,252 Commitments and contingencies (Note 13) Stockholders' equity: Convertible Preferred Stock $0.01 par value; authorized 15,000 shares; issued and outstanding 14,500 shares in 1997; none in 1996...................................... 14,357 -- Common Stock $.001 par value; authorized 25,000,000 shares; issued and outstanding 12,318,271 shares in 1997; 11,912,486 shares in 1996......................... 12 12 Additional paid-in capital............................... 45,753 45,375 Accumulated deficit...................................... (29,961) (28,088) -------- -------- Total stockholders' equity............................. 30,161 17,299 -------- -------- Total liabilities and stockholders' equity............. $ 36,589 $ 23,311 ======== ========
See accompanying notes to consolidated financial statements. F-3 TRANSWITCH CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, -------------------------- 1997 1996 1995 ------- -------- ------- Revenues: Product revenues, net............................ $26,930 $ 19,236 $16,464 Research and development contracts............... 154 414 877 License and royalty fees......................... -- -- 125 ------- -------- ------- Total revenues................................. 27,084 19,650 17,466 ------- -------- ------- Cost of revenues: Cost of products sold............................ 11,254 10,615 6,913 Write-down of product license.................... -- 3,128 -- Cost of research and development contracts....... -- 63 482 ------- -------- ------- Total cost of revenues......................... 11,254 13,806 7,395 ------- -------- ------- Gross profit....................................... 15,830 5,844 10,071 ------- -------- ------- Operating expenses: Research and development......................... 9,194 8,928 6,660 Marketing and sales.............................. 6,681 5,454 4,329 General and administrative....................... 2,288 2,229 1,472 ------- -------- ------- Total operating expenses....................... 18,163 16,611 12,461 ------- -------- ------- Operating loss..................................... (2,333) (10,767) (2,390) ------- -------- ------- Interest income (expense): Interest income.................................. 641 819 664 Interest expense................................. (181) (129) (47) ------- -------- ------- Interest income, net........................... 460 690 617 ------- -------- ------- Net loss........................................... $(1,873) $(10,077) $(1,773) ======= ======== ======= Basic loss per share (Note 10)..................... $ (.15) $ (.86) $ (.18) ======= ======== =======
See accompanying notes to consolidated financial statements. F-4 TRANSWITCH CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ----------------- CONVERTIBLE ADDITIONAL PREFERRED PAID-IN ACCUMULATED SHARES AMOUNT STOCK CAPITAL DEFICIT TOTAL ---------- ------ ----------- ---------- ----------- -------- Balance at December 31, 1994................... 1,071,992 $ 1 $ -- $ 913 $(16,238) $(15,324) Shares of common stock issued upon exercise of stock options and warrants............... 546,871 1 -- 288 -- 289 Common stock offered by the company in initial public offering........ 2,875,000 3 -- 23,169 -- 23,172 Conversion of preferred stock to common stock.. 7,009,743 7 -- 20,235 -- 20,242 Compensation related to issuance of stock op- tions.................. -- -- -- 100 -- 100 Net loss................ -- -- -- -- (1,773) (1,773) ---------- ---- ------- ------- -------- -------- Balance at December 31, 1995................... 11,503,606 12 -- 44,705 (18,011) 26,706 Shares of common stock issued upon exercise of stock options and warrants............... 408,880 -- -- 319 -- 319 Compensation related to issuance of stock op- tions.................. -- -- -- 351 -- 351 Net loss................ -- -- -- -- (10,077) (10,077) ---------- ---- ------- ------- -------- -------- Balance at December 31, 1996................... 11,912,486 12 -- 45,375 (28,088) 17,299 Shares of common stock issued upon exercise of stock options and warrants............... 405,785 -- -- 699 -- 699 Issuance of convertible preferred stock, net of issuance costs......... -- -- 12,886 770 -- 13,656 Deemed dividend on convertible preferred stock.................. -- -- 1,471 (1,471) -- -- Compensation related to issuance of stock op- tions.................. -- -- -- 380 -- 380 Net loss................ -- -- -- -- (1,873) (1,873) ---------- ---- ------- ------- -------- -------- Balance at December 31, 1997................... 12,318,271 $ 12 $14,357 $45,753 $(29,961) $ 30,161 ========== ==== ======= ======= ======== ========
See accompanying notes to consolidated financial statements. F-5 TRANSWITCH CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ----------------------------- 1997 1996 1995 -------- --------- -------- Cash flows from operating activities: Net loss...................................... $ (1,873) $ (10,077) $ (1,773) -------- --------- -------- Adjustments required to reconcile net loss to cash flows from operating activities: Depreciation and amortization............... 1,807 2,195 802 Write-down of product license............... -- 3,128 -- Stock compensation expense.................. 380 351 100 Changes in assets and liabilities: Decrease (increase) in accounts receiv- able..................................... (1,635) 2,487 (3,084) (Increase) in inventories................. (1,288) (753) (1,440) Decrease (increase) in prepaids and other current assets........................... (510) 194 (250) Increase (decrease) in accounts payable... (455) (216) 742 Increase (decrease) in accrued expenses and other liabilities.................... 1,598 516 13 -------- --------- -------- Total adjustments....................... (103) 7,902 (3,117) -------- --------- -------- Net cash used in operating activities... (1,976) (2,175) (4,890) -------- --------- -------- Cash flows from investing activities: Purchase of product licenses.................. (3) (445) (2,176) Proceeds from the sale of property and equip- ment......................................... -- -- 3 Capital expenditures.......................... (2,719) (1,892) (1,309) Purchases of short-term investments........... (8,615) (24,057) (5,620) Proceeds from sale of short-term investments.. 16,282 18,900 2,000 -------- --------- -------- Net cash provided by (used in) investing activities............................. 4,945 (7,494) (7,102) -------- --------- -------- Cash flows from financing activities: Payments on borrowings........................ -- -- (1,191) Payments on product license obligations....... (727) (369) Proceeds from the exercise of stock options and warrants................................. 699 319 289 Proceeds from the issuance of common stock, net.......................................... -- -- 23,172 Proceeds from the issuance of convertible preferred stock, net of issuance costs....... 13,656 -- -- -------- --------- -------- Net cash provided by (used in) financing activities............................. 13,628 (50) 22,270 -------- --------- -------- Increase (decrease) in cash and cash equiva- lents.......................................... 16,597 (9,719) 10,278 Cash and cash equivalents at beginning of year.. 3,911 13,630 3,352 -------- --------- -------- Cash and cash equivalents at end of year........ $ 20,508 $ 3,911 $ 13,630 ======== ========= ======== Supplemental disclosure of cash flows informa- tion: Cash paid for interest........................ $ 181 $ 129 $ 47 Supplemental schedule of non-cash financing ac- tivities: Obligations for purchase of product licenses.. $ -- $ 134 $ 2,399
See accompanying notes to consolidated financial statements. F-6 TRANSWITCH CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business TranSwitch Corporation (the "Company") was incorporated in Delaware on April 26, 1988. On January 28, 1994, the Company formed TranSwitch Europe N.V./S.A., a wholly-owned subsidiary located in Brussels, Belgium. 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 subsidiary. 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 $18,668 and $2,989 at December 31, 1997 and 1996, 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. Investment Securities The Company adopted Statement of Financial Accounting Standards (SFAS) No. 115 "Accounting for Certain Investments in Debt and Equity Securities." Under SFAS No. 115, the Company's short-term investments were classified as available-for-sale and were recorded at fair market value in the accompanying balance sheet. Inventories Inventories are carried at the lower of cost (on a first-in, first-out basis) or estimated net realizable value. Property and Equipment Property and equipment are carried at cost less accumulated depreciation. Depreciation of property and equipment is provided on the half-year convention method based on the related assets estimated useful lives, ranging from three to seven years. Depreciation of semiconductor tooling costs is provided on the straight-line method using the lesser of three years or the life of the related semiconductor it produces. Repairs and maintenance are charged to operations as incurred. Product Licenses Product licenses are amortized over the lesser of the Company's estimated product sales volume or the straight-line method over three to five years. Subsequent to its acquisition, the Company continually evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of a product license may warrant revision or that the remaining balance of a product license may not be recoverable. When factors indicate that a product license should be evaluated for possible impairment, the Company uses an estimate of the related product licenses' undiscounted future cash flows over the remaining life of the asset in measuring whether the product license is recoverable. Any impairment is measured against discounted cash flows. F-7 TRANSWITCH CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 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. The Company recognizes royalties and license fees when its obligations under the license and royalty agreements are fulfilled and when payment has been received or is reasonably assured. Concentration of Credit Risk The Company sells its products to customers in the United States and overseas. Credit evaluations are done on all new customers and periodically evaluated for existing customers. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. Product Warranties The Company provides for expected costs that may be incurred under its product warranties. Estimated warranty costs are accrued as products are sold and charged to cost of revenues. Research and Development Costs Research and development costs are expensed as incurred. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Earnings per Share Basic earnings per share are based upon the weighted average common shares outstanding during the period. Diluted earnings per share assume exercise of in-the-money stock options outstanding and full conversion of convertible preferred stock into common stock at the beginning of the year or the date of issuance, unless they are antidilutive. Diluted loss per share is not presented as it is the same as basic loss per share. F-8 TRANSWITCH CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. Accounting Changes Effective December 1997, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 128--"Earnings per Share." SFAS No. 128 simplifies the calculation of earnings per share (EPS), replaces primary EPS with basic EPS and replaces fully diluted EPS with diluted EPS. Basic EPS is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period. The computation of diluted EPS is similar to the computation of basic EPS except that it gives effect to all potentially dilutive instruments that were outstanding during the period. In prior years, the Company has computed EPS without consideration to potentially dilutive instruments due to the losses incurred by the Company. Accordingly, the adoption of this standard has not resulted in a change to the Company's previously reported EPS amounts. In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income," and No. 131, "Disclosures about Segments of an Enterprise and Related Information." Commencing in 1998, SFAS No. 130 will require companies to report comprehensive income, and SFAS No. 131 will require companies to report segment performance as it is used internally to evaluate segment performance. These statements provide for additional disclosure requirements. (2) SHORT-TERM INVESTMENTS Short-term investments, classified as available-for-sale, consist of the following at December 31, 1997 and 1996:
1997 1996 ---------------------------- ---------------------------- AMORTIZED UNREALIZED FAIR AMORTIZED UNREALIZED FAIR COST GAIN (LOSS) VALUE COST GAIN (LOSS) VALUE --------- ----------- ------ --------- ----------- ------ Commercial paper and corporate debt securi- ties (average maturity of 4 months in 1997 and 1996).................. $1,110 $ -- $1,110 $3,774 $ -- $3,774 Corporate bonds......... -- -- -- 1,004 -- 1,004 U.S. Treasury Bill...... -- -- -- 3,999 -- 3,999 ------ ----- ------ ------ ----- ------ Total................. $1,110 $ -- $1,110 $8,777 $ -- $8,777 ====== ===== ====== ====== ===== ======
Gross realized gains and losses on sales of securities in 1997 and 1996 were immaterial. (3) FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of our financial instruments at December 31, 1997 and 1996 follow:
1997 1996 ---------------- --------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- ------- -------- ------ Cash and cash equivalents.................. $20,508 $20,508 $3,911 $3,911 Short-term investments..................... 1,110 1,110 8,777 8,777 Accounts receivable, net................... 4,528 4,528 2,893 2,893
F-9 TRANSWITCH CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) The carrying amounts for cash and accounts receivables, net, approximate fair value because of the short maturities of these instruments. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and trade accounts receivable. The Company places its cash primarily in market interest rate accounts. The Company, by policy, limits the amount of credit exposure to any one financial institution or commercial issuer. (4) INVENTORIES The components of inventories at December 31, 1997 and 1996 follow:
1997 19967 ------ ------ Raw materials.................................................. $1,086 $ 600 Work in process................................................ 1,654 1,500 Finished goods................................................. 2,072 1,424 ------ ------ Total........................................................ $4,812 $3,524 ====== ======
(5) PROPERTY AND EQUIPMENT, NET The components of property and equipment, net at December 31, 1997 and 1996 follow:
ESTIMATED USEFUL LIVES 1997 1996 ---------------- ------- ------- Purchased computer software............. 3 years $ 4,220 $ 2,756 Equipment............................... 3-7 years 3,171 2,356 Semiconductor tooling................... 3 years 879 771 Furniture............................... 3-7 years 967 351 Leasehold improvements.................. Lease term 186 158 Construction in progress................ 106 418 ------- ------- 9,529 6,810 Less accumulated depreciationand amorti- zation................................. (5,713) (4,163) ======= ======= Property and equipment, net............. $ 3,816 $ 2,647 ======= =======
(6) PRODUCT LICENSES, NET Product licenses, net amounted to $1,000 and $1,254 at December 31, 1997 and 1996, respectively. On December 15, 1995 the Company entered into a new agreement with Texas Instruments (TI) in which it repurchased its license agreement for a total of $4,875 representing an upfront payment of $2,125 in cash and the discounted present value of future minimum payments. The Company recorded the repurchased license (TI license) in its consolidated balance sheet under the caption product licenses and is amortizing the asset over a five year period based upon the estimated related incremental product sales. Interest expense is being accrued over the three year minimum payment period. In the fourth quarter of 1996, the TI License was written down to its net realizable value as the forecasted incremental revenues attributable to the TI license were significantly less than originally anticipated. The Company purchased other product licenses during 1996 for $314 which are being amortized over a three year period. F-10 TRANSWITCH CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) Amortization of product licenses amounted to $257, $705 and $0 in 1997, 1996 and 1995, respectively. (7) INCOME TAXES The tax effect of temporary differences that give rise to deferred tax assets and deferred tax liabilities at December 31, 1997 and 1996 are presented below:
1997 1996 ------- ------- Deferred tax assets: Inventory obsolescence................................... $ 532 $ 497 Vacation accrual......................................... 137 79 Warranty reserve......................................... 221 119 Sales allowance reserve.................................. 270 148 Product license.......................................... -- 267 Net operating losses..................................... 12,244 10,637 Research and development credit.......................... 1,860 1,739 Other.................................................... 90 59 ------- ------- Total gross deferred tax assets............................ 15,354 13,545 Less valuation allowance................................... (14,867) (13,384) ------- ------- Net deferred tax assets.................................... 487 161 Deferred tax liabilities: Property and equipment................................... (487) (161) ------- ------- Total deferred taxes, net of valuation allowance....... $ -- $ -- ======= =======
The net change in the total valuation allowance for the year ended December 31, 1997 was an increase of $1,483. Due to the Company's prior operating losses, there is uncertainty surrounding whether the Company will ultimately realize its deferred tax assets. Accordingly, these assets have been fully reserved. Of the total valuation allowance of $14,867, subsequently recognized tax benefits, if any, in the amount of $1,611 will be applied directly to contributed capital. The difference between the statutory federal income tax rate and the Company's effective tax rate for the years ended December 31, 1997, 1996 and 1995 is principally due to net operating losses. At December 31, 1997, the Company had available, for federal income tax purposes, net operating loss carryforwards of approximately $29,440 and research and development tax credit carryforwards of approximately $1,860 expiring in varying amounts from 2003 through 2012. 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 $24,000 of the Company's net operating loss carryforward and $1,410 of the Company's research and development tax credit carryforward are subject to these limitations. (8) CONVERTIBLE PREFERRED STOCK The Company has authorized 15,000 shares of preferred stock with a par value of $.01. 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 is being accreted ratably to the Series A Stock as a deemed dividend through the earliest conversion date. F-11 TRANSWITCH CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 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. (9) STOCKHOLDERS' EQUITY Common Stock On June 19, 1995 and July 13, 1995 the Company completed its initial public offering of 2,500,000 shares of Common Stock and 375,000 shares of Common Stock, respectively, all of which were sold by the Company. Concurrent with consummation of the offering, all outstanding shares of Mandatorily Redeemable Convertible Preferred Stock were converted into 7,009,743 shares of Common Stock. Stock-Based Compensation 1989 Stock Option Plan Effective January 12, 1989, the Company adopted a Stock Option Plan. Under the Plan, the Board of Directors (or an appointed committee) grants to all new employees, and to certain key employees and consultants, incentive stock options ("qualified" options) and non-qualified stock options to purchase Common Stock. In 1993, the Company amended the Stock Option Plan, increasing the total number of common shares reserved for issuance to 1,827,413. The option price for incentive stock options shall not be less than 100% of the fair market value (110% in the case of an employee owning more than 10% of the combined voting power) on the date of grant; and the option price for non- qualified stock options shall not be less than 85% of the fair market value on the date of grant. 1995 Stock Plan On April 11, 1995, the Company's Board of Directors adopted the 1995 Stock Plan (the 1995 Plan) which was approved by the Company's stockholders on April 19, 1995. The 1995 Plan took effect upon the completion of the Initial Public Offering. In 1996, the Company increased the total number of shares of Common Stock authorized under the 1995 Stock Plan and amended and restated the 1995 Stock Plan (as amended and restated, "The 1995 Plan"). At December 31, 1997, 2,469,019 shares of the Company's Common Stock are reserved for issuance pursuant to the grant to employees of incentive stock options and the grant of non-qualified stock option, awards or direct purchases of the Company's Common Stock to employees, consultants, directors and officers of the Company. The terms of the options granted will be 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. 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 F-12 TRANSWITCH CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) terms of the 1995 Purchase Plan, all employees of the Company, except five percent or more stockholders, may contribute to the plan, up to 5% of their annual compensation toward the purchase of the Company's Common Stock. The Company has reserved 100,000 shares for issuance under the 1995 Purchase Plan. The purchase price per share is the lesser of (a) 85% of the fair market value of the Common Stock on the date of the grant of the option, as defined, or (b) 85% of the fair market value of the Common Stock on the date of exercise of the option, as defined. 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 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 12,500 shares, one-third of which vest immediately, one- third after the first year, and the remaining one-third after the second year. Annually thereafter, Directors are granted 7,500 shares which vest fully after one year. The Director Plan will be administered by the Compensation Committee of the Board of Directors. No option granted under the Director Plan may be exercised after the expiration of five years from the date of grant. The exercise price of options under the Director Plan must be equal to the fair market value of the Common Stock on the date of grant. Options granted under the Director Plan are generally nontransferable. Stock Option Information Information regarding the Company's stock options are set forth as follows:
NUMBER WEIGHTED AVERAGE OF SHARES OPTION PRICE --------- ---------------- Outstanding at December 31, 1994................. 1,190,912 $ 0.51 Granted........................................ 556,225 10.34 Exercised...................................... (390,055) 0.43 Canceled....................................... (50,373) 2.00 --------- ------ Outstanding at December 31, 1995................. 1,306,709 3.86 Granted........................................ 1,524,630 7.63 Exercised...................................... (296,954) 0.58 Canceled....................................... (778,968) 10.17 --------- ------ Outstanding at December 31, 1996................. 1,755,417 4.81 Granted........................................ 1,277,300 7.26 Exercised...................................... (382,584) 1.48 Canceled....................................... (592,117) 8.38 --------- ------ Outstanding at December 31, 1997................. 2,058,016 $ 5.72 ========= ======
F-13 TRANSWITCH CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) Options outstanding and exercisable at December 31, 1997 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 --------------- ----------- ----------- -------- ----------- -------- $ 0.40 to $ 1.20 283,020 1.05 $ 0.73 248,928 $ 0.71 4.13 to 6.38 1,214,746 8.39 5.22 439,879 5.35 6.50 to 10.81 443,250 9.53 8.80 61,605 7.41 10.88 to 12.63 117,000 9.01 11.27 94,000 11.12 ---------------- --------- ---- ------ ------- ------ $ 0.40 to $12.63 2,058,016 7.66 $ 5.72 844,412 $ 4.77 ================ ========= ==== ====== ======= ======
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, 1997, 1996 and 1995, the Company recorded compensation expense of $155, $156 and $100, respectively, for these options. The Company does not recognize compensation expense relating to employee stock options because the exercise price of the option equals the fair value of the stock on the date of grant. If the Company had determined the compensation based on the fair value of the options on the date of grant in accordance with SFAS No. 123, the pro forma net loss and loss per share would be as follows:
1997 1996 1995 ------- -------- ------- Net loss-as reported............................ $(1,873) $(10,077) $(1,773) Net loss-pro forma.............................. (2,054) (12,599) (2,189) Basic loss per share-as reported................ (0.15) (0.86) (0.18) Basic loss per share-pro forma.................. (0.17) (1.07) (0.22)
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. Diluted loss per share amounts are not presented as they are the same as basic. As reflected in the pro forma amounts in the preceding table, the average fair value of each option granted in 1997, 1996 and 1995 was $6.73, $3.00 and $4.70, 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:
1997 1996 1995 ---- ---- ---- Risk-free interest rate.................................... 5.7% 6.0% 5.5% Expected life in years..................................... 4.0 6.0 6.0 Expected volatility........................................ 66.0% 52.0% 52.0% Expected dividend yield.................................... -- -- --
F-14 TRANSWITCH CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) For the years ended December 31, 1997 and 1996, the Company recognized additional compensation expense of $225 and $195, respectively, as required by SFAS No. 123 relating to stock options granted to non-employees. Warrants Warrants to purchase Common Stock and Preferred Stock have been granted to the original investors in consideration of additional financing and loans, and for services performed by various other parties. The warrants presented in the table below are convertible into Common Stock and Preferred Stock at a rate of one share of Common Stock and Preferred Stock for each warrant to purchase Common Stock and Preferred Stock, respectively. During 1995, 58,396 shares of Preferred Stock warrants were converted into 29,198 shares of Common Stock at a rate of one share of Common Stock for each two shares of Preferred Stock and 13,488 shares of Preferred Stock warrants were canceled.
WARRANTS--COMMON STOCK WARRANTS--PREFERRED STOCK ------------------------------- ------------------------------ PRICE PER EXPIRATION PRICE PER EXPIRATION NUMBER SHARE DATE NUMBER SHARE DATE -------- --------- ----------- ------- ---------- ---------- Outstanding at December 31, 1994............... 215,409 $.06-1.00 12/96-11/98 71,884 $1.00-1.30 8/90-7/00 Exercised............. (122,964) -- 12/96-11/98 (58,396) $1.00-1.30 8/99-7/00 Canceled.............. -- -- -- (13,488) $1.00-1.30 8/99-7/00 -------- --------- ----------- ------- ---------- --------- Outstanding at December 31, 1995............... 92,445 $.06-1.00 12/96-11/98 -- -- -- Exercised............. (82,011) -- 12/96-11/98 -- -- -- -------- --------- ----------- ------- ---------- --------- Outstanding at December 31, 1996............... 10,434 $.40-1.00 12/96-11/98 -- -- -- Exercised............. (8,038) -- 12/96-11/98 -- -- -- -------- --------- ----------- ------- ---------- --------- Outstanding at December 31, 1997............... 2,393 $.40-1.00 12/96-11/98 -- -- -- ======== ========= =========== ======= ========== =========
(10) EARNINGS PER SHARE The basic loss per share for the years ended December 31, 1997, 1996 and 1995 follows:
1997 1996 1995 ------- -------- ------- Net loss........................................ $(1,873) $(10,077) $(1,773) Average shares (in thousands)................... 12,152 11,751 10,062 Basic loss per share............................ $ (.15) $ (.86) $ (.18)
Diluted loss per share amounts are not presented as they are the same as basic. The weighted average shares of dilutive securities that would have been used to calculate diluted EPS had their effect not been anti-dilutive are as follows:
1997 1996 1995 --------- ------- ------- Options............................................ 634,867 281,460 541,490 Warrants........................................... 1,954 5,153 52,691 Convertible Preferred Stock 380,697 -- -- --------- ------- ------- Total............................................ 1,017,518 286,613 594,181 ========= ======= =======
F-15 TRANSWITCH CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) (11) EMPLOYEE SAVINGS PLAN On November 21, 1988, the Company established a 401(k) retirement savings plan. All employees are entitled to contribute from 1% to 15% of their pre-tax income, not exceeding the IRS maximum for income deferrals, to the Plan, and may elect to invest their contributions in various established funds, which include fixed income, growth and equity funds. In 1997, the maximum contribution was 20% of pre-tax income subject to IRS limitations. The Company began providing matching contributions in 1996 for 50 percent of the employees deferred compensation up to a maximum of 6 percent. The Company's contribution expense amounted to $188 and $156 for 1997 and 1996, respectively. (12) CONCENTRATION OF SALES The percentage of total revenues attributable to the Company's significant customers for the years ended December 31, 1997, 1996 and 1995 follow:
1997 1996 995 ---- ---- --- Insight Electronics, Inc.*..................................... 41% 16% 16% Tellabs Operations, Inc........................................ 16% 14% 17% ECI Telecom, LTD............................................... ** 22% **
- -------- * Insight Electronics, Inc. is a distributor to various end-users, none of which comprised more than 10% of the Company's total revenues. ** Revenues were less than 10% of the Company's total revenues in these years. Export revenues represented 33%, 46% and 38% of total revenues in 1997, 1996 and 1995, respectively. Revenues from customers located outside the United States were as follows:
1997 1996 1995 ------ ------ ------ Europe................................................ $3,902 $2,100 $3,084 Middle East........................................... 517 4,232 -- Far East.............................................. 2,885 1,976 1,798 Canada and other...................................... 1,721 592 1,626 ------ ------ ------ Total................................................. $9,025 $8,900 $6,508 ====== ====== ======
(13) COMMITMENTS AND CONTINGENCIES Line of Credit In June 1997, the Company entered into a new line of credit agreement with Silicon Valley Bank whereby the Company has access up to $6,000 for working capital purposes, bearing interest at prime + 3/4% due on July 10, 1998, and $2,000 for equipment purchases, bearing interest at prime +1% due on May 31, 2002. The lines are secured by all corporate assets except intellectual property of the Company. The agreement contains certain financial restrictions and covenants which, among other things, include provisions for maintaining a minimum amount of cash, net worth and profitability. At December 31, 1997, no amounts were outstanding under this agreement. F-16 TRANSWITCH CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) Development Agreements From time to time, the Company has entered into agreements with third parties for the development and/or licensing of products for its manufacture and sale, or the licensing of technology that the Company may use in the manufacture of products, for which royalties are paid against actual sales of these products. The Company recognized royalty expense of $1,110, $1,266 and $829 in 1997, 1996 and 1995, respectively, under these agreements; these amounts are included in cost of products sold in the consolidated statements of operations. Lease Agreements Total rental expense under all operating lease agreements aggregated $745, $446 and $586 during 1997, 1996 and 1995, respectively. Future minimum operating lease commitments that have remaining, non-cancelable lease terms in excess of one year at December 31, 1997 follow: 1998.............................................................. $ 548 1999.............................................................. 546 2000.............................................................. 466 2001.............................................................. 396 2002.............................................................. 393 Thereafter........................................................ 1,865 ------ $4,214 ======
Foundry Purchase Commitments In April 1996, the Company entered into a foundry agreement with Taiwan Semiconductor Manufacturing Co., Ltd. (TSMC) which includes future minimum purchase commitments as follows: 1998................................................................ $476 1999................................................................ 128 ---- $604 ====
F-17 SCHEDULE II TRANSWITCH CORPORATION VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
ADDITIONS ------------------- BALANCE AT CHARGED TO CHARGES BALANCE BEGINNING COSTS AND TO OTHER AT END DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD ----------- ---------- ---------- -------- ---------- --------- Year ended December 31, 1997: Deductions from asset account: Allowance for doubtful accounts............. $ 140 100 -- (22) $ 218 Inventory valuation... 1,196 121 -- (39) 1,278 ------ ----- --- ---- ------ $1,336 221 -- (61) $1,496 ====== ===== === ==== ====== Year ended December 31, 1996: Deductions from asset account: Allowance for doubtful accounts............. $ 138 14 -- (12) $ 140 Inventory valuation... 295 1,261 -- (360) 1,196 ------ ----- --- ---- ------ $ 433 1,275 -- (372) $1,336 ====== ===== === ==== ====== Year ended December 31, 1995: Deductions from asset account: Allowance for doubtful accounts............. $ 36 110 -- (8) $ 138 Inventory valuation... 597 31 -- (333)(1) 295 ------ ----- --- ---- ------ $ 633 141 -- (341) $ 433 ====== ===== === ==== ======
- -------- (1) Includes a reversal of a reserve for inventory on hand which was built up in anticipation of a major customer's order in 1994 which was no longer required as products were shipped. EX-10.14 2 LEASE AGREEMENT, AS AMENDED, WITH ROBERT D. SCINTO EXHIBIT 10.14 SECOND AMENDMENT OF LEASE This Second Amendment of Lease is made as of this 11th day of July, 1997, by and between Three Enterprise Drive - Shelton LLC (hereinafter referred to as "Landlord"), and TranSwitch Corporation, of Shelton, Connecticut (hereinafter referred to as "Tenant"). In consideration of the mutual benefits and obligations set forth herein, the parties hereby amend a certain lease between Landlord and Tenant dated November 27, 1996, previously amended by a First Amendment of Lease dated June 25, 1997, for the lease of space in Landlord's building at Three Enterprise Drive, Shelton, Connecticut (the November 27, 1996 lease and all amendments thereto hereinafter referred to collectively as the "Lease"), in the following manner: The First Amendment of Lease is hereby canceled and restated, as amended by this Second Amendment of Lease, such that as of the Second Amendment of Lease, the Lease shall be read and interpreted by reference to only the original November 27, 1997 lease and the First Amendment of Lease. A. Paragraph 1.01 of the Lease is deleted and is replaced with the following: "1.01 The Leased Premises consists of 39,267 square feet of Tenant's Net Rentable Area." B. Paragraph 1.05 of the Lease is deleted and is replaced with the following: "1.05 The Basic Minimum Annual Rent for the Initial Term is $392,670 per annum, payable in equal monthly installments of $32,722.50 per month." C. Reference to Exhibit A in the Lease means the Exhibit A attached to the November 27, 1996 lease. Exhibit A, Sheet 2, is hereby deleted along with the First Amendment of Lease. "Exhibit A, Sheet 3", a separate exhibit from Exhibit A, is added to the Lease and incorporated into it as a new exhibit, and is attached to the Third Amendment of Lease. Exhibit A, Sheet 3 shows the 2,514 sq. ft. of space added to first floor of the Leased Premises by means of this Second Amendment of Lease. In the event of any conflict between this Second Amendment of Amendment of Lease and the November 27, 1996 lease, this First Amendment of Lease shall control, the Lease being hereby ratified and to remain in full force and effect in all other respects. IN WITNESS WHEREOF, the parties have hereunto set their hands and seals as of the day and year first above written. TranSwitch Corporation By: /s/ Michael C. McCoy -------------------------- Michael C. McCoy its duly authorized Director of Administration Three Enterprise Drive - Shelton LCC By: /s/ Robert D. Scinto -------------------------- Robert D. Scinto, a member 2 State of Connecticut ss City of Shelton County of Fairfield Personally appeared Michael C. McCoy, singer and sealer of the foregoing instrument, who acknowledged himself to be the Director of Administration of TranSwitch Corporation and the execution to be his free act and deed and the duly authorized free act and deed of TranSwitch Corporation, before me, this 8th --- day of July, 1997. /s/ Eleanor M. Choate ----------------------------------- Notary Public ELEANOR M. CHOATE NOTARY PUBLIC MY COMMISSION EXPIRES JULY 31, 1998 State of Connecticut ss City of Shelton County of Fairfield Personally appeared Robert D. Scinto, signer and sealer of the foregoing instrument, who acknowledged himself to be a member of Three Enterprise Drive - Shelton LLC and the execution to be his free act and deed and the duly authorized free act and deed of Three Enterprise - Shelton LLC, before me, this ____ day of July, 1997. ----------------------------------- Commissioner of the Superior Court/ Notary Public 3 EXHIBIT A, SHEET 3 LEASE BETWEEN THREE ENTERPRISE DRIVE - SHELTON LLC TRANSWITCH CORPORATION THREE ENTERPRISE DRIVE SHELTON, CT LEASE AGREEMENT This Lease Agreement is made as of this 27th day of November, 1996, by and ---- -------- between Three Enterprise Drive - Shelton LLC, a Connecticut limited liability company (hereinafter called "Landlord") and TranSwitch Corporation, a Delaware corporation (hereinafter called "Tenant"). WITNESSETH: ARTICLE I Data Section Wherever this Lease refers to any item specified in this Data Section, such reference shall be deemed to incorporate the information set forth in the Data Section. Some terms mentioned in the Data Section are further defined by other provisions in the Lease. Whenever a term is more specifically defined, the more specific definition shall control. 1.01 The Leased Premises consists of 36,753 square feet of Tenant's Net Rentable Area. 1.02 The Leased Premises is located on the first and second floors in a building to be constructed by Landlord and to be known as Three Enterprise Drive, Shelton, Connecticut. The Leased Premises is further defined by the floor area outline attached as Exhibit A. 1.03 The Initial Term of the Lease is from the Commencement Date to the end of the month 120 full calendar months from and after the Commencement Date. 1.04 The Commencement Date is upon substantial completion of the Leased Premises and the further conditions set forth in paragraph 19.04, estimated to be October 1, 1997. 1.05 The Basic Minimum Annual Rent for the Initial Term is $367,530 per annum, payable in equal monthly installments of $30,627.50 per month. 1.06 The Security Deposit is $0. 1.07 Tenant shall use the Leased Premises for the sole purpose of general administrative business offices, engineering laboratories and associated light manufacturing. 1.08 The Notice Address for each of the parties is: Landlord Tenant Three Enterprise Drive - Shelton LLC TranSwitch Corporation c/o R. D. Scinto, Inc. Three Enterprise Drive One Corporate Drive Shelton, Connecticut 06484 Shelton, Connecticut 06484 but until occupancy TranSwitch Corporation 8 Progress Drive Shelton, Connecticut 06484 - 1 - ARTICLE II Definitions The following words and phrases shall have the following meanings. 2.01 "Leased Premises" means the usable area leased to Tenant in Landlord's building. The outer vertical boundary of the Leased Premises is outlined on the floor plan attached hereto as Exhibit A. The upper boundary of the Leased Premises shall be the lower surface of the suspended or finished ceiling. The lower boundary of the Leased Premises shall be the surface of the unfinished floor. The vertical boundary of the Leased Premises shall be the unfinished surface exposed to the Leased Premises of all walls bounding the exterior of the building, other rentable area, building common area, and other area not for use by Tenant (HVAC duct chases and structural column enclosures for example). 2.02 "Building" means the building in which the Leased Premises is located. 2.03 "Project" means the Building and the real property appurtenant to the Building, including the parking areas for the Building. The current real property boundary is described in Exhibit B, attached hereto. The "Project" will not include any building other than the Building and any ancillary building which may serve the Building (a guard station serving the Building, as an example of a possible ancillary building). In the event that Landlord desires to construct on the real estate comprising the Project any building not permitted within the definition of the word "Project", the real estate constituting the Project shall be reduced by elimination of such other building and the land appurtenant to it. 2.04 "Tenant's Net Rentable Area" means the approximate area of the Leased Premises plus a share of the core area of the building in which the Leased Premises is located. 2.05 "Tenant's Pro Rata Share" means the percentage obtained by dividing Tenant's Net Rentable area by the total Net Rentable Area in the building in which the Leased Premises is located. Although a specific Pro Rata Share may be set forth in the Data Section, the Pro Rata Share shall be subject to adjustment upon increase or decrease of the total Net Rentable Area in the building. 2.06 "General Common Area" means all areas and facilities in the building in which the Leased Premises is located and all exterior areas of the Project which are available for the use of all tenants. The General Common Area includes corridors, janitor closets, rest rooms and parking facilities. General Common Area does not include restricted areas such as boiler rooms, machine rooms for elevator equipment and utility rooms of the Landlord. 2.07 "Term of this Lease" means the Initial Term, and if the Lease grants any option to extend the Term of this Lease, Term of this Lease shall include any validly exercised option to extend. 2.08 "Basic Operating Cost" shall mean all Operating Expenses of the Project, which shall be computed on the accrual basis and shall consist of all reasonable and necessary costs and expenses incurred by Landlord to maintain all facilities in the operation of the Project and such additional facilities now and in subsequent years as may be determined by Landlord to be necessary to the Project. All Operating Expenses shall be determined in accordance with generally accepted accounting principles, which shall be consistently applied (with accruals appropriate to Landlord's business). The term "Operating Expenses" shall include the amortized cost of capital items, provided, however, that the useful life of any item shall in no event exceed fifteen years. The term "operating expenses" as used - 2 - herein shall mean all expenses and costs of every kind and nature which Landlord shall pay or become obligated to pay because of or in connection with the ownership and operation of the Project and supporting facilities of the Project. Operating Expenses shall be limited so as not to include: specific costs which are otherwise allocated to tenant areas under other provisions of this Lease; expenses and costs which are billed to and paid by specific tenants; and expenses associated with any financing indebtedness of Landlord, whether or not secured by the Project. Operating expenses, include, but are not limited to, the following: (a) the cost of all supplies, materials and equipment used in the operation and maintenance of the Project; (b) the cost of utilities, including water and power, heating, lighting, air conditioning and ventilating the entire Project; (c) management fees at rates in accordance with the prevailing rates charged for comparable properties in the area of the Project; (d) the cost of all maintenance, janitorial and service agreements for the Project and the equipment therein, including, without limitation, alarm service, window cleaning and elevator maintenance; (e) accounting costs, including the costs of audits by certified public accountants; (f) the cost of all insurance, including but not limited to fire, casualty, liability, rental abatement on account of casualty damage, workers compensation and any other type of insurance reasonably obtained, all as limited to those coverages applicable to the Project and the employee's and Landlord's personal property used in connection therewith; (g) the cost of repairs, replacements and general maintenance (excluding repairs and general maintenance paid by proceeds of insurance or by Tenant or other third parties, and alterations attributable solely to tenants of the Project other than Tenant); (h) gardening, landscaping, planting, replanting and replacing of flowers and shrubbery; (i) any and all General Common Area maintenance costs relating to public areas of the Projet, including sidewalks, parking areas, landscaping and service areas, including repaving, restriping, plowing and sanding of the walks and parking areas, and including rubbish removal from the Project; (j) compensation to personnel to implement all of the services set forth in this paragraph, including wages, workers compensation insurance premiums and other items paid for the employment of said personnel; (k) all taxes, service payments in lieu of taxes, excises, assessments, levies, fees or charges, general and special, ordinary and extraordinary, unforeseen as well as foreseen, of any kind which are assessed, levied, charged, confirmed, or imposed by any public authority upon the Project, its operation or the rent provided for in this Lease Agreement (it is agreed that Tenant will be responsible for ad valorem taxes on Tenant's personal property, if any, and on the value of leasehold improvements to the extent that some exceed standard building allowances provided by Landlord under this Lease); and (l) any other item reasonably expended for the maintenance, operation, repair and insurance of the Project. Notwithstanding anything in this Lease to the contrary, Operating Expenses shall in no event include: [i] income tax of Landlord; or [ii] capital items, except to the extent that (a) such items are incurred in the reasonable anticipation of producing a net savings in Operating Expenses or (b) such items are replacements. 2.09 "Repair" shall mean replacement wherever reasonably necessary. 2.10 "Consent" or "Approval" of Landlord shall mean approval or consent in writing. 2.11 "Notice" from either party to the other shall mean written notice, served by either party upon the other by certified mail, return receipt requested or by a nationally recognized, receipted overnight courier service at the address herein set forth or at such other address as either party may from time to time designate. ARTICLE III Grant and Term 3.01 In consideration of the rent and covenants herein reserved and contained on the part of Tenant to be observed and performed, Landlord demises and leases to Tenant and Tenant rents from -3- Landlord the Leased Premises and the improvements now or hereafter therin. Together with the Leased Premises, Landlord grants to Tenant and Tenant's employees and invitees the right to use the General Common Area, subject to the rules and regulations reasonably established by Landlord. 3.02 The Initial Term shall be the period of time set forth in the Data Section. The Term of this Lease shall commence on the Commencement Date. ARTICLE IV Rent 4.01 Tenant agrees to pay Landlord during the Term of this Lease the Basic Minimum Annual Rent. 4.02 Tenant agrees to pay Landlord during the Term of this Lease Additional Rent, consisting of: [i] Tenant's Pro Rata Share of the Basic Operating Cost; [ii] all utility charges which are not included as items of Basic Operating Cost but are the cost responsibility of Tenant under other provisions of this Lease (which have not been paid by Tenant directly to the utility providing the service under other provisions of this Lease); [iii] and any other item specifically set forth elsewhere in this Lease as an item of Additional Rent or as an item which is in any other manner the cost responsibility of Tenant. Landlord shall give Tenant within a reasonable time after the commencement of Landlord's fiscal operating year for the Project a statement of Tenant's Pro Rata Share of estimated Basic Operating Cost for the ensuing year. Tenant agrees to pay Tenant's Pro Rata Share of the Basic Operating Cost for each fiscal year in monthly installments in accordance with Landlord's statement. Landlord shall, within a reasonable period of time after the end of each fiscal year for which Basic Operating Cost has been charged in accordance with the estimated charges, give to Tenant a statement of the actual Basic Operating Cost incurred for the previous year. Adjustment shall be made for any overpayment or underpayment of the actual charges resulting from any variance between the actual Basic Operating Cost for the previous year and the estimated Basic Operating Cost paid by Tenant, which adjustment may be made by increasing or decreasing the Additional Rent charges for the next year, or a refund or lump sum billing, provided, however, that Landlord shall not be required to make such adjustment more than once per year. If during any fiscal operating year, Landlord shall not have delivered to Tenant the statement mentioned for such year, Tenant shall continue to pay Landlord the sums payable for the immediately preceding year, until the statement for the current year shall have been delivered, at which time the monthly payments by Tenant shall be adjusted retroactively. If during all or part of any fiscal year any particular item or items of service or work (which would constitute an element of Additional Rent hereunder) are not furnished to any portion of the Project due to the fact that such portion is not completed, occupied or leased, then for the purposes of computing Additional Rent payable hereunder, the amount of such expenses for such items shall be increased by an amount equal to the expenses which would have reasonably been incurred during such period if Landlord had at his own expense furnished such items of service or work to such portion of the Project, provided that in no event shall Landlord charge for any item or work or service not actually provided to the Project and in no event shall this sentence operate to allow Landlord to recoup more than 100% of the expenses actually incurred by Landlord. Utility charges set forth as a portion of Additional Rent, above, may be included with the statement of estimated Basic Operating Cost and billed and adjusted in the same manner as Tenant's Pro Rata Share of the Basic Operating Cost. If any part of the first or last years of the Term of this Lease shall include part of a tax or operating expense year, Tenant's liability under this paragraph shall be apportioned so that Tenant shall pay only for such parts of such tax year and operating expense years that shall be included in the Term of this Lease. Landlord may elect to bill the full amount of any item of Additional Rent which is not an item of Basic Operating Cost as such item of expense is incurred by Landlord (repair of damage caused by Tenant, for example). All items of -4- Additional Rent which are capital items not specifically the immediate cost responsibility of Tenant pursuant to other terms of the Lease shall be amortized in accordance with generally accepted accounting principles, provided that no item shall have a useful life of more than fifteen years. 4.03 Limitation On Operating Expenses Chargeable To Tenant. ----------------------------------------------------- Notwithstanding anything in this Lease to the contrary, in no event will items [i] and [ii] of Additional Rent specified in the first sentence of paragraph 4.02 exceed $5.25 per square foot of Tenant's Net Rentable Area for the "Base Year", on an annualized basis. Notwithstanding anything in this Lease to the contrary, in no event will the "Capped Portion of Additional Rent" for any calendar year subsequent to the Base Year exceed the "Adjusted Base Year Limit" increased by the percentage increase in the "CPI" from October 1996 to the October preceding the calendar year for which the limit is being determined. The "Base Year" is the calendar year in which the Commencement Date occurs. The "Capped Portion of Adjusted Rent" is items [i] and [ii] of Additional Rent specified in the first sentence of paragraph 4.02, but exclusive of any tax, utility and insurance premium components. The "Adjusted Base Year Limit" is $5.25 per square foot of Tenant's Net Rentable Area less the tax, utility and insurance portions of items [i] and [ii] of Additional Rent specified in the first sentence of paragraph 4.02 incurred for the Base Year. "On an annualized basis" means that partial years shall be pro-rated. For example, if the Commencement Date occurs October 1, 1997, then the $5.25 per square foot limit for which Tenant would be responsible during the Base Year would be $5.25 multiplied by the three twelfths of the calendar year remaining after the commencement date. Accordingly, under the foregoing example, items [i] and [ii] of Additional Rent specified in the first sentence of paragraph 4.02 would in no event exceed $5.25 per square foot x 3/12 = $1.3125 per square foot for the period from October 1, 1997 through December 31, 1997. The "CPI" is the United States Department of Labor Bureau of Labor Statistics Consumer Price Index--All Urban Consumers-All Cities (1982-4 = 100), or if such index is no longer published, a substitute index selected by Landlord as reflecting similar changes in purchasing power. Notwithstanding the foregoing, the CPI limit shall not apply to any element of Operating Expenses which consists of a service provided to the Project and allowed to be charged pursuant to paragraph 2.07 which has not been charged for the Base Year, but the amount chargeable to Operating Expenses for any calendar year after the calendar year in which the additional service has been provided for a full calendar year shall be limited to the reasonable cost of such service for the beginning full calendar year in which such service is provided increased by the percentage increase in the CPI between the October preceding such beginning calendar year and the October preceding the calendar year for which the CPI limit is being determined. For example, if a 24 hour security guard service had not been provided to the Project at the outset of the Term of the Lease but Landlord had at a later date deemed it reasonably appropriate to provide such a guard service to the Project, the increase in Operating Expenses due to the addition of such 24 hour security guard shall not be affected or limited by the preceding CPI limit on the Capped Portion of Operating Expenses for the beginning calendar year in which the 24 hour security guard service has been provided for a full calendar year. 4.04 The Basic Minimum Annual Rent and the monthly installment portion of the Additional Rent shall be due in installments, commencing with the Commencement Date and continuing on the first day of each month thereafter, in advance. If the Commencement Date is not the first day of a calendar month, the installment due on the Commencement Date shall be pro rated for the fractional period remaining in the month of the Commencement Date. It is the intention of the Landlord and Tenant that the rents herein shall be net to the Landlord in each year during the Term of this Lease, payable without any reduction, abatement, counterclaim or setoff. All past due installments of rent shall bear interest at the lesser of two percentage points over the prime rate of interest as announced by People's Bank, of Bridgeport, Connecticut, or its successor, or the maximum rate permitted by applicable law, from date due until payment is received. Any liability for unpaid Basic Minimum Annual Rent and Additional Rent shall survive the termination of the Lease. -5- ARTICLE V Conduct of Tenant 5.01 Tenant agrees that Tenant and Tenant's permitted assignees or sub-lessees shall use the Leased Premises for any of the sole and exclusive purposes set forth in the Data Section. The use of the Leased Premises shall also be in accordance with the ordinances and regulations of the municipality in which the Leased Premises is located. Without limitation of the foregoing, Tenant agrees that the Leased Premises will not be used for any purpose other than that provided above. Tenant agrees to comply with all rules and regulations, of which Tenant is given notice, reasonably established by Landlord for the governing of conduct of tenants in general in the Project. The current rules and regulations for tenants in the Project are set forth in Exhibit C. 5.02 Tenant agrees that Tenant will not keep, use, sell or offer for sale in or upon the Leased Premises any article which may be prohibited by the standard form of fire insurance policy. Tenant agrees to pay any increase in premiums for fire and extended and/or all risk coverage insurance that may be charged during the Term of this Lease on the amount of such insurance which may be carried by Landlord on the Project, resulting from the type of equipment, merchandise or services used by Tenant in the Leased Premises, whether or not Landlord has consented to the same. In determining whether increased premiums are the result of Tenant's use of the Leased Premises, a schedule issued by the organization making the insurance rate on the Leased Premises, showing the various components of such rate, shall be conclusive evidence of the several items and charges which make up the fire insurance rate on the Leased Premises and the Project. 5.03 Tenant shall not commit or suffer to be committed any waste to the Leased Premises or Project or any nuisance or other act or thing which may disturb the quiet enjoyment of any other tenant in the Project. 5.04 Tenant shall, at Tenant's sole cost and expense, comply with all of the requirements of all county, municipal, state, federal and other applicable governmental authorities, now in force or which may hereafter be in force and not being reasonably disputed by Tenant, pertaining to the Tenant's use of the Leased Premises or any act therein by Tenant. Tenant shall faithfully observe in the use of the Leased Premises all federal, state, county and municipal laws, ordinances and regulations now in force or which may hereafter be in force not being reasonably disputed by Tenant, excepting any structural changes required by such authorities which are not caused by the act or neglect of the Tenant or by Tenant's specific use of the Leased Premises. Specific reference is made to Tenant's duty to comply with all state, federal and local laws concerning environmental protection and Tenant's conduct at the Project. Tenant agrees to indemnify Landlord against any cost and expense which Landlord may suffer by reason of Tenant's failure to comply with the laws governing its conduct at the Project, including all laws concerning environmental protection. Tenant shall undertake no acts which would result in the leased Premises being defined as an "Establishment" under the environmental laws of the State of Connecticut. 5.05 Tenant will not place or maintain, or cause to be placed or maintained, on any portion of the Project exterior to the Leased Premises or any portion of the Project (including the Leased Premises) visible from the exterior of the Leased Premises, any sign or advertising matter without Landlord's written consent. Tenant shall not place any object on any portion of the Project exterior to the Leased Premises without Landlord's written consent. Tenant shall not install or maintain any window treatment without the prior written consent of Landlord. Landlord shall not unreasonably delay or withhold consent to a sign outside the entrance door to the Leased Premises and a listing on the building directory sign. - 6 - 5.06 Tenant agrees to keep the Leased Premises in a clean and sanitary condition and free from trash, inflammable material and other objectionable matter and to make all interior repairs other than to Landlord's mechanical systems. Tenant shall maintain all equipment installed by Tenant at Tenant's own cost and expense. Tenant shall not make any building alteration or addition to the Leased Premises without Landlord's consent, which shall not be unreasonably withheld. Ordinary office trash in volumes consistent with normal office usage may be placed in the dumpster maintained at the Project by Landlord, the cost of which dumpster may be charged by Landlord as a part of Operating Expenses. Tenant shall be responsible for the proper disposal of trash in excess of normal office usage volumes and for the disposal of any trash other than ordinary office trash. For example, any waste that may not be disposed of in an ordinary landfill without any special handling (such as biomedical waste from a medical office) shall be handled and disposed of by Tenant, at Tenant's sole cost and expense, in full compliance with all laws relating to the handling and disposal of such waste. 5.07 If Tenant refused or neglects to perform any item of maintenance or repair which is Tenant's responsibility within a reasonable time, Landlord may make such repairs without liability to Tenant for any loss or damage that may accrue to Tenant's merchandise, fixtures, or other property or to Tenant's business by reason thereof, and upon completion thereof, Tenant shall pay Landlord's costs for making such repairs upon presentation of an invoice therefor, as Additional Rent, which shall include interest from the date of such repairs at the same rate as that due for overdue rental payments. In the case of a repair which is not an emergency repair, Landlord shall not exercise Landlord's right to make the repair unless Tenant has not commenced the repair within ten days after written demand from Landlord and proceeds to complete same with diligence. 5.08 Tenant shall promptly pay all contractors and materialmen hired by Tenant to furnish any labor or materials which may give rise to the filing of a mechanic's lien against the Project attributable to contracts entered into by the Tenant. Should any such lien be made or filed, Tenant shall cause same to be discharged as a lien against the Project within the sooner of [i] 60 days after Tenant receives notice of such lien or [ii] 60 days after request by Landlord to remove such lien. If bond is filed and such lien is discharged, Tenant shall not be obligated to discharge the lien by payment. Notwithstanding any notice and grace period before default elsewhere set forth in this Lease, if Tenant shall fail to discharge such lien within the time period set forth in this paragraph above, and shall further fail to discharge such lien within ten more business days after notice of failure to discharge the lien is given from Landlord, then Tenant shall be in material default of the Lease, without any further notice or grace period. ARTICLE VI Landlord's Conduct and Services at the Project 6.01 Landlord agrees to keep the parking areas in the Project reasonably free of snow, ice and debris and to keep same reasonably lighted during normal business hours of the tenants in the Project. Landlord agrees to keep the General Common Area (including any common restrooms) in reasonably good repair and order. Landlord shall perform all structural repairs to the building or buildings in the Project, all General Common Area in the Project, and all mechanical equipment installed by Landlord for heating, ventilation and air conditioning, plumbing and other mechanical systems of the Leased Premises. Tenant shall pay: [i] Tenant's Pro Rata Share for maintenance and repair of the portion of said mechanical systems which are building standard; and [ii] the full cost of said maintenance and repair for the portion of said mechanical systems servicing the Leased Premises in excess of building standard. Although Landlord is responsible for the performance of certain work under this paragraph the cost of such work may be Tenant's responsibility under this and other provisions of the Lease, in full or as a Pro Rata Share. - 7 - 6.02 Landlord shall furnish keys to Tenant so that Tenant may have access to the Leased Premises before and after normal business hours. No locks other than those furnished by Landlord shall be installed on the doors providing access to the Leased Premises without Landlord's written consent. Tenant shall furnish to Landlord keys to any such locks allowing access to Tenant's Leased Premises. 6.03 Landlord shall have the right to make alterations and/or additions to the Project and the buildings and land of the Project, subject to the limitations set forth in paragraph 2.03. The exercise by Landlord of any right under this paragraph shall be limited so that there shall be no unreasonable interference with Tenant's use of the Leased Premises and the General Common Area. 6.04 Landlord shall have the right to establish rules and regulations for the use of the parking areas by Tenant and other tenants in the project, but Landlord shall not have any duty to police the traffic in the parking areas. Tenant shall have the use of the parking areas, existing from time to time in the Project, for the benefit of Tenant's employees, visitors and customers, in common with other tenants in the Project, which use is to be in accordance with Tenant's Pro Rata Share of the parking areas available for all tenants in the Project, which, in the case of Tenant, shall be four parking spaces per thousand square feet of Tenant's Net Rentable Area. ARTICLE VII Insurance, Indemnity and Subrogation Waiver 7.01 Tenant shall during the entire Term of this Lease keep in full force and effect a policy of public liability and property damages insurance. Tenant's insurance policy shall insure against Tenant's liability for all acts and omissions with respect to conduct in the Leased Premises and the Project of Tenant and Tenant's agents, servants, employees, licensees and invitees. The policy limits of Tenant's Insurance shall be at least $1,000,000 per occurrence, or such other limits as to public liability and property damage as Landlord may reasonably require. Tenant's policy shall name Landlord as an additional insured and shall contain a clause providing that the Insurer will not cancel or change the insurance without first giving the Landlord fifteen days prior written notice. Tenant's insurance policy shall be with an insurance company approved by Landlord and a copy of the policy or a certificate of insurance shall be delivered to Landlord prior to the Commencement Date, which approval shall not be unreasonably withheld or delayed and the decision based solely upon a reasonably satisfactory rating from a service such as A.M. Best. 7.02 Tenant shall during the entire Term of this Lease keep in full force and effect a hazard and all risk insurance policy, including fire, extended and all risk type coverage, in an amount adequate to cover the cost of repair and replacement of all alterations, decorations, or improvements made by Tenant in the Leased Premises. Tenant's policy shall name Landlord as an additional insured and shall contain a clause that the insurer will not cancel or change the insurance without first giving the Landlord fifteen days prior written notice. Tenant's insurance policy shall be with an insurance company approved by Landlord and a copy of the policy or a certificate of insurance shall be delivered to Landlord prior to the Commencement Date, which approval shall not be unreasonably withheld or delayed and the decision based solely upon a reasonably satisfactory rating from a service such as A.M. Best. 7.03 Landlord agrees to maintain or cause to be maintained hazard and all risk insurance, with fire, extended and all risk type coverage, upon all of the buildings, structures or improvements (excluding tenant improvements required to be insured by Tenant under other terms of this Lease) in the Project, in an amount adequate to cover the cost of replacing the foregoing in the event of fire or -8- other destruction, less a commercially reasonable deductible. In the event of fire or other destruction to such property, Landlord agrees, subject to the rights of any mortgagee to insurance proceeds, to immediately collect or cause to be collected the insurance proceeds and to apply the same to the reconstruction and repair of the damaged property. Tenant shall pay Tenant's Pro Rata Share of the premiums for the insurance specified herein as an item of Basic Operating Cost Additional Rent. 7.04 To the extent commercially reasonably obtainable, each policy of public liability insurance, hazard insurance or other insurance insuring risks arising out of any occurrence at the Project, carried by Tenant or Landlord, shall provide that the insurer waives any rights of subrogation against the Landlord (in the case of Tenant's policies) and against the Tenant (in the case of Landlord's policies) in connection with or arising out of any claim or benefit provided under such insurance policy. Except to the extent not permitted in any insurance policy obtained by Tenant in accordance with the provisions of this Article, in no event shall Tenant or any person or corporation claiming an interest in the Leased Premises by, through or under Tenant and over whom Tenant shall have control, claim, maintain or prosecute any action or suit at law or in equity against the Landlord for any loss, cost or damage caused by or resulting from fire or other risk or casualty in the Project for which Tenant is or may be insured under a standard hazard and all risk insurance policy, including fire, extended and/or all risk type coverage, whether or not the property (tangible or intangible) is insured or required to be insured under this Lease, and whether or not caused by the negligence of the Landlord, or the agents, or servants, or employees of the Landlord. Except to the extent not permitted in any insurance policy obtained by Landlord in accordance with the provisions of this Article, in no event shall Landlord or any person or corporation claiming an interest in the Project by, through or under Landlord and over whom Landlord shall have control, claim, maintain or prosecute any action or suit at law or in equity against the Tenant for any property damage to the Project caused by or resulting from fire or other risk or casualty in the Project for which Landlord is required to be insured under the provisions of the Lease, whether or not caused by the negligence of the Tenant or the agents, servants and/or employees of the Tenant. 7.05 In the case of third party claims arising out of an act or omission of Tenant or an agent, servant or employee of Tenant (a "Tenant Fault Claim") and not out of an act or omission of Landlord or an agent, servant or employee of Landlord (a "Landlord Fault Claim"), Tenant shall be responsible for the Tort Indemnity of Landlord. In the event of a Landlord Fault Claim, Landlord shall be responsible for the Tort Indemnity of Tenant. In the event of claims which are both Tenant Fault Claims and Landlord Fault Claims, as between Landlord and Tenant: each party shall be responsible for the claim in the proportion such party's fault in fact bears to the total fault of Landlord and Tenant; and such party shall indemnify the other against the portion of the claim for which such party is responsible. Tort Indemnity shall mean that the party responsible for the indemnification shall provide the legal defense of the claim (counsel being subject to the approval of the indemnified party, approval not to be unreasonably withheld) and the indemnifying party shall be responsible to pay the amount of the claim (subject to the right to defend it) up to the limits of the indemnification set forth in this paragraph, above, except that in the case of claims which are both Tenant Fault Claims and Landlord Fault Claims, each party shall be responsible for its own costs of legal defense. Tort Indemnity shall not be owed to the extent that the party owing the indemnification has been prejudiced by any failure of the party seeking the indemnification to give notice to the other party within a reasonable time after said party becomes aware of a claim in which the other party may owe an indemnity obligation under this paragraph. -9- ARTICLE VIII Utilities 8.01 From and after the Commencement Date, Tenant shall pay all charges for utilities used, consumed in or allocable to the Leased Premises, including, but not limited to, fuel, electricity, water and gas. Said utilities may be either directly metered to Tenant or shared with other tenants. If any utility consumption in the Leased Premises is not separately metered, Landlord may allocate the shared utility consumption to the Leased Premises in any reasonable manner. In the case of building systems such as HVAC, utility consumption of such systems may be allocated in accordance with Tenant's Pro Rata Share. The charges for all utilities not paid directly to the utility providing the service shall be paid to Landlord as an element of Additional Rent; and Tenant shall, at Landlord's option, either pay the separately metered utilities directly to the utility providing the service, or pay for said separately metered utilities as an item of Additional Rent. Notwithstanding the foregoing, Landlord shall provide a separate electric meter for the electricity to be consumed in the Leased Premises, and Tenant shall maintain Tenant's own metered account with the utility company providing service to the Project for such electric meter. ARTICLE IX Estoppel Statement, Attornment, Subordination 9.01 Upon request of Landlord or any mortgagee of Landlord, Tenant shall execute an estoppel certificate, certifying the status of any facts with respect to the Lease. Estoppel certification may include; whether the Lease is in full force and effect; the rentals due under the Lease and the degree to which same have been paid; that there are no defenses or claims against Landlord for any alleged violation of the Lease by Landlord, or a statement of such defenses or claims; acknowledgement of the interpretation or meaning of any term of the Lease, provided such acknowledgement shall not change any term or provision hereof; and such other matters reasonably requested to be certified in the estoppel certificate. 9.02 The Tenant agrees that the Lease and all rights of the Tenant herein shall, at the election of Landlord or mortgagee, be subordinate to the lien of any mortgage or mortgages now or which may hereafter be placed on the Project or any part of the Project during the term of this Lease. In the event any proceeding is brought for the foreclosure of the Leased Premises, Tenant agrees to attorn to the mortgagee in the event of strict foreclosure, or to the purchaser in the event of foreclosure by sale or deed in lieu of foreclosure, and recognize such mortgagee or purchaser (as the case may be) as the Landlord under this Lease. Tenant further agrees to execute any further instrument or instruments which the Landlord or its successors in title may at any time require to evidence the subordination of this Lease to the lien of any such mortgage or mortgages and Tenant's agreement to attorn, provided, however, that the Landlord, if Tenant so requests, obtains a standard non-disturbance agreement from the mortgagee for the benefit of the Tenant. Notwithstanding the foregoing, if there shall be a first mortgage placed on all or a portion of the Project, this Lease shall not be subordinated to any other encumbrance subsequent in right to the first mortgage unless the first mortgagee shall consent to such subordination, in writing; Notwithstanding the foregoing, Tenant's right under this Lease shall not be subordinated to any mortgage, and Tenant shall not be required to execute any subordination agreement, unless the mortgagee provides Tenant with standard non disturbance rights, in form reasonably acceptable to Tenant. Upon execution of this Lease, Landlord shall use best efforts to obtain a non disturbance agreement from the existing mortagee of the Project (People's Bank). 9.03 Tenant agrees to execute and deliver to Landlord or the party designated by Landlord, -10- within ten days after presentation of the proposed form, any estoppel certificate and/or subordination, attornment and/or non disturbance agreement requested to be executed by Tenant pursuant to the terms of this Lease. Tenant further agrees to include in any such documents, if requested by Landlord: an agreement not to pay Landlord rent for more than one month in advance; an agreement to give any mortgagee a notice of any alleged default by Landlord and a reasonable time for such mortgagee to have such default cured before Tenant will exercise any right to terminate this Lease; and an agreement that Tenant will not look to such mortgagee for the return of any security deposit or other monies not actually received by such mortgagee. If Tenant shall not have delivered the executed documents, required to be executed and delivered under this Article, within the ten day period set forth above, Landlord may give Tenant written notice of Tenant's failure to deliver such documents, and if Tenant shall then fail to deliver said executed documents within three business days after delivery of such written notice, notwithstanding any provision for notice and grace period for default elsewhere contained in this Lease, Tenant shall be in material default of the Lease, and Landlord shall have all rights provided for in the event of such default, including termination. ARTICLE X Destruction of Leased Premises 10.01 Landlord agrees, subject to and excepting the other provisions of this Article, that if the Leased Premises shall be damaged by fire or other casualty during the term of this lease, Landlord shall, at Landlord's own expense, use best efforts to cause the damage to be promptly repaired within a reasonable time after such damage has occurred, which period shall not exceed six months. If by reason of such occurrence, any portion of the Leased Premises is thereby rendered untenantable and Tenant ceases use of said portion, the rent and other charges payable by Tenant hereunder shall be abated in proportion to the area of the Leased Premises which is rendered untenantable and which is not used by Tenant, said abatement to continue until the sooner of the time when the Leased Premises is repaired or until Tenant uses the damaged portion of the Leased Premises. Landlord's obligation to restore under this Article shall be limited to the extent of Landlord's deductible on Landlord's property insurance policy and the insurance proceeds made available by any mortgagee having control over the disposition of such proceeds. Notwithstanding the foregoing, if there is such a casualty damage materially adversely affecting Tenant's use and enjoyment of the Leased Premises, and if Tenant does not vacate the Leased Premises but continues to use the same, the rent shall be equitably adjusted based upon the fair rental value of the Leased Premises in its impaired condition, during the period of materially adverse impairment. 10.02 In the event that fifty percent or more of the Leased Premises shall be damaged or destroyed by fire or other cause during the Term of this Lease and same shall not be repairable by Landlord within six months, Landlord or Tenant shall have the right, to be exercised by written notice to the other party, within sixty days from and after said occurrence, to elect to cancel and terminate this Lease. Upon the giving of such notice, the term of this Lease shall expire by lapse of time upon the thirtieth day after such notice is given, and Tenant shall vacate the Leased Premises and surrender the same to Landlord on such date of expiration. ARTICLE XI Eminent Domain and Cessation of Business 11.01 In the event any portion of the Leased Premises or any portion of the Project which renders the Leased Premises unusable is taken in condemnation proceedings or by any right of eminent -11- domain or for any public or quasi-public use, this Lease shall terminate as of the date of vesting of title in the condemning authority and all rent, including additional rent, payable under this lease shall be paid to that date. 11.02 In the event of any taking provided for in this Article, all proceeds of any award, judgment or settlement payable by the condemning authority shall be and remain the sole and exclusive property of Landlord, and Tenant waives any right to make any claim to said award, judgment or settlement received by Landlord. Tenant may pursue its own claim against the condemning authority permitted by statute to be paid to Tenant without diminishing or reducing the award, judgment or settlement payable to Landlord. ARTICLE XII Assignment and Subletting 12.02 Tenant will not assign this Lease in whole or in part nor sublet all or any part of the Leased Premises without the prior written consent of Landlord, which shall not be unreasonably withheld or delayed. Landlord hereby expressly consents to any assignment or subletting to an entity controlled by Tenant, which controls Tenant, or is under the control of the same entity as controls Tenant. For the purposes of the preceding sentence, "control" means legal voting control. The consent by Landlord to any assignment or subletting shall not constitute a waiver of the necessity for such consent to any subsequent assignment or subletting. This prohibition against assigning or subletting shall be construed to include a prohibition against any assignment or subletting by operation of law. If the Leased Premises shall be occupied by anybody other than Tenant, Landlord may collect rent from the assignee, under- tenant or occupant and apply the net amount collected to the rent herein reserved, but no such assignment, underletting, occupancy or collection shall be deemed a waiver of this covenant, or the acceptance of the assignee, under- tenant or occupant as tenant, or a release of Tenant from the further performance by Tenant of covenants on the part of Tenant herein contained. Notwithstanding any assignment or sublease, Tenant shall remain primarily liable on this Lease and shall not be released from performing any of the terms, covenants and conditions of this Lease, but Tenant and such assignee, under-tenant or occupant shall thereafter be jointly and severally liable for the full and faithful performance of the obligations of Tenant under this Lease. Any attempted assignment by Tenant without the prior written consent of Landlord shall be void. No assignment or subletting shall provide for a rental payment, or other payment for use and occupancy or utilization, based in whole or in part on the net income or profits derived by any person or entity from the property assigned, subleased, occupied or utilized (other than an amount based upon a fixed percentage of sales), and any such purported assignment or subletting based upon such payment shall be void and any amount payable thereunder or any rental amount therefor passed to any person or entity shall not have deducted therefrom any expenses or costs related in any way to the leasing of such space. 12.02 In the event Tenant desires to sublet or assign this Lease in whole or in part and the resulting agreement provides the Tenant with any gross profit in excess of the rents payable hereunder, Landlord shall have the option of terminating the Lease and the Tenant shall be relieved of any further liability from the date it vacates the premises. Said option shall be exercised by written notice from Landlord to Tenant within thirty (30) days from date Tenant notifies Landlord of the terms of the assignment or subleases. -12- ARTICLE XIII Default of the Tenant 13.01 In the event of any failure of Tenant to pay any Basic Minimum Annual Rent, Additional Rent or any other monies payable to Landlord under this Lease within fifteen (15) days after written notice of failure to pay said sums, Tenant shall be in material default of the Lease. Tenant shall also be in material default of this Lease upon the happening of any of the following: (i) the failure to deliver any estoppel or subordination, non disturbance and/or attornment agreement within the time limits set forth for default in the Article of this Lease requiring execution and delivery of such documents; (ii) the failure to have any mechanic's lien discharged within the time period set forth for default in the Article requiring removal of mechanic's liens; (iii) the failure to commence within thirty (30) days after written notice of failure to perform, and diligently pursue the performance of, any other of the terms, conditions or covenants of this Lease to be observed or performed by Tenant; (iv) if Tenant or any guarantor shall become bankrupt or insolvent, or file any debtor proceedings, or take or have taken against them, in any court, pursuant to any statute either of the United States or of any State, a petition in bankruptcy or insolvency or for the reorganization or for the appointment of a receiver or trustee of all or a portion of Tenant's property or make an assignment for the benefit of creditors; or (v) if Tenant's interest in this Lease shall be taken under any writ of execution. The foregoing conditions of default shall be limited to the extent required by any state or federal laws affecting this Lease and Landlord's rights against Tenant, including the United States bankruptcy laws. To the extent permitted by law, all payments are due on the due dates set forth in the Lease, and there shall be no grace period for the due date of the rent other than the above 15 day period after notice from Landlord. 13.02 In the event of default, then Landlord, besides other rights or remedies Landlord may have, shall have the right to terminate this Lease and proceed under any law entitling Landlord to recover possession of the Leased Premises, and to the extent permitted by law, shall be entitled the right of immediate reentry and to eject Tenant from the Project, without resort to court proceedings. Upon such default, to the extent permitted by law, Tenant's property may be removed and stored in a public warehouse or elsewhere at the cost of, and for the account of Tenant. Tenant acknowledges that this Lease is a commercial Lease, and to the extent permitted by law, Tenant waives the requirement of a statutory notice to quit possession prior to commencement of summary process proceedings. 13.03 Should Landlord elect to reenter, as herein provided, or should it take possession pursuant to legal proceedings or pursuant to any notice provided for by law, Landlord may either terminate this Lease or Landlord may from time to time, without terminating this Lease, make such alterations and repairs as may be necessary in order to relet the Leased Premises, or any part thereof, for such term or terms (which may be for a term extending beyond the terms of this Lease) and at such rental or rentals and upon such other terms and conditions as Landlord in Landlord's discretion may deem advisable. Upon each such reletting, all rentals received by the Landlord from such reletting shall be applied first to the payment of any indebtedness other than rent due hereunder from Tenant to Landlord; second, to the payment of any costs and expenses of such reletting, including brokerage fees and attorney's fees and of costs of such alterations and repairs; third, to the payment of rent due and unpaid hereunder, and the residue, if any, shall be held by Landlord and applied in payment of future rent as the same may become due and payable hereunder. If such rentals received from such reletting during any month are less than that to be paid during that month by Tenant hereunder, Tenant shall pay any deficiency to Landlord. Such deficiency shall be calculated and paid monthly. No such reentry or taking possession of the Leased Premises by Landlord shall be construed as an election on Landlord's part to terminate this Lease unless a written notice of such intention be given to Tenant or unless the termination thereof be decreed by a court of competent jurisdiction. Notwithstanding any -13- such reletting without termination, Landlord may at any time thereafter elect to terminate this Lease for such previous breach. Should Landlord at any time terminate this Lease for any breach, in addition to any other remedies Landlord may have, Landlord may recover from Tenant all damages Landlord may incur by reason of such breach, including the cost of recovering the Leased Premises, reasonable attorney's fees, and the present value of the lost rent resulting from the failure of Landlord or Tenant to obtain another Tenant for the Leased Premises for any period of time after Tenant's default, and/or resulting from the fact that the reasonable rental value of the Lease Premises at the time of Tenant's default is less than the value of the remaining rental payments due under this Lease. 13.04 In case Landlord shall retain an attorney to enforce the provisions of this Lease or if suit shall be brought for recovery of possession of the Leased Premises, for the recovery of rent or any other amount due under the provisions of this Lease, or because of the breach of any other covenant herein contained on the part of Tenant to be kept or performed, Tenant shall pay to Landlord all expenses incurred therefor, including a reasonable attorney's fee. ARTICLE XIV Security Deposit (this article is intentionally omitted) ARTICLE XV Limitation of Liability of Landlord 15.01 In the event of any alleged default of Landlord, Tenant agrees that Tenant shall not seek to secure any claim for damages or indemnification by any attachment, garnishment or other security proceeding against any property of the Landlord other than the Project or property related thereto, and in the event Tenant obtains any judgment against Landlord by virtue of an alleged default by Landlord under this Lease, Tenant agrees that Tenant will not look to any property of Landlord other than the Project for satisfaction of such judgment. 15.02 Unless caused by the gross negligence or wilful misconduct of Landlord, Landlord shall not be liable for any damage to property of Tenant or of others located on the Leased Premises, or for the loss of or damage to any property of Tenant or of others by theft or otherwise. Unless caused by the gross negligence or wilful misconduct of Landlord, Landlord shall not be liable for any injury or damage to persons or property resulting from fire, explosion, falling plaster, steam, gas, electricity, water, rain or snow or leaks from any part of the Leased Premises or from the pipes, appliances or plumbing works or from the roof, street or subsurface or from any other place or by dampness or by any other cause of whatsoever nature. Landlord shall not be liable for any such damage caused by other tenants or persons in the Project, by occupants of adjacent property to the Project, by other members of the public, or caused by operation or construction of any other private or public work. All property of Tenant kept or stored on the Leased Premises shall be so kept or stored at the risk of Tenant only. 15.03 Upon any transfer of Landlord's interest in the Project, the then transferor Landlord shall be relieved of any and all liability to Tenant under this Lease, except for claims of Tenant against Landlord arising out of events occurring prior to such transfer. -14- ARTICLE XVI Quiet Enjoyment 16.01 Upon payment by the Tenant of the rents herein provided, and upon the observance and performance of all the covenants, terms and conditions on Tenant's part to be observed and performed, Tenant shall peaceably and quietly hold and enjoy the Leased Premises for the term hereby demised without hindrance or interruption, subject, nevertheless to the terms and conditions of this Lease. ARTICLE XVII Miscellaneous Covenants 17.01 The Landlord and Tenant hereby waive trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other on any matters whatsoever arising out of or in any way connected with this Lease, the relationship of Landlord and Tenant, Tenant's use or occupancy of the Leased Premises, and/or claim of injury or damage. In any dispute between the parties relating to the tenancy hereby created, the exclusive forum for any such legal action shall be the state or federal courthouse in Connecticut nearest the Leased Premises and having jurisdiction and venue over the matter. Connecticut law shall apply to all state law matters arising under this Lease. 17.02 The waiver by Landlord of any breach by Tenant of any term, covenant or condition herein contained shall not be deemed to be a waiver of such term, covenant or condition or any subsequent breach of the same or any other term, covenant or condition herein contained. The subsequent acceptance of rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, other than the failure of Tenant to pay the particular rental so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such rent. No covenant, term or condition of this lease shall be deemed to have been waived by Landlord unless such waiver be in writing by Landlord. 17.03 No payment by Tenant or receipt by Landlord of a lesser amount than the monthly rent herein stipulated shall be deemed to be other than on account of the earliest stipulated rent, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such rent or pursue any other remedy in this Lease provided. 17.04 This Lease and the Exhibits, attached hereto and forming a part hereof, set forth all the covenants, promises, agreements, conditions and understandings between Landlord and Tenant concerning the Leased Premises and there are no covenants, promises, agreements, conditions or understandings, either oral or written, between the parties other than those herein set forth. No subsequent alteration, amendment, change or addition to this lease shall be binding upon Landlord or Tenant unless reduced to writing and signed by the party to be charged. 17.05 If any term, covenant or condition of this Lease or the application thereof to any person or circumstances shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term, covenant or condition to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and each term, covenant or condition of this Lease shall be valid and enforced to the fullest extent permitted by law. -15- 17.06 If the Commencement Date is not a date certain, the Commencement Date shall in no event be later than a time which would not violate any applicable rule against perpetuities, determined as if all relevant lives in being ceased as of the date of execution of this Lease. 17.07 In the event that Landlord shall be delayed in, hindered in, or prevented from, the performance of any act required hereunder by reason of Force Majeure, which shall mean strikes, lockouts, labor troubles, inability to procure materials, failure of power, restrictive governmental laws or regulations, riots, insurrection, war or other reason of a like nature not the fault of the Landlord and despite his good faith efforts to avoid such Force Majeure, then performance of such act shall be excused for the period of the delay. 17.08 Tenant agrees that the Landlord and Landlord's agents and other representatives shall have the right to enter into and upon the Leased Premises at all reasonable hours, upon reasonable notice, consistent with Tenant's security requirements, (without notice in the case of an emergency) for the purpose of examining the Leased Premises, or making such repairs or alterations therein as may be necessary for the safety and preservation of the Project. In the course of any such entry, Landlord will cause the least amount of disruption to Tenant's business and operations as is reasonably possible. 17.09 Tenant agrees to permit the Landlord or Landlord's agents to show the Leased Premises to persons wishing to hire or purchase the same upon reasonable notice to Tenant and at reasonable hours. 17.10 Tenant shall not encumber or obstruct the General Common area in the Project, nor allow the same to be obstructed or encumbered in any manner. Landlord shall not obstruct the entrance to the Leased Premises and shall not unreasonably interfere with Tenant's use of the General Common Area. 17.11 The submission of this Lease for examination does not constitute a reservation of or option for the Leased Premises and this Lease shall become effective only upon execution and delivery thereof by Landlord and Tenant. 17.12 Neither party shall record this Lease, but the parties hereto agree to execute a Notice of Lease drawn in accordance with the Connecticut statutes, and the parties agree to execute in recordable form an agreement establishing the specific commencement date of this Lease when the same is ascertainable. 17.13 If there shall be one or more tenants or one or more landlords, each tenant and landlord shall be jointly and severally liable for all of the covenants and obligations of the Tenant and Landlord hereunder, as the case may be, except as express provision may be elsewhere made to the contrary. 17.14 The use of the neuter singular pronoun to refer to Landlord or Tenant shall be deemed a proper reference even though Landlord or Tenant may be an individual, a partnership, a corporation, or a group of two or more individuals or corporations. The necessary grammatical changes required to make the provisions of this Lease apply in the plural sense where there is more than one Landlord or Tenant, or to either corporations, associations, partnerships, or individuals, males or females, shall in all instances be assumed as though in each case fully expressed. 17.15 The headings, section numbers and article numbers appearing in this Lease are inserted only as a matter of convenience and in no way define, limit, construe, or describe the scope or intent of such sections or articles of this Lease nor in any way affect this Lease. -16- ARTICLE XVIII Surrender and Holding Over 18.01 At the expiration of the tenancy hereby created, whether by lapse of time or otherwise, Tenant shall surrender the Leased Premises in the same condition as the Leased Premises were in upon delivery of possession thereto under this Lease, reasonable wear and tear and insured casualty excepted, and Tenant shall surrender all keys for the Leased Premises to Landlord at the place then fixed for the payment of rent, and Tenant shall inform Landlord of all combinations on locks, safes and vaults, if any, in the Leased Premises. Tenant shall remove all its trade fixtures and/or, at the option of the Landlord, any alteration or improvements installed by Tenant, before surrendering the premises as aforesaid and shall repair any damage to the Leased Premises caused thereby. Tenant's obligation to observe or perform this covenant shall survive the expiration or other termination of the term of this Lease. If Tenant fails to remove such trade fixtures and restore the Leased Premises, then upon the expiration or sooner termination of this Lease, and upon the Tenant's removal from the premises, all such alterations, decorations, additions and improvements shall become the property of the Landlord. 18.02 Holding over with the written consent of Landlord shall be at the Basic Minimum Annual Rent and the Additional Rent specified herein and shall otherwise be on all terms and conditions set forth herein, except for the term, which shall be month to month, and without any right of first refusal or options to extend the term, lease other space and/or purchase property. It is acknowledged that the damages which Landlord may suffer on account of an unconsented to holding over may be difficult to determine, as they may include lost marketing opportunities with respect to Landlord's ability to obtain a replacement tenant in a timely manner and other elements of damage that may be difficult to quantify. Accordingly, should Tenant withhold possession of the premises from Landlord after termination of the within Lease, whether by lapse of time, by termination by either party as provided herein, or in any other manner, and except in the case where the Landlord has given written consent to holding over, the damages to Landlord on account of Tenant's failure to vacate on time, plus the use and occupancy for the Leased Premises, are hereby liquidated at a monthly sum equal to any installment Additional Rent in effect as of the end of the Term (any utility charges and Tenant's Pro Rata Share of the Basic Operating Expense, for example) plus one and one-half times the monthly installment of Basic Minimum Annual Rent which would have been in effect for the month immediately prior to the end of the Term of the Lease had the Lease run the full course of the Initial Term and any option to extend that may have been exercised prior to the unconsented to holding over. Tenant shall also be responsible for any other item of Additional Rent which would be owed had the Lease remained in effect (attorney's fees and damage to Landlord's property, for example). ARTICLE XIX Construction of Building, Site and Leased Premises 19.01 The Building and site shall be constructed and improved by Landlord in accordance with the site plans and elevational plans entitled "Enterprise III Building, Enterprise Drive, Shelton, CT, dated October 25, 1996, prepared for R.D. Scinto, Inc. by Kasper Group, Inc., Sheet SP-1 and Sheets A-1 through A-5", and the exterior siding and windows for the Building shall be similar to that of the neighboring Two Enterprise Drive building (the foregoing Building construction and site improvement work herein referred to as the "General Construction Work"). 19.02 The interior Leased Premises shall be constructed by Landlord in accordance with the Leased Premises Construction Plans (the foregoing Leased Premises construction work herein referred to as the "Leased Premises Construction Work"). It is acknowledged that as of the date of this Lease, -17- the Leased Premises Construction Plans have not been completed. Upon execution of this Lease, Tenant shall cooperate with Landlord in developing the Leased Premises Construction Plans, such that the same may be finalized within 30 days after the execution of this Lease. Landlord will provide Tenant with the free of charge use of Landlord's architectural department for the development of the Leased Premises Construction Plans, and Tenant agrees to provide prompt turn-around time in making any decisions required of Tenant for the finalization of the Leased Premises Construction Plans by the above date. The Leased Premises Construction Plans shall be subject to Landlord's approval, which shall not be unreasonably withheld or delayed. Notwithstanding anything in this Lease to the contrary, if Landlord shall be delayed in completing work which is Landlord's responsibility or if Landlord shall be otherwise delayed in obtaining a certificate of occupancy for the Leased Premises, and if such delay is caused by the failure of Tenant to develop the Leased Premises Construction Plans promptly, in the manner provided above, the failure of Tenant to provide reasonable turn around time on architectural decisions to be made by Tenant, or the failure of Tenant to provide items to the Leased Premises on time which are Tenant's responsibility, then the Commencement Date shall be the date on which the Leased Premises would have been ready but for the delay due to Tenant. 19.03 Upon execution of this Lease, Landlord diligently proceed to complete the General Construction Work and Leased Premises Construction Work on a timetable reasonably calculated to achieve a Commencement Date of October 1, 1997. All construction work carried out by Landlord shall be carried out in a workmanlike manner in compliance with all laws and shall be warranted by Landlord for a period of one year from the completion date and any further period to the extent of coverage under any manufacturer's warranties. 19.04 The Commencement Date is the date upon which all of the following conditions have been met or such earlier date upon which Tenant has moved into and begun conducting its business from the Leased Premises: (a) substantial completion of the Leased Premises Construction Work; (b) substantial completion of those portions of the Project necessary for Tenant's use and enjoyment of the Leased Premises, including, without limitation, the Common Area of the Building serving the Leased Premises, and the drives, parking areas and walkways sufficient to provide Tenant with parking for and access to the Leased Premises; and (c) issuance of a certificate of occupancy by the City of Shelton for the Leased Premises. Substantial completion of the Leased Premises Construction Work shall mean that the work has been completed with the possible exception of punch list items, whose absence does not materially affect Tenant's ability to conduct its business in the Leased Premises. Landlord shall tender possession of the Leased Premises to Tenant upon the Commencement Date, clean and free of all construction debris and personal property other than that belonging to Tenant, and shall promptly and diligently pursue the completion of any punch list items. 19.05 The General Construction Work shall be carried out by Landlord at Landlord's sole cost and expense. All of the Leased Premises Construction Work as is consistent with "Building Standard Work" shall be carried out by Landlord at Landlord's sole cost and expense. If the Leased Premises Construction Plans call for Landlord to perform any work in excess of Building Standard Work ("Extra Leased Premises Construction Work"), Tenant be responsible to pay for the cost of any Extra Leased Premises Construction Work in installments, as Landlord's Overall Construction Work progresses, 1/3 upon delivery of an estimate therefore by Landlord, 1/3 upon substantial completion of the sheetrock, and 1/3 upon substantial completion of the work. Each progress payment is due within 15 days after presentment of an invoice therefor from Landlord. Notwithstanding the foregoing, Landlord shall perform and bear the cost of the following, at Landlord's sole cost and expense, without any extra charge to Tenant: (a) installation in the walls and ceilings of the Leased Premises computer network wiring for Tenant's computer system and for Tenant's telephone system (the hookup of Tenant's computers and telephones to the computer and telephone wire outlets to be Tenant's responsibility); (b) removal from 8 Progress Drive of Tenant's telephone switching equipment and reinstallation of it in the Leased Premises; (c) the reasonable cost of moving Tenant's personal property form its 8 Progress Drive premises to the Leased Premises. "Building Standard Work" is defined in paragraph 19.07; and (d) providing sufficient power to the Leased Premises for the operation of Tenant's business in the same character as it is operated at B Progress Drive, Shelton as of the date of this Lease. The cost for Extra Leased Premises Construction Work is the cost incurred by Landlord for any item in excess of the cost of the item of Building Standard Work that it replaces and the full cost incurred by Landlord for any item that is in addition to and not in replacement of an item of Building Standard Work. 19.06 Landlord will, subject to all the covenants, agreements, terms, provisions and conditions of this Lease give access to the Leased Premises to decorators and other contractors employed by Tenant for the purpose of making improvements therein, when so long as, in Landlord's reasonable judgment, the work to be done in the Leased Premises by Landlord as provided herein shall have been completed to such an extent that the making of such improvements will not interfere with or delay Landlord's performance of the remaining portion of its work; it being understood that Tenant shall not be deemed to have entered into occupancy of the Leased Premises by reason of the presence in the Leased Premises of any decorator or other contractor. If at any time such entry shall cause disharmony, delay or interference with Landlord's performance of the remaining portion of the work, this license may be withdrawn by Landlord immediately upon written notice to Tenant. 19.07 "Building Standard Work" is defined as the following: (a) Partitions of at least 5/8" sheetrock to hung ceiling, mounted on steel or wood studs, to provide for the reasonable subdivision of the Leased Premises at a rate not exceeding six straight lineal feet of such partitioning per 100 square feet of rentable floor area or fraction thereof. Sheetrock walls and/or windows shall be provided to all Leased Premises boundary walls, and on walls separating other space in the building, shall run to structure above ceiling; (b) Doors at least 7'-0" high 3'-0" wide of wood construction, with metal frames, including latch sets and doorstops, at the rate of not more than one door per 500 square feet of rentable floor area or fraction thereof and, in the case of the entrance door to the Leased Premises, one lock set and door closer; (c) Flooring: commercial grade carpeting throughout the Leased Premises, consisting of 100% nylon static control, 30 ounce, cut pile, 10 year guaranty, Patcraft brand, or equal. Tenant may select rooms in which anti-static vinyl composition tile may be installed in lieu of carpet; (d) Painting of all wall surfaces, doors and trim, included in Building Standard Work, with not more than one color in each room, with two or three coats as necessary. The colors shall be selected by Tenant from a spectrum of colors supplied by Landlord; (e) Electrical distribution system sufficient to provide for a lighting load of 2 watts per square foot of useable floor area, or fraction thereof, plus an additional electrical load of 2 watts per square foot of useable floor area or fraction thereof for electrical receptacles, at the rate of not more than one duplex receptacle for each 125 square feet of rentable floor area or fraction thereof. Lighting fixtures of not more than one building standard fixture (a four 40-watt tube fixture, measuring two feet by four feet) per 125 square feet of useable floor area or fraction thereof. Light switches provided as per applicable building code. The lighting shall also be "energy efficient lighting", as per United Illuminating specifications; -19- (f) Ceiling of 2 foot by 4 foot lay-in suspended acoustical tile with medium mineral fissured texture; and (g) Heating, Ventilating and Air Conditioning systems in general shall consist of gas heating and electrical cooling. Building standard HVAC shall allow the following conditions to be maintained: in the cooling season, interior conditions of not more than 78 degrees F. Dry Bulb, and 50% relative humidity when the outside temperature is no more than 90 degrees F. Dry Bulb, and 77 degrees F. Wet Bulb; and in the heating season, not less than 68 degrees F. Dry Bulb, when the outside temperature is not less than 0 degrees F. Dry Bulb. Maintenance of these conditions is contingent on the sources of heat within the Leased Premises not exceeding one person per 100 square feet of useable floor area, or fraction thereof, and four watts of electrical consumption for all purposes, including lighting and power, per square foot of useable floor area, or fraction thereof. If and to the extent that the sources of heat in the Leased Premises exceed the aforesaid design criteria, any additional cost incurred by the Landlord in furnishing and operating equipment capable of meeting the heating or air conditioning performance criteria set forth above shall be reimbursed to Landlord by Tenant. 19.08 In the event Landlord shall be delayed in obtaining delivery of any item specially ordered for Tenant's Leased Premises in accordance with Tenant's finish plans and if such delay shall cause a delay in Landlord's obtaining a certificate of occupancy, the Commencement Date shall be the date on which Landlord would have been able to obtain a certificate of occupancy but for the delay in obtaining the specially ordered item. Landlord shall use best efforts to obtain prompt delivery of all items required for completion of the Leased Premises in time to complete the Leased Premises on time. In the event, however, that Landlord shall foresee difficulty in obtaining timely delivery of any such specially ordered item referred to above, Landlord shall notify Tenant of this condition, and Tenant shall have the option of obtaining delivery of said item through Tenant's own source or replacing the item for which timely delivery is not obtainable with an item with an earlier delivery date. ARTICLE XX Rights Of Refusal To Leasing In Building 20.01 Notice of Bona Fide Offer and Exercise of Refusal Right by Tenant. ----------------------------------------------------------------- Tenant shall have a right of refusal to the leasing of space in the Building to other tenants, in accordance with the provisions of this Article (the "Refusal Right to Leasing"). Landlord shall give Tenant a "Notice of Bona Fide Offer" prior to the initial renting of any space in the Building to another Tenant. The "Notice of Bona Fide Offer" shall be a Notice to Tenant which sets forth the terms and conditions of an offer that Landlord has received to rent space to another party, which terms and conditions are acceptable to Landlord. Tenant may only exercise Tenant's Refusal Right to Leasing by giving Landlord Notice of exercise within 10 business days after Landlord's Notice of Bona Fide Offer to Tenant, which Notice of exercise must unequivocally and unconditionally state: that Tenant is exercising the Refusal Right to Leasing: and whether Tenant is electing the "Bona Fide Offer Option" or the "Existing Rent Option" (defined below). If Landlord's Notice of Bona Fide Offer to Tenant is in the form of a proposed formal lease and if Tenant seeks to exercise the Refusal Right to Leasing with election of the Bona Fide Offer Option, then the exercise shall only be valid if the Notice of exercise is accomplished by return of the lease, duly executed by Tenant. Tenant's Refusal Right shall not apply, and Landlord shall not be obligated to give any Notice of Bona Fide Offer: for any rental to a tenant after the first renting of any space; and, for any rental to another tenant on terms not less favorable to Landlord than those contained in any Notice of Bona Fide Offer in response to which Tenant did not duly exercise Tenant's -20- Refusal Right to Leases. If, in the course of the initial rent-up of said space, Landlord desires to rent said space on business terms less favorable to Landlord than those contained in Landlord's original Notice of Bona Fide Offer to Tenant, the above process shall be repeated. Notwithstanding anything in this Article to the contrary, Tenant's Refusal Right to Leases shall not be valid unless given in strict compliance with the requirements of this Article and shall no longer be in effect if Tenant has been in default of this Lease beyond any applicable notice and grace period. 20.02 Bona Fide Offer Option. Tenant's election of the "Bona Fide Offer ---------------------- Option" means that Tenant has elected to accept the same lease terms as are contained in Landlord's Notice of bona fide offer and enter into a lease with Landlord on said terms, which may contain a different rent, length of term and other provisions than those contained in the within Lease. If Landlord's Notice of bona fide offer to Tenant is not in the form of a proposed formal lease, then Landlord may deliver a proposed formal lease to Tenant, embodying the business terms contained in the Notice of bona offer, and, in order to keep Tenant's exercise of the Right of Refusal to Leasing in effect, Tenant must, within 10 business days after Tenant's delivery of the proposed lease, return the lease, duly executed by Tenant. 20.03 Existing Rent Option. Tenant's election of the "Existing Rent -------------------- Option" means that Tenant has elected to add the entire space that was subject to Landlord's Notice of Bona Fide Offer in manner provided for the "Existing Rent Option" in Article XXI. Accordingly, the space would be added at the same rental and with all other terms and provisions as are provided in Article XXI. ARTICLE XXI Tenant's Expansion Right 21.01 Existence Of Tenant's Expansion Right. Tenant shall have a right of ------------------------------------- expansion into other space in the Building in accordance with the provisions of this Article (the "Expansion Right"). Tenant may exercise Tenant's Expansion Right for any space only by giving Landlord Notice of exercise for said space: prior to the time the space has been the subject of any Notice of Bona Fide Offer (as defined in paragraph 20.01); or in response to a Notice of Bona Fide Offer for the space (as defined in paragraph 20.01); or in response to a Notice of Availability for the space. A "Notice of Availability" is a Notice from Landlord to Tenant which; must designate the space to which it applies; must state the Basic Minimum Annual Rent and length of term desired to be offered for the space by Landlord; may state any maximum level of fit-out at no additional charge to tenant and any other business term desired to be offered for the space by Landlord; and may not be given earlier than 9 months prior to the date Landlord has bona fide reason to believe will be the date said space will become vacant, after having been rented to another tenant. Landlord shall not be obligated to give any Notice of Availability for any space in the Building prior to its initial rental. For the leasing of any space in the Building to a tenant other than Tenant, subsequent to the initial leasing of the space and with a commencement date prior to the last year of the Term of this Lease, as long as this Article XXI Expansion Right is in effect, Landlord shall only be able to rent such space to such other tenant if Landlord has given Tenant a Notice of Availability for such space, in which event, Tenant may shall have the right to Exercise Tenant's Expansion Right for such space pursuant to this Article before the space is rented to such other tenant, and provided further that the rental to the other tenant is on terms not less favorable to Landlord than those contained in Landlord's Notice of Availability to Tenant for the space. Notwithstanding anything in this Article to the contrary, Tenant's Expansion Right shall not be valid unless given in strict compliance with the requirements of this Article and shall no longer be in effect if Tenant has been in default of this Lease beyond any applicable notice and grace period. Tenant's Notice of exercise must comply with the following requirements: (a) If the exercise is being made in response to a Notice of Bona Fide Offer, -21- the Notice of exercise shall be deemed to be for all of the space which is the subject of the Notice of Bona Fide Offer and must: (i) be given within 10 business days after Landlord's Notice of Bona Fide Offer; and (ii) state that the exercise is being made for the "Existing Rent Option" or "Bona Fide Offer Option"; or (b) if the exercise is being made in response to a Notice of Availability, the Notice of exercise must: (i) be given within 10 business days after Landlord's Notice of Availability; (ii) state whether the exercise is being made for the "Existing Rent Option" or the "Availability Terms Option"; (iii) designate the portion of the space referenced in the Notice of Availability to which Tenant is making the exercise; or (c) If the exercise is being made prior to a Notice of Bona Fide Offer for the space, the Notice of exercise shall be deemed to be for the "Existing Rent Option" and must: (i) be given within prior to the giving of any Notice of Bona Fide Offer for the space; and (ii) designate the portion of the space for which Tenant is making the exercise. 21.02 Finalization of Size and Configuration of Exercised Expansion Space. ------------------------------------------------------------------- If Tenant's exercise is pursuant to subparagraphs 21.01 (b) or (c) (in response to a Notice of Availability or prior to a Notice of Bona Fide Offer on initial rent-up) and Tenant has elected to take less than all of the Expansion Space then available to Tenant, Landlord shall have the right to adjust the size and perimeter configuration of the space designated by Tenant, but only to the least degree reasonably determined by Landlord such that the space not taken or rented by Tenant constitutes a commercially reasonably rentable configuration, with no material adverse impairment on account of the manner in which it has been separated from the space to be rented to Tenant. 21.03 Effect of Type of Exercise. As set forth in paragraph 21.01, -------------------------- Tenant's exercise may have been for any one of the following options: the "Bona Fide Offer Option"; the "Existing Rent Option" or the "Availability Terms Option". The effect of each of these options is described as follows: (a) The Bona Fide Offer Option means that Tenant has elected to accept the terms set forth in Landlord's Notice of Bona Fide Offer to Tenant, as provided in Article XX, in which event, the provisions of Article XX shall control with respect to Tenant's leasing of the space. (b) The "Existing Rent Option" means, with respect to the space to which Tenant's exercise applies: that Landlord shall provide Tenant with "Expansion Space Construction Work" in accordance with the provisions of paragraph 21.04; the -22- Commencement Date for such space shall be the date the Commencement Date would have been for such space had it been a part of the original Leased Premises and the Commencement Date had been determined in accordance with paragraph 19.04 and 19.02; and, upon the Commencement Date for the Expansion Space: (i) the Leased Premises shall be increased by addition of the Expansion Space; (ii) the Basic Minimum Annual Rent shall be increased by the Tenant's Net Rentable Area for the Expansion Space multiplied by the per square foot rental rate in effect as of the Commencement Date for the Expansion Space; (iii) the Initial Term of the Lease shall be extended to expire at the end 120th full calendar month from and after the Commencement Date for the Expansion Space; (iv) Tenant's Net Rentable Area and Tenant's Pro Rata Share shall be adjusted for addition of the Tenant's Net Rentable Area of the Expansion Space; and (v) any other item based upon the Tenant's Net Rentable Area or Tenant's Pro Rata Share shall be adjusted accordingly. (b) The "Availability Terms Option" means that Tenant has agreed to rent the Expansion Space to which Tenant's exercise applies on the same business terms contained in Landlord's Notice of Availability on the same legal terms as contained in this Lease (which, for example, would not include the Article XX or XXI rights, unless contained in Landlord's Notice of Availability), and with the further provision that any default by Tenant on any lease with Landlord shall constitute a default by Tenant on any other lease with Landlord. At any time after election of the Availability Terms Option, Landlord may deliver a proposed formal lease to Tenant embodying the business and legal terms to apply to the leasing. Tenant must, within 10 business days after Landlord's delivery to Tenant of such Lease, return the lease, duly executed by Tenant, otherwise Tenant shall have no further rights under Article XXI or XX. 21.04 Fit-Out Work To Be Performed By Landlord For Expansion Space. If ------------------------------------------------------------ Tenant has elected the Existing Rent Option, then Tenant shall cooperate with Landlord in developing construction plans for the Expansion Space (the "Expansion Space Construction Plans"), such that the same may be finalized within two weeks after finalization of the perimeter configuration of the space for which Tenant has exercised the Expansion Right. Landlord will provide Tenant with the free of charge use of Landlord's architectural department for the development of the Expansion Space Construction Plans, and Tenant agrees to provide prompt turn-around time in making any decisions required of Tenant for the finalization of the Expansion Space Construction Plans by the above date. The Expansion Space Construction Plans shall be subject to Landlord's approval, which shall not be unreasonably withheld or delayed. Landlord shall carry out the construction work for Expansion Space (the "Expansion Space Construction Work") in the same manner as is provided for the Leased Premises Construction Work in Article XIX. All of the Expansion Space Construction Work as is consistent with "Building Standard Work" in Article XIX shall be carried out by Landlord at Landlord's sole cost and expense. If the Expansion Space Construction Plans call for Landlord to perform any work in excess of Building Standard Work ("Extra Expansion Space Construction Work"), Tenant be responsible to pay for the cost of the same in the same manner as is provided for any Extra Leased Premises Construction Work -23- in Article XIX. 22.05 Rental Adjustment for Expansion Space Added Pursuant to Existing ---------------------------------------------------------------- Rent Option. If any Expansion Space is added to the Leased Premises pursuant to - ----------- the Existing Rent Option and the Commencement Date for such space occurs at any time after the fifth anniversary of the original Commencement Date of this Lease, the Basic Minimum Annual Rent for the Leased Premises shall be adjusted on the 10th anniversary of the original Commencement Date and every 5 years thereafter to an amount equal to the per square foot Basic Minimum Annual Rent in effect immediately prior to the adjustment, increased by the percentage increase in the CPI over the five year period ending three months immediately prior to the adjustment date. The "CPI" is defined in paragraph 4.03. This agreement shall inure for the benefit and be binding upon the parties hereto, their respective heirs, representatives, successors and assigns, except where provided to the contrary by express provisions contained herein. IN WITNESS WHEREOF, the parties have hereunto set their hands and seals as of the day and year first above written. TranSwitch Corporation by /s/ Michael McCoy ---------------------------- Three Enterprise Drive - Shelton LLC by /s/ Robert D. Scinto ---------------------------- Robert D. Scinto, a member -24- State of _______________________ ss City/Town of __________________________ County of _______________________ Personally appeared _________________ , signer and sealer of the foregoing instrument, who acknowledged himself to be the ________________ of TranSwitch Corporation and the execution to be his or her free act and deed and the duly authorized free act and deed of TranSwitch Corporation, before me, this ________ day of _________________ 1996. ________________________________ Commissioner of the Superior Court/Notary Public State of Connecticut ss City/Town of Shelton County of Fairfield Personally appeared Robert D. Scinto, signer and sealer of the foregoing instrument, who acknowledged himself to be a member of Three Enterprise Drive - Shelton LLC and the execution to be his or her free act and deed and the duly authorized free act and deed of Three Enterprise Drive - Shelton LLC, before me, this 2nd day of December 1996. /s/ Eleanor M. Choate ------------------------------- Notary Public Eleanor M. Choate Notary Public My Commission Expires July 31, 1998 -25- EXHIBIT A. Sheet 1 TranSwitch Corporation Three Enterprise Drive Shelton, Connecticut first floor Leased Premises EXHIBIT A, Sheet 2 TranSwitch Corporation Three Enterprise Drive Shelton, Connecticut second floor Leased Premises [FLOOR PLAN APPEARS HERE] EXHIBIT B All that certain piece or parcel of land, together with the buildings and improvements thereon, situated in Shelton, Connecticut and shown and described as Lot No. 5 on a certain map entitled, "Section Three Subdivision Plan of property on Bridgeport Avenue (Old Route 8) & Commerce Drive, Shelton, Connecticut", prepared for Robert D. Scinto by J & D Kasper & Associates December 6, 1984 and on file in the Shelton Land Records as Map No. 2252. Said property is also known as Three Enterprise Drive. EXHIBIT C Rules and Regulations As of the execution of the Lease, the rules and regulations are as follows: 1. The delivery or shipping of merchandise, supplies and fixtures to and from the Leased Premises and the Project shall be subject to such rules and regulations as in the reasonable judgment of the Landlord are necessary for the proper operation of the Leased Premises and Project and shall not unreasonably interfere with other tenant's use of the Project. 2. All garbage and refuse shall be kept in the kind of container specified and shall be placed outside of the Leased Premises, prepared for collection at the location, in the manner and at the times specified by Landlord. 3. No aerial shall be erected on the roof or exterior wall of the Leased Premises or in any other area of the Project exterior to the Leased Premises without, in each instance, the prior Consent of the Landlord, which may be withheld in Landlord's absolute discretion, unless the party installing the aerial shall be entitled to the same under such party's lease. Any aerial so installed without such written consent shall be subject to removal without notice at any time. 4. No electronic interference shall emanate from the Leased Premises which shall interfere with any reception or emission of any other person's telephone signal, television signal, radio signal, data signal or electricity. 5. No loud speakers, televisions, phonographs, radios or other devices shall be used in a manner so as to be heard or seen outside of the Leased Premises without the prior written consent of the Landlord. 6. To the extent that Tenant has thermostatic control of the temperature in the Leased Premises, Tenant shall keep the Leased Premises at a temperature sufficiently high to prevent freezing of water pipes and fixtures. 7. The plumbing facilities shall not be used for any other purposes than that for which they are constructed, and no foreign substance of any kind shall be thrown therein, other than objects made for disposal in such plumbing facilities. The reasonable expense of any breakage, stoppage, or damage resulting from a violation of this provision shall be borne by Tenant who, or whose employees, agents or invitees have, caused such damage. 8. Tenant shall not burn any trash or garbage of any kind in or about the Leased Premises or Project. 9. Tenant and Tenant's employees and agents shall not solicit business in the Parking areas or other General Common Area, nor shall Tenant distribute any handbills or other advertising matter in automobiles parked in the parking area or other General Common Area. EX-21.1 3 SUBSIDIARY OF THE COMPANY EXHIBIT 21.1 SUBSIDIARY TranSwitch Europe N.V./S.A. EX-23.1 4 CONSENT OF KPMG PEAT MARWICK LLP EXHIBIT 23.1 REPORT AND CONSENT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders of TranSwitch Corporation: The audits referred to in our report dated February 4, 1998 included the related financial statement schedule as of December 31, 1997, and for each of the years in the three-year period ended December 31, 1997, included in the Company's Annual Report on Form 10-K. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. We consent to the use of our reports included herein and incorporated by reference in the Registration Statements of TranSwitch Corporation on Form S-8 (No. 33-94234) and Form S-3 (No. 333-40897), relating to the consolidated balance sheets of TranSwitch Corporation and subsidiary as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows and related financial statement schedule for each of the years in the three-year period ended December 31, 1997, which reports appear in the 1997 Annual Report on Form 10-K of TranSwitch Corporation. KPMG Peat Marwick LLP Stamford, Connecticut March 31, 1998 EX-27.1 5 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS 12-MOS DEC-31-1997 DEC-31-1997 OCT-1-1997 JAN-1-1997 DEC-31-1997 DEC-31-1997 20,508 20,508 1,110 1,110 4,746 4,746 218 218 4,812 4,812 31,773 31,773 9,539 9,539 5,723 5,723 36,589 36,589 6,125 6,125 0 0 0 0 14,357 14,357 12 12 15,792 15,792 36,589 36,589 8,334 27,084 8,334 27,084 3,249 15,830 4,921 18,163 0 0 0 0 0 0 433 (1,873) 0 0 433 (1,873) 0 0 0 0 0 0 433 (1,873) 0.04 (0.15) 0.03 (0.15)
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