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Table of Contents
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
 
x
 
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
for the quarterly period ended September 30, 2002
or
 
¨
 
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
for the transition period from _______ to _______             
 
Commission File Number 0-25996
 
TRANSWITCH CORPORATION
(Exact name of Registrant as Specified in its Charter)
 
Delaware
  
06-1236189
(State of Incorporation)
  
(I.R.S. Employer Identification Number)
 
3 Enterprise Drive
Shelton, Connecticut 06484
(Address of Principal Executive Offices)
 
Telephone (203) 929-8810
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes    x    No    ¨
 
Securities registered pursuant to Section 12(b) of the Act: None
 
Securities registered pursuant to Section 12(g) of the Act:
 
Common Stock, par value $.001 per share, outstanding at October 31, 2002; 90,076,386
Series A Junior Participating Preferred Stock Purchase Rights
4½% Convertible Notes due 2005 outstanding at October 31, 2002; $114,113,000

Table of Contents
 
TranSwitch Corporation
 
FORM 10-Q
 
For the Quarter Ended September 30, 2002
 
Table of Contents
 
PART I.    FINANCIAL INFORMATION
   
Page
Item 1.    Financial Statements (unaudited)
     
  
3
  
4
  
5
  
6
  
18
  
52
Item 4.     Controls and Procedures
  
52
PART II.    OTHER INFORMATION
     
  
53
                 Signatures
   
54
                 Certifications
   
55
 

2

Table of Contents
TRANSWITCH CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
 
(in thousands, except share and per share amounts)
 
    
September 30,
2002
(unaudited)
     
December 31,
2001(1)
  
ASSETS
                  
Current assets:
                  
Cash and cash equivalents
   
$
176,754
 
   
$
370,248
 
Short-term investments
   
 
24,206
 
   
 
39,344
 
Accounts receivable, net
   
 
2,498
 
   
 
3,525
 
Inventories
   
 
3,798
 
   
 
8,227
 
Deferred income taxes
   
 
—  
 
   
 
3,023
 
Prepaid expenses and other current assets
   
 
4,159
 
   
 
2,936
 
    
  
Total current assets
   
 
211,415
 
   
 
427,303
 
Long-term investments (marketable securities)
   
 
19,579
 
   
 
26,582
 
Property and equipment, net
   
 
18,643
 
   
 
18,946
 
Deferred income taxes
   
 
74
 
   
 
65,536
 
Goodwill
   
 
—  
 
   
 
54,547
 
Patents, net of accumulated amortization
   
 
1,710
 
   
 
1,560
 
Investments in non-publicly traded companies
   
 
2,879
 
   
 
9,791
 
Deferred financing costs, net
   
 
2,397
 
   
 
8,092
 
Other assets
   
 
3,642
 
   
 
4,007
 
    
  
Total assets
   
$
260,339
 
   
$
616,364
 
    
  
LIABILITIES AND STOCKHOLDERS’ EQUITY
                  
Current liabilities:
                  
Accounts payable
   
$
1,770
 
   
$
3,960
 
Accrued expenses and other current liabilities
   
 
9,355
 
   
 
9,149
 
Accrued compensation and benefits
   
 
1,827
 
   
 
2,717
 
Accrued sales returns, allowances and stock rotation
   
 
1,517
 
   
 
2,300
 
Accrued interest
   
 
262
 
   
 
4,120
 
Deferred revenue
   
 
—  
 
   
 
51
 
Restructuring liabilities
   
 
2,916
 
   
 
2,999
 
    
  
Total current liabilities
   
 
17,647
 
   
 
25,296
 
Restructuring liabilities – long term
   
 
25,462
 
   
 
26,925
 
4½% Convertible Notes due 2005
   
 
114,113
 
   
 
314,050
 
    
  
Total liabilities
   
 
157,222
 
   
 
366,271
 
    
  
Stockholders’ equity:
                  
Common stock $.001 par value; authorized 300,000,000 shares; issued and
outstanding, 90,078,203 shares at September 30, 2002 and 90,932,469
shares at December 31, 2001
   
 
90
 
   
 
91
 
Additional paid-in capital
   
 
289,990
 
   
 
293,902
 
Accumulated other comprehensive loss
   
 
(79
)
   
 
(303
)
Accumulated deficit
   
 
(186,884
)
   
 
(39,386
)
Less 1,010,000 shares of common stock in treasury, at cost
   
 
—  
 
   
 
(4,211
)
    
  
Total stockholders’ equity
   
 
103,117
 
   
 
250,093
 
    
  
Total liabilities and stockholders’ equity
   
$
260,339
 
   
$
616,364
 
    
  
 
(1)
 
The 2001 figures have been adjusted for the effect of the change in the investment in OptiX Networks, Inc. from the cost to the equity method of accounting.
 
See accompanying notes to unaudited consolidated financial statements

3

Table of Contents
TRANSWITCH CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(unaudited)
 
    
Three Months Ended
September 30,
     
Nine Months Ended
September 30,
  
    
2002
     
2001(1)
     
2002
     
2001(1)
  
Net revenues:
                                    
Product revenues
   
$
3,635
 
   
$
4,486
 
   
$
12,430
 
   
$
53,773
 
Service revenues
   
 
23
 
   
 
16
 
   
 
579
 
   
 
411
 
    
  
  
  
Total net revenues
   
 
3,658
 
   
 
4,502
 
   
 
13,009
 
   
 
54,184
 
Cost of revenues:
                                    
Cost of product revenues
   
 
1,604
 
   
 
1,163
 
   
 
4,149
 
   
 
19,065
 
Provision for excess inventories
   
 
4,832
 
   
 
—  
 
   
 
4,832
 
   
 
24,694
 
Cost of service revenues
   
 
—  
 
   
 
—  
 
   
 
846
 
         
    
  
  
  
Total cost of revenues
   
 
6,436
 
   
 
1,163
 
   
 
9,827
 
   
 
43,759
 
    
  
  
  
Gross profit (loss)
   
 
(2,778
)
   
 
3,339
 
   
 
3,182
 
   
 
10,425
 
Operating expenses:
                                    
Research and development
   
 
13,972
 
   
 
11,658
 
   
 
40,487
 
   
 
34,638
 
Marketing and sales
   
 
3,393
 
   
 
4,712
 
   
 
10,070
 
   
 
18,222
 
General and administrative
   
 
1,618
 
   
 
2,026
 
   
 
5,814
 
   
 
6,547
 
Amortization of goodwill
   
 
—  
 
   
 
630
 
   
 
—  
 
   
 
1,806
 
Impairment of goodwill
   
 
59,901
 
   
 
—  
 
   
 
59,901
 
   
 
—  
 
Restructuring charge and asset impairments
   
 
5,532
 
   
 
1,891
 
   
 
4,052
 
   
 
1,891
 
Purchased in-process research and development
   
 
—  
 
   
 
22,000
 
   
 
2,000
 
   
 
22,000
 
    
  
  
  
Total operating expenses
   
 
84,416
 
   
 
42,917
 
   
 
122,324
 
   
 
85,104
 
    
  
  
  
Operating loss
   
 
(87,194
)
   
 
(39,578
)
   
 
(119,142
)
   
 
(74,679
)
Other income (expense):
                                    
Impairment of investments in non-publicly traded companies
   
 
(7,719
)
   
 
—  
 
   
 
(7,719
)
   
 
—  
 
Equity in net losses of affiliates
   
 
(733
)
   
 
(501
)
   
 
(1,848
)
   
 
(1,240
)
Interest (expense) income:
                                    
Interest income
   
 
1,395
 
   
 
5,004
 
   
 
5,306
 
   
 
20,288
 
Interest expense
   
 
(1,422
)
   
 
(4,808
)
   
 
(6,828
)
   
 
(16,407
)
    
  
  
  
Interest (expense) income, net
   
 
(27
)
   
 
196
 
   
 
(1,522
)
   
 
3,881
 
    
  
  
  
Total other income (expense)
   
 
(8,479
)
   
 
(305
)
   
 
(11,089
)
   
 
2,641
 
    
  
  
  
Loss before income taxes and extraordinary gain
   
 
(95,673
)
   
 
(39,883
)
   
 
(130,231
)
   
 
(72,038
)
Income tax provision (benefit)
   
 
61,478
 
   
 
(6,215
)
   
 
49,752
 
   
 
(17,210
)
    
  
  
  
Loss before extraordinary gain
   
 
(157,151