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EX-23.1 - TRANSWITCH CORP /DE | v180775_ex23-1.htm |
AS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION ON APRIL 13, 2010
Registration
No. [_____]
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
S-1
REGISTRATION
STATEMENT
UNDER
THE
SECURITIES ACT OF 1933
TRANSWITCH
CORPORATION
(Exact
name of registrant as specified in its charter)
Delaware
|
06-1236189
|
|||
(State
or Other Jurisdiction
of
Incorporation or Organization)
|
(IRS
Employer
Identification
No.)
|
Three
Enterprise Drive
Shelton,
Connecticut 06484
(203)
929-8810
(Address,
including zip code, and telephone number, including area code, of registrant’s
principal executive offices)
Dr.
M. Ali Khatibzadeh
President
and Chief Executive Officer
TranSwitch
Corporation
Three
Enterprise Drive
Shelton,
Connecticut 06484
(203)
929-8810
(Name, address, including
zip code, and telephone number, including area code, of agent for
service)
Copies
of communications to:
Timothy
C. Maguire, Esq.
Jessica
H. Collins, Esq.
Brown
Rudnick LLP
One
Financial Center
Boston,
Massachusetts 02111
Telephone:
(617) 856-8200
Telecopy:
(617) 856-8201
Approximate date of commencement of
proposed sale to the public: As soon as practicable after the effective
date of this Registration Statement.
If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the
following box:
x
If this
Form is filed to register additional shares for an offering pursuant to Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. ¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering.
¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering.
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer ¨
|
Accelerated
filer
|
x
|
||||
Non-accelerated
filer ¨
|
(Do
not check if a smaller reporting company)
|
Small
reporting company
|
¨
|
CALCULATION
OF REGISTRATION FEE
Title
of each Class of Securities to be Registered (1)
|
Amount to be
Registered
(Shares)
|
Proposed
Maximum
Offering Price
per
Share
|
Proposed
Maximum
Aggregate
Offering Price (3)
|
Amount
of
Registration
Fee
|
||||||||||||
Rights
to purchase shares of Common Stock, no par value (2)
|
— | — | — | $ | 0.00 | |||||||||||
Common
Stock, par value $0.001 per share, underlying the rights
|
— | — | $ | 10,000,000 | $ | 713.00 |
(1)
|
This
registration statement relates to (a) the subscription rights to purchase
Common Stock and (b) the shares of Common Stock deliverable upon the
exercise of the subscription rights pursuant to the rights offering
described in this Registration Statement on Form
S-1.
|
(2)
|
The
subscription rights are being issued without consideration. Pursuant to
Rule 457(g), no separate registration fee is payable with respect to the
subscription rights being offered hereby since the subscription rights are
being registered in the same registration statement as the securities to
be offered pursuant thereto.
|
(3)
|
Estimated
solely for the purpose of calculating the registration fee in accordance
with Rule 457(o) of the Securities Act of 1933, as
amended.
|
The
Registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until the Registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
SUBJECT
TO COMPLETION, DATED APRIL 13,
2010
PRELIMINARY
PROSPECTUS
[—] SHARES OF
COMMON STOCK
SUBSCRIPTION
RIGHTS TO PURCHASE AN AGGREGATE OF UP TO [—] SHARES OF
COMMON STOCK AT $[—] PER
SHARE
We are
distributing, at no charge, to holders of our common stock subscription rights
to purchase up to [—] shares of our
common stock. We refer to this offering as the “rights offering.” In the rights
offering, you will receive one subscription right for each full share of common
stock owned at 5:00 p.m., Eastern Time, on[—], 2010, the
record date of the rights offering.
Each
subscription right will entitle you to purchase [—] shares of our
common stock at a subscription price of $[—] per share,
which we refer to as the basic subscription right. If you fully exercise all of
your basic subscription rights, and other stockholders do not fully exercise
their basic subscription rights, you will be entitled to exercise an
over-subscription privilege to purchase a portion of the unsubscribed shares at
the same price of $[—] per share,
subject to proration and subject, further, to reduction by us under certain
circumstances. To the extent you properly exercise your over-subscription
privilege for an amount of shares that exceeds the number of the unsubscribed
shares available to you, any excess subscription payments will be returned
promptly, without interest or penalty.
The
subscription rights will expire if they are not exercised by 5:00 p.m., Eastern
Time, on [—], 2010, but we
may extend the rights offering for additional periods ending no later than
[—], 2010.
Our board of directors may cancel the rights offering for any reason at any time
before it expires. If we cancel the rights offering, all subscription payments
received will be returned promptly, without interest or penalty.
We have
agreed with Computershare Trust Company, N.A. to serve as the
subscription agent for the rights offering. The subscription agent will hold in
escrow the funds we receive from subscribers until we complete or cancel the
rights offering. We have agreed with Georgeson, Inc. to serve as information
agent for the rights offering.
OUR
BOARD OF DIRECTORS IS NOT MAKING A RECOMMENDATION REGARDING YOUR EXERCISE OF THE
SUBSCRIPTION RIGHTS. You should carefully consider whether to exercise your
subscription rights before the rights offering expires. All exercises of
subscription rights are irrevocable.
THE
PURCHASE OF SHARES OF OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU
SHOULD READ CAREFULLY THE SECTION ENTITLED “RISK
FACTORS”
BEGINNING ON PAGE 9 OF THIS PROSPECTUS.
Our
common stock is traded on The NASDAQ Capital Market under the symbol
“TXCC.” The last reported sales price of our common stock on April 9,
2010 was $2.87 per share. The shares of common stock issued in the rights
offering will also be listed on The Nasdaq Capital Market under the same ticker
symbol.
This is
not an underwritten offering. Our shares of common stock are being offered
directly by us without the services of an underwriter or selling
agent.
If you
have any questions or need further information about this rights offering,
please call Georgeson, Inc., our information agent for the rights offering, at
(212) 440-9800 (call collect) or at (888) 867-6856
(toll-free).
The
date of this prospectus is [—],
2010.
TABLE
OF CONTENTS
ABOUT
THIS PROSPECTUS
|
1 | |
SPECIAL
NOTE REGARDING FORWARD-LOOKING INFORMATION
|
1 | |
QUESTIONS
AND ANSWERS RELATING TO THE RIGHTS OFFERING
|
2 | |
SUMMARY
|
6 | |
RISK
FACTORS
|
9 | |
CAPITALIZATION
|
17 | |
DETERMINATION
OF SUBSCRIPTION PRICE
|
18 | |
DILUTION
|
19 | |
SELECTED
CONSOLIDATED FINANCIAL DATA
|
20 | |
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
21 | |
PRICE
RANGE OF OUR COMMON STOCK AND DIVIDEND INFORMATION
|
30 | |
OFFICER
AND DIRECTORS INFORMATION
|
32 | |
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
37 | |
COMPENSATION
AND OTHER INFORMATION CONCERNING NAMED EXECUTIVE OFFICERS
|
43 | |
THE
RIGHTS OFFERING
|
53 | |
USE
OF PROCEEDS
|
60 | |
PLAN
OF DISTRIBUTION
|
61 | |
DESCRIPTION
OF COMMON STOCK
|
62 | |
CERTAIN
ANTI-TAKEOVER PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BY-LAWS
AND DELAWARE LAW
|
63 | |
LEGAL
MATTERS
|
64 | |
EXPERTS
|
64 | |
WHERE
YOU CAN FIND MORE INFORMATION
|
65 | |
INCORPORATION
OF DOCUMENTS BY REFERENCE
|
65 | |
CONSOLIDATED
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULE
|
F-1 - F-8 |
-i-
Important
Notice about the Information Presented in this Prospectus
You
should rely only on the information contained or incorporated by reference in
this prospectus or any applicable prospectus supplement. We have not authorized
any other person to provide you with different information. If anyone provides
you with different or inconsistent information, you should not rely on it. For
further information, see the section of this prospectus entitled “Where You Can
Find More Information.” We are not making an offer to sell these securities in
any jurisdiction where the offer or sale is not permitted.
You
should not assume that the information appearing in this prospectus or any
applicable prospectus supplement is accurate as of any date other than the date
on the front cover of this prospectus or the applicable prospectus supplement,
or that the information contained in any document incorporated by reference is
accurate as of any date other than the date of the document incorporated by
reference, regardless of the time of delivery of this prospectus or any
prospectus supplement or any sale of a security. Our business, financial
condition, results of operations and prospects may have changed since such
dates.
ABOUT
THIS PROSPECTUS
We
obtained statistical data, market data, and other industry data and forecasts
used throughout this prospectus from market research, publicly available
information, and industry publications. Industry publications generally state
that they obtain their information from sources that they believe to be
reliable, but they do not guarantee the accuracy or completeness of the
information. Similarly, while we believe that the statistical data, industry
data, and forecasts and market research are reliable, we have not independently
verified the data, and we do not make any representation as to the accuracy of
the information. We have not sought the consent of the sources to refer to their
reports appearing in this prospectus.
Unless
the context otherwise requires, the terms “TranSwitch,” “the
Company,” “our company,” “we,” “us,” “our” and similar names
refer collectively to TranSwitch Corporation and its
subsidiaries.
SPECIAL
NOTE REGARDING FORWARD-LOOKING INFORMATION
This
prospectus includes and incorporates forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”). All statements, other than statements of
historical facts, included or incorporated in this prospectus regarding our
strategy, future operations, financial position, future revenues, projected
costs, prospects, plans and objectives of management are forward-looking
statements. The words “anticipates,” “believes,” “estimates,” “expects,”
“intends,” “may,” “plans,” “projects,” “will,” “would” and similar expressions
are intended to identify forward-looking statements, although not all
forward-looking statements contain these identifying words. We cannot guarantee
that we actually will achieve the plans, intentions or expectations disclosed in
our forward-looking statements and you should not place undue reliance on our
forward-looking statements. There are a number of important factors that could
cause our actual results to differ materially from those indicated by these
forward-looking statements. These important factors include the factors that we
identify in the documents we incorporate by reference in this prospectus, as
well as other information we include or incorporate by reference in this
prospectus and any prospectus supplement. See “Risk Factors.” You should read
these factors and other cautionary statements made in this prospectus and any
accompanying prospectus supplement, and in the documents we incorporate by
reference as being applicable to all related forward-looking statements wherever
they appear in the prospectus and any accompanying prospectus supplement, and in
the documents incorporated by reference. We do not assume any obligation to
update any forward-looking statements made by us.
-1-
QUESTIONS
AND ANSWERS RELATING TO THE RIGHTS OFFERING
The
following are examples of what we anticipate will be common questions about the
rights offering. The answers are based on selected information
included elsewhere in this prospectus. The following questions and answers do
not contain all of the information that may be important to you and may not
address all of the questions that you may have about the rights offering. This
prospectus and the documents incorporated by reference into this prospectus
contain more detailed descriptions of the terms and conditions of the rights
offering and provide additional information about us and our business, including
potential risks related to the rights offering, the shares of our common stock
offered in the rights offering and our business.
What
is the rights offering?
We are
distributing, at no charge, to holders of our shares of common
stock, subscription rights to purchase shares of our common stock at
a price of $[— ] per whole
share. You will receive one subscription right for each share of common stock
you owned as of 5:00 p.m., Eastern Time, on [—], 2010, the
record date for the rights offering. Each subscription right entitles the holder
to a basic subscription right and an over-subscription privilege, as described
below.
What
is the basic subscription right?
The basic
subscription right gives our stockholders the opportunity to purchase an
aggregate of [—] shares of our
common stock at a subscription price of $[— ] per share.
For each share you owned as of the record date for the rights offering, your
basic subscription right gives you the opportunity to purchase [— ] shares. For
example, if you owned 100 shares of common stock as of the record date, you
would have received 100 subscription rights and would have the right to purchase
[— ]
shares of our common stock for $[— ] per full
share (or a total payment of $[—]). You may
exercise all or a portion of your basic subscription rights, or you may choose
not to exercise any subscription rights at all. If you exercise less than all of
your basic subscription rights, you will not be entitled to purchase shares
under your over-subscription privilege.
We will
not issue or pay cash in place of fractional rights or fractional shares.
Instead, we will round up any fractional rights to the nearest whole right, or
any resulting fractional shares to the nearest whole share. If you hold a
TranSwitch stock certificate, the number of shares you may purchase pursuant to
your basic subscription rights is indicated on the enclosed rights certificate.
If you hold your shares in the name of a broker, dealer, custodian bank or other
nominee who uses the services of the Depository Trust Company (“DTC”), you will
not receive a rights certificate. Instead, DTC will issue one subscription right
to your nominee record holder for each share of our common stock that you own as
of the record date. If you are not contacted by your nominee, you should contact
your nominee as soon as possible.
What
is the over-subscription privilege?
If you
purchase all of the shares available to you pursuant to your basic subscription
rights, you may also choose to purchase a portion of any shares that our other
stockholders do not purchase through the exercise of their basic subscription
rights. You should indicate on your rights certificate, or the form provided by
your nominee if your shares are held in the name of a nominee, how many
additional shares you would like to purchase pursuant to your over-subscription
privilege. As described below, this offering is limited to an aggregate
subscription price of $10,000,000.
If
sufficient shares are available, we will seek to honor your over-subscription
request in full. If over-subscription requests exceed the number of shares
available, however, we will allocate the available shares pro rata among the
stockholders exercising the over-subscription privilege in proportion to the
number of shares of our common stock each of those stockholders owned on the
record date, relative to the number of shares owned on the record date by all
stockholders exercising the over-subscription privilege. If this pro rata
allocation results in any stockholder receiving a greater number of shares than
the stockholder subscribed for pursuant to the exercise of the over-subscription
privilege, then such stockholder will be allocated only that number of shares
for which the stockholder oversubscribed, and the remaining shares will be
allocated among all other stockholders exercising the over-subscription
privilege on the same pro rata basis described above. The proration process will
be repeated until all shares have been allocated.
To
properly exercise your over-subscription privilege, you must deliver to the
subscription agent the subscription payment related to your over-subscription
privilege before the rights offering expires. If you send payment by uncertified
check, payment will not be deemed to have been delivered to the subscription
agent until the check has cleared. Because we will not know the total number of
unsubscribed shares before the rights offering expires, if you wish to maximize
the number of shares you purchase pursuant to your over-subscription privilege,
you will need to deliver payment in an amount equal to the aggregate
subscription price for the maximum number of shares that may be available to you
(i.e., the aggregate payment for both your basic subscription rights and for any
additional shares you desire to purchase pursuant to your over-subscription
privilege). See “The Rights
Offering—The Subscription Rights—Over-Subscription Privilege.” Any excess
subscription payments received by the subscription agent will be returned
promptly, without interest or penalty.
We will
not issue or pay cash in place of fractional rights or fractional shares.
Instead, we will round up any fractional rights to the nearest whole right, or
any resulting fractional shares to the nearest whole share.
Computershare
Trust Company, N.A., our subscription agent for the rights offering, will
determine the over-subscription allocation based on the formula described
above.
What
happens if holders exercise basic subscription rights or over-subscription
rights to purchase more than [—] shares in
this offering?
If the
rights holders exercise their basic subscription rights to purchase more than
[—]
shares, we will allocate the [—]available
shares pro rata among rights holders who exercise their basic subscription
rights, based on the number of shares they own on the record date. If the rights
holders exercise their basic subscription rights to purchase less than [—] shares, we
will allocate the remaining available shares pro rata among rights holders who
exercise their over-subscription rights, based on the number of shares they own
on the record date. The allocation process will assure that the total number of
shares available for basic subscriptions and over-subscriptions is distributed
on a pro rata basis. The percentage of shares each rights holder may acquire
will be rounded up to result in delivery of whole shares.
Payments
for basic subscription and over-subscription rights will be deposited upon
receipt by the subscription agent and held in a segregated account with the
subscription agent pending a final determination of the number of shares to be
issued pursuant to the basic and over-subscription rights. If the prorated
amount of shares allocated to you in connection with your basic subscription and
over-subscription right is less than your basic subscription and
over-subscription request, then the excess funds held by the subscription agent
on your behalf will be promptly returned to you without interest or penalty. We
will issue certificates or direct registration system statement (“DRS”)
representing your shares of our common stock, or credit your account at your
nominee holder with shares of our common stock, electronically in registered,
book-entry form only on our records or on the records of our transfer agent,
Computershare Trust Company, N.A., that you purchased pursuant to your basic
subscription and over-subscription rights as soon as practicable after the
rights offering has expired and all proration calculations, reductions, and
additions contemplated by the terms of the rights offering have been
effected.
Are
there any limits on the number of shares I may purchase in the rights offering
or own as a result of the rights offering?
You may
only purchase the number of whole shares of common stock purchasable upon
exercise of the number of basic subscription rights distributed to you in the
rights offering, plus the maximum amount of over- subscription privilege shares
available, if any. Accordingly, the number of shares of common stock that you
may purchase in the rights offering is limited by the number of shares of our
common stock you held on the record date and by the extent to which other
stockholders exercise their subscription rights and over-subscription
privileges, which we cannot determine prior to completion of the rights
offering. We reserve the right to reject any or all subscriptions not
properly submitted or the acceptance of which would, in the opinion of our
counsel, be unlawful or trigger the “poison pill” through the purchase of 15% or
more of our outstanding common stock as set forth in our rights agreement dated
as of October 1, 2001, as amended on February 24, 2006 with Computershare Trust
Company, N.A., as rights agent.
-2-
Why
are we engaging in a rights offering and how will we use the proceeds from the
rights offering?
The
purpose of this rights offering is to raise equity capital in a cost-effective
manner that gives all of our stockholders the opportunity to
participate. The net proceeds will be used for working capital and
other general corporate purposes. Working capital and other general corporate
purposes may include research and development expenditures, capital expenditures
and any other purpose that we may specify in any prospectus supplement,
including the repayment of up to $7.5 million principal amount outstanding of
certain indebtedness of the Company under our 5.45% Convertible Notes due
2011. See “Use of Proceeds.”
Our board
of directors has chosen the structure of a rights offering to raise capital to
allow existing stockholders to purchase additional shares of our common stock
based on their pro rata ownership percentage.
How
was the $[—] per share
subscription price determined?
We
established a special committee, comprising of three members of our board
of directors, all of whom are independent directors. In determining the
subscription price, the special committee is considering a number of factors,
including:, the price at which our stockholders might be willing to participate
in the rights offering, historical and current trading prices for our common
stock, the need for capital and alternatives available to us for raising
capital, potential market conditions, and the desire to provide an opportunity
to our stockholders to participate in the rights offering on a pro rata basis.
In conjunction with its review of these factors, the special committee also
reviewed our history and prospects, including our past and present earnings, our
prospects for future earnings, and the outlook for our industry, our current
financial condition and considered data relating to a range of discounts to
market value represented by the subscription prices in various prior rights
offerings. The special committee determined that the subscription
price should be designed to provide an incentive to our current stockholders to
exercise their rights. The special committee also obtained advice
from Needham & Company, LLC, our financial advisor with respect to financing
alternatives, including the rights offering, on a number of these
issues.
The
subscription price does not necessarily bear any relationship to any other
established criteria for value. You should not consider the subscription price
as an indication of value of the Company or our common stock. You should not
assume or expect that, after the rights offering, our shares of common stock
will trade at or above the subscription price in any given time period. The
market price of our common stock may decline during or after the rights
offering, and you may not be able to sell the underlying shares of our common
stock purchased during the rights offering at a price equal to or greater than
the subscription price. You should obtain a current quote for our common stock
before exercising your subscription rights and make your own assessment of our
business and financial condition, our prospects for the future, and the terms of
this rights offering. See “The Rights Offering—Determination of
Subscription Price” in this prospectus.
Am
I required to exercise all of the subscription rights I receive in the rights
offering?
No. You
may exercise any number of your subscription rights or you may choose not to
exercise any subscription rights. If you do not exercise any subscription
rights, the number of shares of our common stock you own will not change.
However, if you choose not to exercise your subscription rights, your ownership
interest in TranSwitch will be diluted by other stockholder
purchases.
In
addition, if you do not exercise all of your basic subscription rights in full,
you will not be entitled to participate in the over-subscription privilege. See
“Risk Factors—If you do not exercise your subscription rights, your percentage
ownership in TranSwitch will be diluted.”
How
soon must I act to exercise my subscription rights?
If you
received a rights certificate and elect to exercise any or all of your
subscription rights, the subscription agent must receive your completed and
signed rights certificate and payment, including final clearance of any
uncertified check, before the rights offering expires on [— ], 2010, at
5:00 p.m., Eastern Time. If you hold your shares in the name of a broker,
dealer, custodian bank or other nominee, your nominee may establish a deadline
before the expiration of the rights offering by which you must provide it with
your instructions to exercise your subscription rights. Although our board of
directors may, in its discretion, extend the expiration date of the rights
offering, we currently do not intend to do so. Our board of directors may cancel
the rights offering at any time. If we cancel the rights offering, all
subscription payments received will be returned promptly, without interest or
penalty.
Although
we will make reasonable attempts to provide this prospectus to our stockholders,
the rights offering and all subscription rights will expire on the expiration
date, whether or not we have been able to locate each person entitled to
subscription rights.
May
I transfer my subscription rights?
Yes. You
may sell, transfer, or assign your subscription rights to anyone in whole or in
part. Subscription rights, however, will not be listed for trading on the NASDAQ
Capital Market, any other stock exchange or market, or on the OTC Bulletin
Board. Any transferee of any of your subscription rights must exercise those
rights in the same way and subject to the same conditions as apply to you when
exercising your rights, except as noted below.
Subscription
rights, whether or not transferred, must be exercised prior to the expiration of
the rights offering or they will terminate. It should be noted that the resale
restrictions of Rule 144 will apply to the transfer of subscription rights by
affiliates of the Company and to recipients of rights transferred from such
affiliates. The resale restrictions of Rule 144 also will apply to shares of
common stock purchased by affiliates as a result of the exercise of rights
associated with restricted shares. Please see the section of this prospectus
entitled “The Rights Offering - Rule 144” for additional
information.
Practically
speaking, the subscription agent must receive a proper transfer of a rights
certificate from a transferor by [— ], 2010 for
the transferee to be able to properly exercise the transferee’s own re-issued
rights certificate by [●], 2010.
Are
we requiring a minimum overall subscription to complete the rights
offering?
No. We
are not requiring an overall minimum subscription to complete the rights
offering. However, our board of directors reserves the right to cancel the
rights offering for any reason, including if we do not receive aggregate
subscriptions that we believe will satisfy our capital plans.
Can
the board of directors cancel or extend the rights offering?
Yes. Our
board of directors may decide to cancel the rights offering at any time and for
any reason before the rights offering expires. If our board of directors cancels
the rights offering, any money received from subscribing stockholders will be
returned promptly, without interest or penalty. We also have the right to extend
the rights offering for additional periods ending no later than [— ], 2010,
although we do not presently intend to do so.
Has
the board of directors made a recommendation to stockholders regarding the
rights offering?
No. Our
board of directors is making no recommendation regarding your exercise of the
subscription rights. Shareholders who exercise subscription rights will incur
investment risk on new money invested. We cannot predict the price at which our
shares of common stock will trade after the offering. The market price for our
common stock may decrease to an amount below the subscription price, and if you
purchase shares at the subscription price, you may not be able to sell the
underlying shares of our common stock in the future at the same price or a
higher price. You should make your decision based on your assessment of our
business and financial condition, our prospects for the future, the terms of the
rights offering and the information contained in, or incorporated by reference
into, this prospectus. See “Risk
Factors” for a discussion of some of the risks involved in investing in our
shares of common stock.
-3-
Will
our directors and executive officers participate in the rights
offering?
We expect
our directors and executive officers, together with their affiliates, to
participate in the rights offering at various levels, but they are not required
to do so. We expect
that one or more directors and or executive officers may exercise their
over-subscription privileges. Directors and executive officers, as a
group, have collectively committed to participate, such that we expect insider
ownership to remain at or above existing levels. If the offering is
fully subscribed, we anticipate that directors and executive officers will
purchase approximately $[—] of common
stock. Our directors and officers are entitled to participate in the offering on
the same terms and conditions applicable to all stockholders. See “The Rights
Offering—Directors’ and Executive Officers’ Participation.” Following the rights
offering, our directors and executive officers, together with their affiliates,
are expected to own approximately [— ] shares of
common stock, [— ]% of our
total outstanding shares of common stock if we sell [— ] shares in
the rights offering, including shares of our common stock they currently
own.
How
do I exercise my subscription rights if I own shares in certificate
form?
If you
hold a TranSwitch stock certificate and you wish to participate in the rights
offering, you must deliver a properly completed and signed rights certificate,
together with payment of the purchase price, to the subscription agent before
5:00 p.m., Eastern Time, on [— ], 2010. If
you send an uncertified check, payment will not be deemed to have been delivered
to the subscription agent until the check has cleared. In certain cases, you may
be required to provide signature guarantees.
Please
follow the delivery instructions on the rights certificate. Do not deliver
documents to TranSwitch. You are solely responsible for completing delivery to
the subscription agent of your subscription documents, rights certificate and
payment. You should allow sufficient time for delivery of your subscription
materials to the subscription agent so that the subscription agent receives them
by 5:00 p.m., Eastern Time, on [— ],
2010.
If you
send a payment that is insufficient to purchase the number of shares you
requested, or if the number of shares you requested is not specified in the
forms, the payment received will be applied to exercise your subscription rights
to the fullest extent possible based on the amount of the payment received,
subject to the availability of shares under the over-subscription privilege and
the elimination of fractional shares.
What
should I do if I want to participate in the rights offering but my shares are
held in the name of a broker, dealer, custodian bank or other
nominee?
If you
hold your shares of common stock through a broker, dealer, custodian bank or
other nominee, then your nominee is the record holder of the shares you own. The
record holder must exercise the subscription rights on your behalf. If you wish
to purchase our common stock through the rights offering, you should contact
your broker, dealer, custodian bank or nominee as soon as possible. Please
follow the instructions of your nominee. Your nominee may establish a deadline
that may be before the expiration date of the rights offering.
What form of payment is required to
purchase our common shares?
As
described in the instructions accompanying the rights certificate, payments
submitted to the subscription agent must be made in U.S. currency, by check or
bank draft payable to “Computershare Trust Company N.A. (acting as Subscription
Agent for TranSwitch Corporation),” drawn upon a U.S. bank. If you send payment
by uncertified check, payment will not be deemed to have been delivered to the
subscription agent until the check has cleared.
When
will I receive my new shares?
If you
purchase shares in the rights offering by submitting a rights certificate and
payment, we will mail you a share certificate or DRS statement as soon as
practicable after the completion of the rights offering. One share certificate
or DRS statement will be generated for each rights certificate processed. Until
your share certificate or DRS statement is received, you may not be able to sell
the shares acquired in the rights offering. If your shares as of the record date
were held by a custodian bank, broker, dealer or other nominee, and you
participate in the rights offering, you will not receive share certificates for
your new shares. Your custodian bank, broker, dealer or other nominee will be
credited with the shares of common stock you purchase in the rights offering as
soon as practicable after the completion of the rights offer.
After
I send in my payment and rights certificate to the subscription agent, may I
cancel my exercise of subscription rights?
No. All
exercises of subscription rights are irrevocable unless the rights offering is
cancelled, even if you later learn information that you consider to be
unfavorable to the exercise of your subscription rights. You should not exercise
your subscription rights unless you are certain that you wish to purchase shares
at the subscription price of $[— ] per
share.
Will
the shares of common stock that I receive upon exercise of my rights be tradable
on the NASDAQ Capital Market, other stock exchange or market, or on the OTC
Bulletin Board?
Our
shares of common stock are listed for trading on the NASDAQ Capital Market and
we expect that the shares of our common stock to be issued upon the exercise of
the rights also will be listed for trading on that market.
What
effects will the rights offering have on our outstanding common
stock?
Assuming
no other transactions by us involving our common shares other than as described
herein, and no options for our common shares are exercised, prior to the
expiration of the rights offering, if the offering is fully subscribed through
the exercise of the subscription rights before the expiration of the rights
offering, then an additional [— ] shares of
our common stock will be issued and outstanding after the closing of the rights
offering, for a total of [— ] shares of
common stock outstanding. As a result of the rights offering, the ownership
interests and voting interests of the existing stockholders that do not fully
exercise their basic subscription rights will be diluted. The exact number of
shares that we will issue in this rights offering will depend on the number of
shares that are subscribed for in the rights offering by our
stockholders.
On
December 31, 2009, we entered into a Common Stock Purchase Agreement with
Seaside 88, LP, a Florida limited partnership (“Seaside”), relating to the
offering and sale of up to 1,950,000 shares of our common
stock. The Common Stock Purchase Agreement requires us to issue
and sell, and Seaside to purchase, up to 75,000 shares of Common Stock once
every two (2) weeks, subject to the satisfaction of customary closing
conditions. As of April 13, 2010, we have sold 600,000 shares of our common
stock in such closings.
In
addition, if the subscription price of the shares is less than the market price
of our common stock it will likely reduce the market price per share of shares
you already hold.
How
much will TranSwitch receive from the rights offering?
If all of
the subscription rights (including all over-subscription privileges) are
exercised in full by our stockholders, we estimate that the net proceeds to us
from the rights offering, after deducting estimated offering expenses, will be
approximately $[—] million. It
is possible that we may not sell all or any of the shares being offered to
existing stockholders or that we will elect to cancel the rights offering
altogether.
-4-
Are
there risks in exercising my subscription rights?
Yes. The
exercise of your subscription rights involves risks. Exercising your
subscription rights involves the purchase of additional shares of common stock
and you should consider this investment as carefully as you would consider any
other investment. Among other things, you should carefully consider the risks
described under the heading “Risk Factors” beginning on page 9 of this
prospectus and in the documents incorporated by reference into this
prospectus.
If
the rights offering is not completed, will my subscription payment be refunded
to me?
Yes. The
subscription agent will hold all funds it receives in a segregated bank account
until completion of the rights offering. If we do not complete the rights
offering, all subscription payments received by the subscription agent will be
returned promptly, without interest or penalty. If you own shares in “street
name,” it may take longer for you to receive your subscription payment because
the subscription agent will return payments through the record holder of your
shares.
How
do I exercise my subscription rights if I live outside the United
States?
We will
not mail this prospectus or the rights certificates to stockholders whose
addresses are outside the United States or who have a military post office or a
foreign post office address. The subscription agent will hold the rights
certificates for their account. To exercise subscription rights, our foreign
stockholders must notify the subscription agent and timely follow the procedures
described in “The Rights Offering—Foreign Shareholders.”
What
fees or charges apply if I purchase shares in the rights offering?
We are
not charging any fee or sales commission to issue subscription rights to you or
to issue shares to you if you exercise your subscription rights. If you exercise
your subscription rights through a broker, dealer, custodian bank or other
nominee, you are responsible for paying any fees your record holder may charge
you.
What
are the U.S. federal income tax consequences of exercising my subscription
rights?
For U.S.
federal income tax purposes, you should not recognize income or loss in
connection with the receipt or exercise of subscription rights in the rights
offering. You should consult your tax advisor as to your particular tax
consequences resulting from the rights offering. For a detailed discussion, see
“Certain U.S. Federal Income Tax Consequences.”
What
effect will the rights offering have on holders of stock options?
Option
holders will not be eligible to participate in the rights offering with respect
to stock options that are unexercised as of the record date. The offering will
not affect the rights of option holders under our equity compensation plans and
relevant stock option agreement.
To
whom should I send my forms and payment?
If your
shares are held in the name of a broker, dealer, custodian bank or other
nominee, then you should send your subscription documents and subscription
payment to that record holder. If you are the record holder, then you should
send your subscription documents, rights certificate and subscription payment by
mail or overnight courier to:
By
mail:
|
|
By
overnight courier:
|
Computershare
Trust Company, N.A.
Attn: Corporate Actions Voluntary Offer P.O. Box 43011 Providence, RI 02940-3011 |
Computershare
Trust Company, N.A.
Attn: Corporate Actions Voluntary Offer 250 Royall Street Suite V Canton, MA 02021 |
You or,
if applicable, your nominee are solely responsible for completing delivery to
the subscription agent of your subscription documents, rights certificate and
payment. You should allow sufficient time for delivery of your subscription
materials to the subscription agent and clearance of payment before the
expiration of the rights offering at 5:00 p.m. Eastern Time on [— ],
2010.
Whom
should I contact if I have other questions?
If you
have any questions regarding the rights offering, completing a rights
certificate or submitting payment in the rights offering, please contact our
information agent for the rights offering, Georgeson, Inc., at (888) 867-6856
(toll-free) or, for banks and brokers, at (212) 440-9800 (call
collect).
If you
have any questions regarding TranSwitch, please contact Robert Bosi, our Chief
Financial Officer, at (203) 929-8810, Monday through Friday, between 8:00 a.m.
and 5:00 p.m., Eastern Time.
-5-
SUMMARY
The
following summary contains basic information about us and the rights offering.
Because it is a summary, it may not contain all of the information that is
important to you. Before making a decision to invest in shares of our common
stock, you should read this prospectus carefully, including the sections
entitled “Risk Factors” and “The Rights Offering,” and the information
incorporated by reference into this prospectus, including our audited
consolidated financial statements and the accompanying notes included in our
Annual Report on Form 10-K for the year ended December 31,
2009.
Overview
TranSwitch
designs, develops and supplies innovative highly-integrated semiconductor
solutions that provide core functionality for voice, data and video
communications equipment for network, enterprise and customer premises
applications. TranSwitch customers for these semiconductor products
are the original equipment manufacturers (“OEMs”) who supply wire-line and
wireless network operators who provide voice, data and video services to end
users such as consumers, corporations, municipalities etc. Our system-on-a-chip
products incorporate digital and mixed-signal semiconductor technology and
related embedded software. In addition to our system-on-a-chip products, we have
been in the business of licensing intellectual property cores to both OEMs as
well as other semiconductor companies. One new area where we have
made significant progress in the past couple years is in the area of licensing
of our proprietary video interconnect technology that enables the transmission
and reception of both HDMI and DisplayPort. We have over 150 active
customers, including the leading global equipment providers, and our products
are deployed in the networks of the major service providers around the
world.
TranSwitch
Corporation is a Delaware corporation incorporated on April 26, 1988. Our
principal executive offices are located at 3 Enterprise Drive, Shelton CT 06484,
and our telephone number at that location is (203) 929-8810. Our Internet
address is www.transwitch.com. We make available free of charge on or through
our Internet website our annual reports on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K and all amendments to those reports as soon as
reasonably practicable after such material is electronically filed with or
furnished to the SEC. Our common stock trades on the Nasdaq Capital Market under
the symbol “TXCC.”
Our
Strategy
Our goal
is to be the leading supplier of innovative, complete VLSI solutions to
telecommunications and data communications OEMs worldwide for the applications
we enable. The key elements of our business strategy include the
following:
Provide
the Optimal Solutions Within Target Markets
We offer
our customers unique chip sets that enable optimized performance and
functionality for applications ranging from Ethernet-over-SONET mapping and
framing for Optical Transport systems, voice media gateway platforms,
fiber-to-the-premises applications, and home gateway/routers. Our
solutions include:
•
|
embedded
software in the computer chip for control of our configurable
devices;
|
•
|
product
reference design models for both hardware and software
applications;
|
•
|
evaluation
boards and reference design;
|
•
|
OEM
product design support;
|
•
|
multi-tier
applications support; and
|
•
|
product
technical and design documentation.
|
Our
‘complete product’ approach allows OEMs to optimally configure their products
while maintaining product compatibility over multiple generations. This approach
allows equipment vendors to selectively upgrade their products with
next-generation higher functionality VLSI devices.
Continue to
Promote the Deployment of Programmable Devices
We will
continue to develop highly integrated products that combine the use of embedded
software-programmable blocks and optimized hardware blocks in order to provide
an optimal level of performance and flexibility to our
customers. This flexibility enables customers to adapt the product
for their unique needs or to accommodate changes resulting from emerging
telecommunications standards.
Seek
Early Market Penetration through Customer Sponsorship
We seek
to develop close sponsoring relationships with strategic OEMs during product
development in order to secure early adoption of our solutions. We believe that
OEMs recognize the value of their early involvement through sponsorship of our
products, as they can design their system products in parallel with our product
development, thereby accelerating their time to market. In addition, we believe
that our sponsoring relationships with leading OEMs help us to obtain early
design wins and help reduce risks of market acceptance for our new
products.
Third-Party
Semiconductor Fabrication
We work
with select third-party foundries to produce our semiconductor devices. This
approach allows us to avoid substantial capital spending, obtain competitive
pricing and technologies, and retain the ability to migrate our products to new
process technologies to reduce costs and optimize performance. Our design
methodology enables the production of our devices at multiple foundries using
well-established and proven processes. We engage foundries that are ISO
9001:2000 certified for quality and which use only semiconductor processes and
packages that are qualified under industry-standard requirements.
-6-
THE
RIGHTS OFFERING
The
following summary describes the principal terms of the rights offering, but it
is not intended to be a complete description of the offering. See the
information under the heading “The Rights Offering” in this prospectus for a
more detailed description of the terms and conditions of the rights
offering.
Securities
Offered
|
We
are distributing to you, at no charge, one subscription right
to purchase [— ] shares
of our common stock for every share of our common stock that you owned as
of 5:00 p.m., Eastern Time, on [— ], 2010,
the record date, either as a holder of record or, in the case of shares
held of record by brokers, dealers, custodian banks or other nominees on
your behalf, as a beneficial owner of those shares. If the rights
offering is fully subscribed, we expect the gross proceeds from the rights
offering will be $10,000,000.
|
||
Basic
subscription rights
|
The
basic subscription right will entitle you to purchase [—] shares
of our common stock for each share you owned as of the record date, at a
subscription price of $[— ] per
share.
|
||
Over-subscription
privilege
|
If
you purchase all of the shares available to you pursuant to your basic
subscription rights, you may also choose to subscribe for a portion of any
shares that are not purchased by our stockholders through the exercise of
their basic subscription rights. You may subscribe for shares pursuant to
this over-subscription privilege, subject to the purchase and ownership
limitations described below. We will not issue or pay cash in place
of fractional rights or fractional shares. Instead, we will round up any
fractional rights to the nearest whole right, or any resulting fractional
shares to the nearest whole share.
|
||
Limitation
on the Purchase of Shares
|
You
may only purchase the number of whole shares of common stock purchasable
upon exercise of the number of basic subscription rights distributed to
you in the rights offering, plus the maximum amount of over- subscription
privilege shares available, if any. Accordingly, the number of shares of
common stock that you may purchase in the rights offering is limited by
the number of shares of our common stock you held on the record date and
by the extent to which other stockholders exercise their subscription
rights and over-subscription privileges, which we cannot determine prior
to completion of the rights offering. We reserve the right to
reject any or all subscriptions not properly submitted or the acceptance
of which would, in the opinion of our counsel, be unlawful or trigger the
“poison pill” through the purchase of 15% or more of our outstanding
common stock as set forth in our rights agreement dated as of October 1,
2001, as amended on February 24, 2006 with Computershare Trust Company,
N.A., as rights agent.
|
||
Subscription
Price
|
$[—] per
share.
|
||
Record
Date
|
5:00
p.m., Eastern Time, on [— ],
2010.
|
||
Expiration
of the Rights Offering
|
5:00
p.m., Eastern Time, on [—],
2010.
|
||
Use
of Proceeds
|
The
purpose of this rights offering is to raise equity capital in a
cost-effective manner that gives all of our stockholders the opportunity
to participate. The net proceeds will be used for general
working capital purposes, including the repayment of up to $7.5 million
principal amount outstanding of certain indebtedness of the Company under
our 5.45% Convertible Notes due 2011.
|
||
Transferability
of Rights
|
The
subscription rights may be sold, transferred or assigned in whole or in
part. Subscription rights, however, will not be listed for trading on the
NASDAQ Capital Market, any other stock exchange or market, or on the OTC
Bulletin Board. Any transferee of any of your subscription rights must
exercise those rights in the same way and subject to the same conditions
as apply to when exercising the transferred rights. Subscription
rights, whether or not transferred, must be exercised prior to the
expiration of the rights offering or they will terminate. It should be
noted that the resale restrictions of Rule 144 will apply to the transfer
of subscription rights by affiliates of the Company and to recipients of
rights transferred from such affiliates. The resale restrictions of Rule
144 also will apply to shares of common stock purchased by affiliates as a
result of the exercise of rights associated with restricted shares. Please
see the section of this prospectus entitled “The Rights Offering - Rule
144” for additional information. Practically speaking, the
subscription agent must receive a proper transfer of a rights certificate
from a transferor by [— ], 2010
for the transferee to be able to properly exercise the transferee’s own
re-issued rights certificate by Computershare.
|
||
Participation
of Directors and Executive Officers
|
We
expect our directors and executive officers, together with their
affiliates, to participate in this rights offering at various levels, but
they are not required to do so. Directors and executive officers have
collectively committed to participate, such that we expect insider
ownership to remain at existing levels. If the offering is fully
subscribed, we anticipate that directors and executive officers will
purchase approximately $[—] of
common stock. Our directors and officers are entitled to participate in
the offering on the same terms and conditions applicable to all
stockholders. See “The
Rights Offering-Directors’ and Executive Officers’
Participation.”
|
||
No
Revocation
|
All
exercises of subscription rights are irrevocable, even if you later learn
of information that you consider to be unfavorable to the exercise of your
subscription rights. You should not exercise your subscription rights
unless you are certain that you wish to purchase shares at a subscription
price of $[— ] per
share.
|
-7-
U.S.
Federal Income Tax Consequences
|
For
U.S. federal income tax purposes, you should not recognize income or loss
upon receipt or exercise of a subscription right. You should consult your
own tax advisor as to the tax consequences to you of the receipt, exercise
or lapse of the subscription rights in light of your particular
circumstances.
|
||
Extension
and Cancellation
|
Although
we do not presently intend to do so, we have the option to extend the
rights offering for additional periods ending no later than [— ]. Our
board of directors may for any reason cancel the rights offering at any
time before the expiration date. If we cancel the rights offering, the
subscription agent will return all subscription payments promptly, without
interest or penalty.
|
||
Procedures
for Exercising Rights
|
To
exercise your subscription rights, you must take the following
steps:
|
||
|
•
|
If
you are a registered holder of our common stock, you must deliver payment
and a properly completed rights certificate to the subscription agent to
be received before 5:00 p.m., Eastern Time, on [— ], 2010.
You may deliver the documents and payments by first class mail or courier
service. If you use first class mail for this purpose, we recommend using
registered mail, properly insured, with return receipt
requested.
|
|
•
|
If
you are a beneficial owner of shares that are registered in the name of a
broker, dealer, custodian bank or other nominee, you should instruct your
broker, dealer, custodian bank or other nominee to exercise your
subscription rights on your behalf. Please follow the instructions of your
nominee, who may require that you meet a deadline earlier than 5:00 p.m.,
Eastern Time, on [— ],
2010.
|
||
Subscription
Agent
|
Computershare
Trust Company, N.A.
|
||
Information
Agent
|
Georgeson,
Inc.
|
||
Shares
Outstanding Before the Rights Offering
|
20,619,417
shares of our common stock were outstanding as of April 9,
2010.
|
||
Shares
Outstanding After Completion of the Rights Offering
|
Assuming
all shares are sold in the rights offering, we expect approximately [—] shares
of our common stock will be outstanding immediately after completion of
the rights offering.
|
||
Fees
and Expenses
|
We
will pay the fees and expenses related to the rights
offering.
|
||
The
Nasdaq Capital Market
|
Our
shares of common stock are currently listed for trading on The Nasdaq
Capital Market under the ticker symbol “TXCC.”
|
||
Corporate
Information
|
Our
principal executive offices are located at 3 Enterprise Drive, Shelton CT
06484, and our telephone number at that location is (203) 929-8810. Our
Internet address is www.transwitch.com. We make available free of charge
on or through our Internet website our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and all
amendments to those reports as soon as reasonably practicable after such
material is electronically filed with or furnished to the SEC. The
information contained on our website is not part of this
prospectus.
|
-8-
RISK
FACTORS
An
investment in our common stock involves a high degree of risk. In evaluating an
investment in shares of our common stock, you should carefully consider the
risks described below, together with the other information included or
incorporated by reference in this prospectus, including the risk factors set
forth in our Annual Report on Form 10-K for the year ended December 31,
2009 and the risks we have highlighted in other sections of this
prospectus.
The
risks described below are not the only risks we face. If any of the events
described in the following risk factors actually occurs, or if additional risks
and uncertainties not presently known to us or that we currently deem
immaterial, materialize, then our business, results of operations and financial
condition could be materially adversely affected. In that event, the trading
price of our common stock could decline, and you may lose all or part of your
investment in our shares. The risks discussed below include forward-looking
statements, and our actual results may differ substantially from those discussed
in these forward-looking statements.
Risks
Related to Our Company
We
have incurred significant net losses.
Our
net losses have been considerable for the past several years. Due to
current economic conditions, we expect that our revenues will continue to
fluctuate in the future and there is no assurance that we will attain positive
net earnings in the future.
Our
net revenues may decrease.
Due to
current economic conditions and slowdowns in purchases of VLSI semiconductor
devices, it has become increasingly difficult for us to predict the purchasing
activities of our customers and we expect that our net revenues may
decrease.
Our
business is characterized by short-term orders and shipment schedules, and
customer orders typically can be cancelled or rescheduled without significant
penalty to our customers. Because we do not have substantial
non-cancelable backlog, we typically plan our production and inventory levels
based on internal forecasts of customer demand, which are highly unpredictable
and can fluctuate substantially. Future fluctuations to our operating
results may also be caused by a number of factors, many of which are beyond our
control.
In
response to anticipated long lead times to obtain inventory and materials from
our foundries, we may order inventory and materials in advance of anticipated
customer demand, which might result in excess inventory levels if the expected
orders fail to materialize. As a result, we cannot predict the timing
and amount of shipments to our customers, and any significant downturn in
customer demand for our products would reduce our quarterly and annual operating
results.
We
continue to have substantial indebtedness.
As of
March 31, 2010, we have approximately $7.5 million in principal amount of
indebtedness outstanding in the form of our 5.45% Convertible Notes due
September 30, 2011 (2011 Notes).
In
addition to this indebtedness, we may incur substantial additional indebtedness
in the future. The level of our indebtedness, among other things,
could:
•
|
make
it difficult for us to make payments on our 2011
Notes;
|
•
|
make
it difficult for us to obtain any necessary future financing for working
capital, capital expenditures, debt service requirements or other
purposes;
|
•
|
limit
our flexibility in planning for, or reacting to changes in, our business;
and
|
•
|
make
us more vulnerable in the event of a downturn in our
business.
|
There can
be no assurance that we will be able to meet our debt service obligations,
including our obligations under the 2011 Notes. The terms of our 2011
Notes permit the holders thereof to voluntarily convert their notes at any time
into a certain number of shares of our common stock.
We
are using our available cash and cash equivalents each quarter to fund our
operations, investments and financing activities.
In
January of 2010 we have restructured our operating expense to allow us to
break-even at the rate of sales of approximately $13 million per quarter. Such
rate of sales may not be sustained. Also we may incur unforeseen expenses, which
will cause us to consume our available cash and cash equivalents.
However,
we believe that we have adequate cash and cash equivalents and other financing
resources to fund our operations, and to meet our debt obligations through at
least December 31, 2010.
We may not be able to pay our debt
and other obligations.
If our
cash, cash equivalents and operating cash flows are inadequate to meet our
obligations, we could face substantial liquidity problems. If we are unable to
generate sufficient cash flow or otherwise obtain funds necessary to make
required payments on the 2011 Notes or our other obligations, we would be in
default under their respective terms. This would permit the holders
of the 2011 Notes and our other obligations to accelerate their respective
maturities and could also cause defaults under any future indebtedness we may
incur. Any such default or cross default would have a material
adverse effect on our business, prospects, financial condition and operating
results. In addition, we cannot be sure that we would be able to
repay amounts due in respect of the 2011 Notes if payment of those notes were to
be accelerated following the occurrence of an event of default as defined in the
2011 Notes indenture.
We
may seek to reduce our indebtedness by issuing equity securities, thereby
causing dilution of our stockholders’ ownership interests.
We may
from time to time seek to exchange our 2011 Notes for shares of our common stock
or other securities. These exchanges may take different forms,
including exchange offers or privately negotiated transactions. As a
result of shares of our common stock or other securities being issued upon such
conversion or pursuant to such exchanges, our stockholders may experience
substantial dilution of their ownership interest.
The terms
of the 2011 Notes include voluntary conversion provisions upon which shares of
our common stock would be issued. As a result of these shares of our common
stock being issued, our stockholders may experience dilution of their ownership
interest.
-9-
If
we seek to secure additional financing we may not be able to do
so. If we are able to secure additional financing our stockholders
may experience dilution of their ownership interest or we may be subject to
limitations on our operations.
If we are
unable to generate sufficient cash flows from operations to meet our anticipated
needs for working capital and capital expenditures, we may need to raise
additional funds. However, events in the future may require us to
seek additional capital and, if so required, that capital may not be available
on terms favorable or acceptable to us, if at all. If we raise
additional funds through the issuance of equity securities, our stockholders may
experience dilution of their ownership interest, and the newly issued securities
may have rights superior to those of our common stock. On October 21,
2009 we filed a shelf registration statement on Form S-3 (File No. 333-162609)
(the “Shelf Registration Statement”) which was declared effective by the
Securities and Exchange Commission on October 28, 2009, to sell up to
$40,000,000 of our securities. On December 31, 2009, we agreed,
pursuant to a privately negotiated purchase agreement, to sell up to 1,950,000
shares of our common stock from the Shelf Registration Statement in multiple
closings over the next twelve months. As of April 13, 2010, we have
sold 600,000 shares of our common stock in such closings.
If we
raise additional funds by issuing debt, we may be limited in our success, as the
terms of the 2011 Notes restrict our ability to issue debt that is senior to or
pari passu with the 2011 Notes, without the consent of the holders of the 2011
Notes.
We
may fail to realize the anticipated benefits of the acquisition of
Centillium.
The
success of the acquisition of Centillium depends on, among other things, our
ability to realize anticipated cost savings and to combine the businesses of
TranSwitch and Centillium in a manner that does not materially disrupt
Centillium’s existing customer relationships or otherwise result in decreased
revenues, and that allows us to capitalize on Centillium’s growth opportunities.
If we are not able to successfully achieve these objectives, the anticipated
benefits of the acquisition may not be realized fully or at all or may take
longer to realize than expected.
It is
possible that the ongoing integration process could result in the loss of key
employees, the disruption of our or Centillium’s ongoing businesses or
inconsistencies in standards, controls, procedures and policies that could
adversely affect our ability to maintain relationships with customers and
employees or to achieve the anticipated benefits of the
acquisition.
Our
failure to continue to operate and manage the combined company effectively could
have a material adverse effect on our business, financial condition and
operating results.
We will
need to meet significant challenges to realize the expected benefits and
synergies of the acquisition of Centillium. These challenges
include:
•
|
integrating
the management teams, strategies, cultures and operations of the two
companies;
|
•
|
retaining
and assimilating the key personnel of each
company;
|
•
|
integrating
sales and business development
operations;
|
•
|
retaining
existing customers of each company;
|
•
|
developing
new products and services that utilize the technologies and resources of
both companies; and
|
•
|
creating
uniform standards, controls, procedures, policies and information
systems.
|
The
accomplishment of these objectives will involve considerable risk,
including:
•
|
the
potential disruption of each company’s ongoing business and distraction of
their respective management teams;
|
•
|
the
difficulty of incorporating acquired technology and rights into our
products and services;
|
•
|
unanticipated
expenses related to technology
integration; and
|
•
|
potential
unknown liabilities associated with the
acquisition.
|
If we do
not succeed in addressing these challenges or any other problems encountered in
connection with the acquisition, our operating results and financial condition
could be adversely affected.
Our
stock price is volatile.
The
market for securities for communication semiconductor companies, including our
Company, has been highly volatile. The daily closing price of our common stock
has fluctuated between a low of $1.60 and a high of $22.72 (share price is
reflective of the November 23, 2009 1 for 8 reverse stock split) during the
period from January 1, 2006 to April 9, 2010. It is likely that the price of our
common stock will continue to fluctuate widely in the future. Factors affecting
the trading price of our common stock include:
•
|
responses
to quarter-to-quarter variations in operating
results;
|
•
|
announcements
of technological innovations or new products by us or our
competitors;
|
•
|
current
market conditions in the telecommunications and data communications
equipment markets; and
|
•
|
changes
in earnings estimates by
analysts.
|
We may have to further restructure
our business.
We may
have to make further restructuring changes if we do not sustain the current
level of quarterly revenues.
We
anticipate that shipments of our products to relatively few customers will
continue to account for a significant portion of our total net
revenues.
Historically,
a relatively small number of customers have accounted for a significant portion
of our total net revenues in any particular period. For the years ended December
31, 2009 and 2008, shipments to our top five customers, including sales to
distributors, accounted for approximately 63% and 51% of our total net revenues,
respectively. We expect that a limited number of customers may account for a
substantial portion of our total net revenues for the foreseeable
future.
-10-
Some of
the following may reduce our total net revenues or adversely affect our
business:
•
|
reduction,
delay or cancellation of orders from one or more of our significant
customers;
|
•
|
development
by one or more of our significant customers of other sources of supply for
current or future products;
|
•
|
loss
of one or more of our current customers or a disruption in our sales and
distribution channels; and
|
•
|
failure
of one or more of our significant customers to make timely payment of our
invoices.
|
We cannot
be certain that our current customers will continue to place orders with us,
that orders by existing customers will return to the levels of previous periods
or that we will be able to obtain orders from new customers. We have no
long-term volume purchase commitments from any of our significant
customers.
The
cyclical nature of the communication semiconductor industry affects our
business.
Communication
service providers, internet service providers, regional operating companies and
inter-exchange carriers continue to closely monitor their capital expenditures.
Spending on voice-only equipment remains slow while spending on equipment
providing the efficient transport of data services on existing infrastructure
appears to be slowly recovering. Demand for new, high bandwidth applications
such as video conferencing, broadband audio and telephone is placing an
increased burden on existing public network infrastructure. We cannot be certain
that the market for our products will not decline in the future.
Because
of our lack of diversity in geographic sources of revenues, economic factors
specific to certain countries may adversely affect our business and operating
results.
During
2009, a substantial amount of our revenue was from, China, Japan, Korea, Israel
and other foreign countries. We expect revenues in 2010 will be substantial
concentrated in foreign markets. All of our sales have been
historically denominated in U.S. dollars and major fluctuations in currency
exchange rates could materially affect our customers’ demand, thereby causing
them to reduce their orders, which could adversely affect our operating results.
While part of our strategy is to diversify the geographic sources of our
revenues, failure to further penetrate other markets could harm our business and
results of operations and subject us to increased currency risk.
If
foreign exchange rates fluctuate significantly, our profitability may
decline.
We are
exposed to foreign currency rate fluctuations because we incur a significant
portion of our operating expenses in currencies other than U.S. dollars (mainly
Indian rupees, Israeli shekels and Euros). The U.S. dollar has devalued
significantly and this trend may continue.
Our
international business operations expose us to a variety of business
risks.
Foreign
markets are a significant part of our net product revenues. For the years ended
December 31, 2009 and December 31, 2008 foreign shipments accounted for
approximately 70% and 85%, respectively of our total net product and services
revenues. We expect foreign markets to continue to account for a significant
percentage of our total net product revenues. A significant portion of our total
net product revenues will, therefore, be subject to risks associated with
foreign markets, including the following:
•
|
unexpected
changes in legal and regulatory requirements and policy changes affecting
the telecommunications and data communications
markets;
|
•
|
changes
in tariffs;
|
•
|
exchange
rates, currency controls and other
barriers;
|
•
|
political
and economic instability;
|
•
|
risk
of terrorism;
|
•
|
difficulties
in accounts receivable
collection;
|
•
|
difficulties
in managing distributors and
representatives;
|
•
|
difficulties
in staffing and managing foreign
operations;
|
•
|
difficulties
in protecting our intellectual property
overseas;
|
•
|
natural
disasters;
|
•
|
seasonality
of customer buying patterns;
and
|
•
|
potentially
adverse tax consequences.
|
Although
substantially all of our total net product revenues to date have been
denominated in U.S. dollars, the value of the U.S. dollar in relation to foreign
currencies also may reduce our total net revenues from foreign customers. With
the acquisition of our Israeli operations and the expansion of our India Design
Center a substantial amount of our costs are denominated in Israeli shekels and
the Indian rupee. To the extent that we further expand our
international operations or change our pricing practices to denominate prices in
foreign currencies, we will expose our margins to increased risks of currency
fluctuations.
Our
net product revenues depend on the success of our customers’ products, and our
design wins do not necessarily generate revenues in a timely
fashion.
Our
customers generally incorporate our new products into their products or systems
at the design stage. However, customer decisions to use our products
(design wins), which can often require significant expenditures by us without
any assurance of success, often precede the generation of production revenues,
if any, by a year or more. Some customer projects are canceled, and
thus will not generate revenues for our products. In addition, even
after we achieve a design win, a customer may require further design
changes. Implementing these design changes can require significant
expenditures of time and expense by us in the development and pre-production
process. Moreover, the value of any design win will largely depend
upon the commercial success of the customer’s product and on the extent to which
the design of the customer’s systems accommodates components manufactured by our
competitors. We cannot ensure that we will continue to achieve design
wins in customer products that achieve market acceptance. Further,
most revenue-generating design wins take several years to translate into
meaningful revenues.
We must successfully transition to
new process technologies to remain competitive.
Our
future success depends upon our ability to develop products that utilize new
process technologies.
Semiconductor
design and process methodologies are subject to rapid technological change and
require large expenditures for research and development. We currently
manufacture our products using 0.8, 0.5, 0.35, 0.25, 0.18 and 0.13 micron and 65
nanometer complementary metal oxide semiconductor (CMOS) processes. We
continuously evaluate the benefits, on a product-by-product basis, of migrating
to smaller geometry process technologies. Other companies in the
industry have experienced difficulty in transitioning to new manufacturing
processes and, consequently, have suffered increased costs, reduced yields or
delays in product deliveries. We believe that transitioning our products to
smaller geometry process technologies will be important for us to remain
competitive. We cannot be certain that we can make such a transition
successfully, if at all, without delay or inefficiencies.
-11-
Our
success depends on the timely development of new products, and we face risks of
product development delays.
Our
success depends upon our ability to develop new VLSI devices and software for
existing and new markets. The development of these new devices and software is
highly complex, and from time to time we have experienced delays in completing
the development of new products. Successful product development and introduction
depends on a number of factors, including the following:
•
|
accurate
new product definition;
|
•
|
timely
completion and introduction of new product
designs;
|
•
|
availability
of foundry capacity;
|
•
|
achievement
of manufacturing yields; and
|
•
|
market
acceptance of our products and our customers’
products.
|
Our
success also depends upon our ability to do the following:
•
|
build
products to applicable
standards;
|
•
|
develop
products that meet customer
requirements;
|
•
|
adjust
to changing market conditions as quickly and cost-effectively as necessary
to compete successfully;
|
•
|
introduce
new products that achieve market acceptance;
and
|
•
|
develop
reliable software to meet our customers’ application needs in a timely
fashion.
|
In
addition, we cannot ensure that the systems manufactured by our customers will
be introduced in a timely manner or that such systems will achieve market
acceptance.
We
sell a range of products that each has a different gross profit. Our total gross
profits will be adversely affected if most of our shipments are of products with
low gross profits.
We
currently sell more than 60 products. Some of our products have a high gross
profit while others do not. If our customers decide
to buy more of our products with low gross profits and fewer of our products
with high gross profits, our total gross profits could be adversely affected. We
plan our mix of products based on our internal forecasts of customer demand,
which are highly unpredictable and can fluctuate substantially.
The
price of our products tends to decrease over the lives of our
products.
Historically,
average selling prices in the communication semiconductor industry have
decreased over the life of a product, and, as a result, the average selling
prices of our products may decrease in the future. Decreases in the price of our
products would adversely affect our operating results. As global competition
increases our customers are increasingly more focused on price. We may have to
decrease our prices to remain competitive in some situations, which may
negatively impact our gross margins.
Our
success depends on the rate of growth of the global communications
infrastructure.
We derive
virtually all of our total net revenues from products for telecommunications,
data and video communications applications. These markets are characterized by
the following:
•
|
susceptibility
to seasonality of customer buying
patterns;
|
•
|
subject
to general business cycles;
|
•
|
intense
competition;
|
•
|
rapid
technological change; and
|
•
|
short
product life cycles.
|
We
anticipate that these markets will continue to experience significant volatility
in the near future.
Our
products must successfully include industry standards to remain
competitive.
Products
for telecommunications and data communications applications are based on
industry standards, which are continually evolving. Our future success will
depend, in part, upon our ability to successfully develop and introduce new
products based on emerging industry standards, which could render our existing
products unmarketable or obsolete. If the telecommunications or data
communications markets evolve to new standards, we cannot be certain that we
will be able to design and manufacture new products successfully that address
the needs of our customers and include the new standards or that such new
products will meet with substantial market acceptance.
Our
intellectual property indemnification practices may adversely impact our
business.
We have
historically agreed to indemnify our customers for certain costs and damages of
intellectual property rights in circumstances where one of our products is the
factor creating the customer’s infringement exposure. This practice may subject
us to significant indemnification claims by our customers. In some instances,
our products are designed for use in devices manufactured by our customers that
comply with international standards. These international standards are often
covered by patent rights held by third parties, which may include our
competitors. The costs of obtaining licenses from holders of patent rights
essential to such international standards could be high. The cost of not
obtaining such licenses could also be high if a holder of such patent rights
brings a claim for patent infringement. We are not aware of any claimed
violations on our part. However, we cannot assure you that claims for
indemnification will not be made or that if made, such claims would not have a
material adverse effect on our business, results of operations or financial
condition.
We
continue to expense our new product process development costs when
incurred.
In the
past, we have incurred significant new product and process development costs
because our policy is to expense these costs, including tooling, fabrication and
pre-production expenses, at the time that they are incurred. We may continue to
incur these types of expenses in the future. These additional expenses will have
a material and adverse effect on our operating results in future
periods.
-12-
We
face intense competition in the communication semiconductor market.
The
communication semiconductor industry is intensely competitive and is
characterized by the following:
•
|
rapid
technological change;
|
•
|
subject
to general business cycles;
|
•
|
price
erosion;
|
•
|
limited
access to fabrication
capacity;
|
•
|
unforeseen
manufacturing yield problems;
and
|
•
|
heightened
international competition in many
markets.
|
These
factors are likely to result in pricing pressures on our products, thus
potentially affecting our operating results.
Our
ability to compete successfully in the rapidly evolving area of high-performance
integrated circuit technology depends on factors both within and outside our
control, including:
•
|
success
in designing and subcontracting the manufacture of new products that
implement new technologies;
|
•
|
protection
of our products by effective use of intellectual property
laws;
|
•
|
product
quality;
|
•
|
reliability;
|
•
|
price;
|
•
|
efficiency
of production;
|
•
|
failure
to find alternative manufacturing sources to produce VLSI devices with
acceptable manufacturing
yields;
|
•
|
the
pace at which customers incorporate our products into their
products;
|
•
|
success
of competitors’ products; and
|
•
|
general
economic conditions.
|
The
telecommunications and data communications industries, which are our primary
target markets, have become intensely competitive because of deregulation,
heightened international competition and significant decreases in demand since
2000. A number of our customers have internal semiconductor design or
manufacturing capability with which we also compete in addition to our other
competitors. Any failure by us to compete successfully in these
target markets, particularly in the communications markets, would have a
material adverse effect on our business, financial condition and results of
operations.
We
rely on outside fabrication facilities, and our business could be hurt if our
relationships with our foundry suppliers are damaged.
We do not
own or operate a VLSI circuit fabrication facility. Four foundries currently
supply us with all of our semiconductor device requirements. While we have had
good relations with these foundries, we cannot be certain that we will be able
to renew or maintain contracts with them or negotiate new contracts to replace
those that expire. In addition, we cannot be certain that renewed or new
contracts will contain terms as favorable as our current terms. There are other
significant risks associated with our reliance on outside foundries, including
the following:
•
|
the
lack of assured semiconductor wafer supply and control over delivery
schedules;
|
•
|
the
unavailability of, or delays in obtaining access to, key process
technologies; and
|
•
|
limited
control over quality assurance, manufacturing yields and production
costs.
|
Reliance
on third-party fabrication facilities limits our ability to control the
manufacturing process.
Manufacturing
integrated circuits is a highly complex and technology-intensive process.
Although we try to diversify our sources of semiconductor device supply and work
closely with our foundries to minimize the likelihood of reduced manufacturing
yields, our foundries occasionally experience 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 manufacturing yields have at times reduced our operating results. A
manufacturing disruption at one or more of our outside foundries, including,
without limitation, those that may result from natural disasters, accidents,
acts of terrorism or political instability or other natural occurrences, could
impact production for an extended period of time.
Our
dependence on a small number of fabrication facilities exposes us to risks of
interruptions in deliveries of semiconductor devices.
We
purchase semiconductor devices from outside foundries pursuant to purchase
orders, and we do not have a guaranteed level of production capacity at any of
our foundries. We provide the foundries with forecasts of our production
requirements. However, the ability of each foundry to provide wafers to us is
limited by the foundry’s available capacity and the availability of raw
materials. Therefore, our foundry suppliers could choose to prioritize capacity
and raw materials for other customers or reduce or eliminate deliveries to us on
short notice. Accordingly, we cannot be certain that our foundries will allocate
sufficient capacity to satisfy our requirements.
We have
been, and expect in the future to be, particularly dependent upon a limited
number of foundries for our VLSI device requirements. In 2009, approximately 85%
of our wafer requirements were manufactured by one foundry. The time required to
qualify alternative manufacturing sources for existing or new products could be
substantial and we might not be able to find alternative manufacturing sources
able to produce our VLSI devices with acceptable manufacturing
yields. As a result, we expect that we could experience substantial
delays or interruptions in the shipment of our products if there was a sudden increase in demand
or if our foundry suppliers were to cease operations or limit our
capacity.
We are subject to
risks arising from our use of subcontractors to assemble our
products.
Contract
assembly houses in Asia assemble all of our semiconductor
products. Raw material shortages, natural disasters, political and
social instability, service disruptions, currency fluctuations, or other
circumstances in the region could force us to seek additional or alternative
sources of supply or assembly. This could lead to supply constraints
or product delivery delays.
-13-
Our
failure to protect our proprietary rights, or the costs of protecting these
rights, may harm our ability to compete.
Our
success depends in part on our ability to obtain patents and licenses and to
preserve other intellectual property rights covering our products and
development and testing tools. To that end, we have obtained certain domestic
and foreign patents and intend to continue to seek patents on our inventions
when appropriate. The process of seeking patent protection can be time consuming
and expensive. We cannot ensure the following:
•
|
that
patents will be issued from currently pending or future
applications;
|
•
|
that
our existing patents or any new patents will be sufficient in scope or
strength to provide meaningful protection or any commercial advantage to
us;
|
•
|
that
foreign intellectual property laws will protect our foreign intellectual
property rights; and
|
•
|
that
others will not independently develop similar products, duplicate our
products or design around any patents issued to
us.
|
Intellectual
property rights are uncertain and adjudication of such rights involves complex
legal and factual questions. We may be unknowingly infringing on the proprietary
rights of others and may be liable for that infringement, which could result in
significant liability for us. We occasionally receive correspondence from third
parties alleging infringement of their intellectual property rights. If we are
found to infringe the proprietary rights of others, we could be forced to either
seek a license to the intellectual property rights of others or alter our
products so that they no longer infringe the proprietary rights of others. A
license could be very expensive to obtain or may not be available at all.
Similarly, changing our products or processes to avoid infringing the rights of
others may be costly or impractical.
We are
responsible for any patent litigation costs. If we were to become involved in a
dispute regarding intellectual property, whether ours or that of another
company, we may have to participate in legal proceedings in the United States
Patent and Trademark Office or in the United States or foreign courts to
determine any or all of the following issues: patent validity, patent
infringement, patent ownership or inventorship. These types of proceedings may
be costly and time consuming for us, even if we eventually prevail. If we do not
prevail, we might be forced to pay significant damages, obtain a license, if
available, or stop making a certain product. From time to time we may prosecute
patent litigation against others and as part of such litigation, other parties
may allege that our patents are not infringed, are invalid and are
unenforceable.
We also
rely on trade secrets, proprietary know-how and confidentiality provisions in
agreements with employees and consultants to protect our intellectual property.
Such parties may not comply with the terms of their agreements with us, and we
may not be able to adequately enforce our rights against these
parties.
The
loss of key management could affect our ability to run our
business.
Our
success depends largely upon the continued service of our executive officers and
technical personnel and on our ability to continue to attract, retain and
motivate other qualified personnel.
We
may engage in acquisitions that may harm our operating results, dilute our
stockholders and cause us to incur debt or assume contingent
liabilities.
We may
pursue acquisitions from time to time that could provide new technologies,
skills, products or service offerings. Future acquisitions by us may involve the
following:
•
|
use
of significant amounts of cash and cash
equivalents;
|
•
|
potentially
dilutive issuances of equity securities;
and
|
•
|
incurrence
of debt or amortization expenses related to intangible assets with
definitive lives.
|
In
addition, acquisitions involve numerous other risks, including:
•
|
diversion
of management’s attention from other business
concerns;
|
•
|
risks
of entering markets in which we have no or limited prior experience;
and
|
•
|
unanticipated
expenses and operational disruptions while acquiring and integrating new
acquisitions.
|
From time
to time, we have engaged in discussions with third parties concerning potential
acquisitions of product lines, technologies and businesses. We currently have no
commitments or agreements with respect to any such acquisition. If such an
acquisition does occur, we cannot be certain that our business, operating
results and financial condition will not be materially adversely affected or
that we will realize the anticipated benefits of the acquisition.
We have made, and may continue to
make, investments in development stage companies, which may not produce any
returns for us in the future.
From time
to time we have made investments in early stage venture-backed, start-up
companies that develop technologies that are complementary to our product
roadmap. In April 2003, we made an initial investment in Opulan
Technologies Corp. (Opulan). Opulan develops high performance and cost-effective
IP convergence ASSPs from its development facility in Shanghai,
China. We plan to continue to use our cash to make selected
investments in these types of companies. Certain companies in which we invested
in the past have failed, and we have lost our entire investment in them. These
investments involve all the risks normally associated with investments in
development stage companies. As such, there can be no assurance that we will
receive a favorable return on these or any future venture-backed investments
that we may make. Additionally, our original and any future investments may
continue to become impaired if these companies do not succeed in the execution
of their business plans. Any further impairment or equity losses in these
investments could negatively impact our future operating results.
We
could be subject to class action litigation due to stock price volatility, which
if it occurs, will distract our management and could result in substantial costs
or large judgments against us.
In the
past, securities and class action litigation has often been brought against
companies following periods of volatility in the market prices of their
securities. We may be the target of similar litigation in the future. Securities
litigation could result in substantial costs and divert our management’s
attention and resources, which could cause serious harm to our business,
operating results and financial condition or dilution to our
stockholders.
Provisions
of our certificate of incorporation, by-laws, stockholder rights plan and
Delaware law may discourage takeover offers and may limit the price investors
would be willing to pay for our common stock.
Delaware
corporate law contains, and our certificate of incorporation and by-laws and
stockholder rights plan contain, certain provisions that could have the effect
of delaying, deferring or preventing a change in control of our Company even if
a change of control would be beneficial to our stockholders. These provisions
could limit the price that certain investors might be willing to pay in the
future for shares of our common stock. Certain of these provisions:
•
|
authorize
the issuance of “blank check” preferred stock (preferred stock which our
Board of Directors can create and issue without prior stockholder
approval) with rights senior to those of common
stock;
|
•
|
prohibit
stockholder action by written
consent;
|
•
|
establish
advance notice requirements for submitting nominations for election to the
Board of Directors and for proposing matters that can be acted upon by
stockholders at a meeting;
and
|
-14-
•
|
dilute
stockholders who acquire more than 15% of our common
stock.
|
Natural
disasters or acts of terrorism affecting our locations, or those of our
suppliers, in the United States or internationally may negatively impact our
business.
We
operate our businesses in the United States and internationally, including the
operation of a design center in India, and sales, design and engineering
operations in Israel. Some of the countries in which we operate or in
which our customers are located have in the past been subject to terrorist acts
and could continue to be subject to acts of terrorism. In addition,
some of these areas may be subject to natural disasters, such as earthquakes or
floods. If our facilities, or those of our suppliers or customers,
are affected by a natural disaster or terrorist act, our employees could be
injured and those facilities damaged, which could lead to loss of skill sets and
affect the development or fabrication of our products, which could lead to lower
short and long-term revenues. In addition, natural disasters or terrorist acts
in the areas in which we operate or in which our customers or suppliers operate
could lead to delays or loss of business opportunities, as well as changes in
security and operations at those locations, which could increase our operating
costs.
Our
ability to sublease excess office space may adversely affect our future cash
outflows.
We have
outstanding operating lease commitments of approximately $28.0 million, payable
over the next eight years. Some of these commitments are for space that is not
being utilized and, for which, we recorded restructuring charges in prior
periods. We are in the process of trying to sublease additional excess space but
it is unlikely that any sublease income generated will offset the entire future
commitment. As of December 31, 2009, we have sublease agreements totaling
approximately $12.0 million to rent portions of our excess facilities over the
next five years. We currently believe that we can fund these lease commitments
in the future; however, there can be no assurances that we will not be required
to seek additional capital or provide additional guarantees or collateral on
these obligations.
Of the
office space being leased in our Shelton, Connecticut location, as of December
31, 2009 approximately 118,335 square feet is considered excess for which we
have taken restructuring charges in prior years. Substantially all of this space
is currently being sublet, but not for the full term that we are committed to
under our lease agreements. If we are unable to re-lease this space, at similar
rates, our future cash outflows would be adversely affected.
Our
business could be harmed if we fail to integrate future acquisitions
adequately.
During
the past four years, we have acquired three companies, one based in the United
States and two in Israel.
Our
management must devote time and resources to the integration of the operations
of any future acquisitions. The process of integrating research and development
initiatives, computer and accounting systems and other aspects of the operations
of any future acquisitions presents a significant challenge to our management.
This is compounded by the challenge of simultaneously managing a larger and more
geographically dispersed entity.
Future
acquisitions could present a number of additional difficulties of integration,
including:
•
|
difficulties
in integrating personnel with disparate business backgrounds and
cultures;
|
•
|
difficulties
in defining and executing a comprehensive product strategy;
and
|
•
|
difficulties
in minimizing the loss of key employees of the acquired
company.
|
If we
delay integrating or fail to integrate operations or experience other unforeseen
difficulties, the integration process may require a disproportionate amount of
our management’s attention and financial and other resources. Our failure to
address these difficulties adequately could harm our business or financial
results, and we could fail to realize the anticipated benefits of the
transaction.
We have
in the past, as a result of industry conditions, later discontinued or abandoned
certain product lines acquired through prior acquisitions.
Risks
Related to the Rights Offering
The
market price of our common stock is volatile and may decline before or after the
subscription rights expire in the rights offering.
The
market price of our common stock could be subject to wide fluctuations in
response to numerous factors, some of which are beyond our control. These
factors include, among other things,
•
|
responses
to quarter-to-quarter variations in operating
results;
|
•
|
announcements
of technological innovations or new products by us or our
competitors;
|
•
|
current
market conditions in the telecommunications and data communications
equipment markets; and
|
•
|
changes
in earnings estimates by
analysts.
|
Once you
exercise your subscription rights, you may not revoke them. We cannot assure you
that the market price of our common stock will not decline after you elect to
exercise your subscription rights. If you exercise your subscription rights and,
afterwards, the public trading market price of our shares of common stock
decreases below the subscription price, you will have committed to buying shares
of our common stock at a price above the prevailing market price and could have
an immediate unrealized loss. Our common stock is traded on The Nasdaq Capital
Market under the symbol “TXCC,” and the last reported sales price of our common
stock on The Nasdaq Capital Market on April 9, 2010 was $2.87 per share.
Moreover, we cannot assure you that following the exercise of your subscription
rights you will be able to sell your shares of common stock at a price equal to
or greater than the subscription price. Until shares are delivered upon
expiration of the rights offering, you will not be able to sell shares that you
purchase in the rights offering.
The
subscription price determined for the rights offering is not necessarily an
indication of the fair value of our common stock.
The per
share subscription price is not necessarily related to our book value, tangible
book value, multiple of earnings or any other established criteria of fair value
and may or may not be considered the fair value of our common stock to be
offered in the rights offering. After the date of this prospectus, our shares of
common stock may trade at prices below the subscription price.
If
you do not exercise your subscription rights, your percentage ownership in
TranSwitch will be diluted.
Assuming
we sell the full amount of shares issuable in connection with the rights
offering, we will issue approximately [— ] shares of
our common stock. If you choose not to exercise your basic subscription rights
and you do not exercise your over-subscription privilege prior to the expiration
of the rights offering, your relative ownership interest in our common stock
will be diluted.
We
may cancel the rights offering at any time without further obligation to
you.
We may,
in our sole discretion, cancel the rights offering before it expires. If we
cancel the rights offering, neither we nor the subscription agent will have any
obligation to you with respect to the rights except to return any payment
received by the subscription agent, without interest, as soon as
practicable.
-15-
You
will not be able to sell the shares you buy in the rights offering until you
receive your stock certificates, DRS statement or your account is
credited with the common stock.
If you
purchase shares in the rights offering by submitting a rights certificate and
payment, we will mail you a stock certificate or DRS statement as soon as
practicable after [—], 2010, or
such later date as to which the rights offering may be extended. If your shares
are held by a broker, dealer, custodian bank or other nominee and you purchase
shares, your account with your nominee will be credited with the shares of our
common stock you purchased in the rights offering as soon as practicable after
the expiration of the rights offering, or such later date as to which the rights
offering may be extended. Until your stock certificates or DRS statement have
been delivered or your account is credited, you may not be able to sell your
shares even though the common stock issued in the rights offering will be listed
for trading on The Nasdaq Capital Market. The stock price may decline between
the time you decide to sell your shares and the time you are actually able to
sell your shares.
The
rights offering does not require a minimum amount of proceeds for us to close
the offering, which means that if you exercise your rights, you may acquire
additional shares of common stock in us when we do not have enough capital to
execute our business strategy in the long term.
There is
no minimum amount of proceeds required to complete the rights offering and your
exercise of your subscription rights is irrevocable. Therefore, if you exercise
your basic subscription rights or the over-subscription privilege, but we do not
sell the entire amount of securities being offered in this rights offering, you
may be investing in a company that does not have sufficient capital to execute
its business strategy.
-16-
CAPITALIZATION
The
following table shows our historical consolidated capitalization at December 31,
2009, our pro forma consolidated capitalization at December 31, 2009 giving
effect to the sale of an assumed [●] shares at the subscription price of $[●]
per share and the receipt of net proceeds of $[●] million from the rights
offering after deducting estimated offering expenses in the amount of $[—]. You should
read this table in conjunction with “Selected Consolidated Financial Data” and
with our consolidated financial statements and the notes to those financial
statements included in the documents incorporated by reference into this
prospectus.
|
At
December 31, 2009
|
|||||||
|
Pro Forma
|
|||||||
|
Actual
|
As Adjusted
|
||||||
|
(dollars in thousands)
|
|||||||
Cash
and cash equivalents and restricted cash
|
$ | 5,075 | $ | 15,075 | ||||
|
||||||||
Total
liabilities excluding debt
|
$ | 31,519 | $ | 31,519 | ||||
|
||||||||
Total
debt
|
$ | 8,762 | 8,762 | |||||
|
||||||||
Common
stock, $0.001 par value (300,000,000 shares authorized; 20,012,521 issued
at December 31, 2009)
|
20 | 24 | ||||||
|
||||||||
Accumulated
other comprehensive income
|
551 | 551 | ||||||
|
||||||||
Common
stock held in treasury (20,794 shares), at cost
|
(118 | ) | (118 | ) | ||||
Additional
paid-in capital
|
382,935 | 392,931 | ||||||
|
||||||||
Accumulated
deficit
|
(370,713 | ) | (370,713 | ) | ||||
|
||||||||
Total
shareholders’ equity
|
$ | 12,675 | $ | 22,675 | ||||
|
||||||||
Total
liabilities and shareholders’ equity
|
$ | 52,956 | $ | 62,956 |
-17-
DETERMINATION
OF SUBSCRIPTION PRICE
We
established a special committee, comprising of three members of our board
of directors, all of whom are independent directors. In determining the
subscription price, the special committee is considering a number of factors,
including: the price at which our stockholders might be willing to participate
in the rights offering, historical and current trading prices for our common
stock, the need for capital and alternatives available to us for raising
capital, potential market conditions, and the desire to provide an opportunity
to our stockholders to participate in the rights offering on a pro rata basis.
In conjunction with its review of these factors, the special committee also
reviewed our history and prospects, including our past and present earnings, our
prospects for future earnings, and the outlook for our industry, our current
financial condition and considered data relating to a range of discounts to
market value represented by the subscription prices in various prior rights
offerings. The special committee determined that the subscription
price should be designed to provide an incentive to our current stockholders to
exercise their rights. The special committee also obtained advice
from Needham & Company, LLC, our financial advisor with respect to financing
alternatives, including the rights offering, on a number of these
issues.
The
subscription price does not necessarily bear any relationship to any other
established criteria for value. You should not consider the subscription price
as an indication of value of the Company or our common stock. You should not
assume or expect that, after the rights offering, our shares of common stock
will trade at or above the subscription price in any given time period. The
market price of our common stock may decline during or after the rights
offering, and you may not be able to sell the underlying shares of our common
stock purchased during the rights offering at a price equal to or greater than
the subscription price. You should obtain a current quote for our common stock
before exercising your subscription rights and make your own assessment of our
business and financial condition, our prospects for the future, and the terms of
this rights offering. See “The Rights Offering—Determination of
Subscription Price” in this prospectus.
-18-
DILUTION
Purchasers
of our common stock in the rights offering will experience an immediate dilution
of the net tangible book value per share of our common stock. Our net tangible
book value as of December 31, 2009 was approximately $(11.3) million, or $(0.57)
per share of our common stock, based upon 20,012,521 shares of our common stock
outstanding. Net tangible book value per share is equal to our total net
tangible book value, which is our total tangible assets less our total
liabilities, divided by the number of shares of our outstanding common stock.
Dilution per share equals the difference between the amount per share paid by
purchasers of shares of common stock in the rights offering and the net tangible
book value per share of our common stock immediately after the rights
offering.
Based on
the aggregate offering of $10.0 million and after deducting estimated offering
expenses payable by us of $ [●], and the
application of the estimated $[●] million of net
proceeds from the rights offering, our pro forma net tangible book value as of
December 31, 2009 would have been approximately $[●] million, or
$[●] per
share. This represents an immediate increase in pro forma net tangible book
value to existing stockholders of $[●] per share and an immediate dilution to
purchasers in the rights offering of $[●] per share.
The
following table illustrates this per share dilution, assuming a fully subscribed
rights offering of [●] shares at the subscription price of $[●] per share to
raise a maximum of $10.0 million in this offering.
Subscription
price
|
$ |
[●]
|
||
Net
tangible book value per share prior to the rights offering
|
[●]
|
|||
Increase
per share attributable to the rights offering
|
[●]
|
|||
Pro
forma net tangible book value per share after the rights
offering
|
[●]
|
|||
Dilution
in net tangible book value per share to purchasers
|
$ |
[●]
|
-19-
The
following selected consolidated financial data should be read in conjunction
with the consolidated financial statements and related notes incorporated herein
by reference thereto and “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” appearing in this prospectus. The selected consolidated
statements of operations data as well as the selected consolidated balance
sheets data presented below are derived from our consolidated financial
statements.
Years ended December 31,
|
||||||||||||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
(Amounts
presented in thousands, except per share amounts)
|
||||||||||||||||||||
Selected
Consolidated Statements of Operations Data:
|
||||||||||||||||||||
Net
revenues
|
$ | 56,107 | $ | 41,934 | $ | 32,565 | $ | 38,920 | $ | 32,900 | ||||||||||
Gross
profit
|
31,484 | 23,894 | 20,171 | 28,174 | 23,984 | |||||||||||||||
Operating
loss
|
(9,720 | ) | (19,774 | ) | (18,800 | ) | (11,136 | ) | (14,662 | ) | ||||||||||
Net
loss (1)
|
$ | (11,531 | ) | $ | (17,046 | ) | $ | (19,712 | ) | $ | (10,856 | ) | $ | (23,754 | ) | |||||
Basic
and diluted net loss per common share
|
$ | (0.58 | ) | $ | (0.99 | ) | $ | (1.19 | ) | $ | (0.70 | ) | $ | (1.81 | ) | |||||
Shares
used in calculation of basic and diluted net loss per common
share
|
19,938 | 17,260 | 16,566 | 15,600 | 13,097 |
December 31,
|
||||||||||||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
Selected
Consolidated Balance Sheets Data:
|
||||||||||||||||||||
Cash,
cash equivalents, restricted cash and short-term
investments
|
$ | 5,075 | $ | 15,284 | $ | 34,098 | $ | 57,723 | $ | 72,702 | ||||||||||
Total
current assets
|
23,224 | 35,179 | 45,527 | 68,236 | 80,822 | |||||||||||||||
Working
capital
|
(2,706 | ) | 8,708 | 36,867 | 30,323 | 73,385 | ||||||||||||||
Total
non-current assets
|
29,732 | 43,248 | 22,060 | 14,420 | 6,004 | |||||||||||||||
Total
assets
|
52,956 | 78,427 | 67,587 | 82,656 | 86,826 | |||||||||||||||
Convertible
Notes due within one year, net of discount
|
5,004 | — | — | 28,811 | — | |||||||||||||||
Derivative
liability, current
|
— | — | — | 980 | — | |||||||||||||||
Total
current liabilities
|
25,930 | 26,471 | 8,660 | 37,913 | 7,437 | |||||||||||||||
5.45%
Convertible Plus Cash Notes due 2007, net of debt discount,
long-term
|
— | — | — | — | 49,102 | |||||||||||||||
5.45%
Convertible Notes due 2010, long-term
|
— | 10,013 | 25,013 | — | — | |||||||||||||||
5.45%
Convertible Notes due 2011, long-term
|
3,758 | — | — | — | — | |||||||||||||||
Derivative
liability, long-term
|
— | — | — | — | 6,040 | |||||||||||||||
Total
non-current liabilities
|
14,351 | 29,677 | 45,259 | 20,689 | 76,180 | |||||||||||||||
Total
stockholders’ equity
|
12,675 | 22,279 | 13,668 | 24,054 | 3,209 |
|
(1)
|
Effective
January 1, 2006, we adopted FASB ASC Topic 718. As such, the
reported net loss for 2009, 2008, 2007 and 2006 reflects stock-based
compensation expense of $1.3 million, $1.5 million, $2.0 million and $2.4
million, respectively.
|
-20-
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Management’s
Discussion and Analysis of Financial Conditions and Results of Operations
(MD&A) is provided to supplement the accompanying consolidated financial
statements and notes in our consolidated Financial Statements as filed with our
Annual Report on Form 10-K for the year ended December 31, 2009 and incorporated
herein by reference and attached hereto, to help provide an understanding of our
financial condition, changes in our financial condition and results of
operations. MD&A is organized as follows:
Caution
concerning forward-looking statements. This
section discusses how certain forward-looking statements made by us throughout
the MD&A are based on management’s present expectations about future events
and are inherently susceptible to uncertainty and changes in
circumstances.
Overview. This
section provides a general description of our business.
Critical
accounting policies and use of estimates. This
section discusses those accounting policies that are both considered important
to our financial condition and operating results and require significant
judgment and estimates on the part of management in their
application.
Results of
operations. This section provides an analysis of
our results of operations for the years ended December 31, 2009, 2008 and 2007.
In addition, a brief description is provided of transactions and events that
impact the comparability of the results.
Liquidity and
capital resources. This section provides an
analysis of our cash position and cash flows, as well as a discussion of our
financing arrangements. In this section, we also summarize related party
transactions and recent accounting pronouncements not yet adopted by
us.
CAUTION
CONCERNING FORWARD-LOOKING STATEMENTS
Management’s
Discussion and Analysis of Financial Condition and Results of Operations contain
forward-looking statements that involve risks and uncertainties. When used in
this report, the words, “intend,” “anticipate,” “believe,” “estimate,” “plan,”
“expect” and similar expressions as they relate to us are included to identify
forward-looking statements. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of factors,
including those set forth under “Risk Factors” and elsewhere in this report. You
should read this discussion in conjunction with the consolidated financial
statements and the notes thereto included in this report.
OVERVIEW
TranSwitch
designs, develops and markets innovative semiconductor solutions that provide
core functionality for voice, data and video communications network equipment.
We supply innovative highly-integrated semiconductor solutions that provide core
functionality for communications network equipment which is supplied to the
world-wide telecommunications industry. In this market, TranSwitch
offers a broad range of next-generation telecom products addressing both copper
and fiber-based broadband access, optical transport, carrier Ethernet, and
Voice-over-Internet Protocol (VoIP) applications. Also, we deliver
standards-based products and technologies that enable the transmission and
reception of high-speed, high-definition content and data to third-party
semiconductor companies, consumer electronics manufacturers, and OEMs
worldwide. The standards that are supported today by these products
include Fast Ethernet, Gigabit Ethernet, HDMI, and DisplayPort. Our customers
are the original equipment manufacturers (“OEMs”) who supply wire-line and
wireless network operators who provide voice, data and video services to end
users such as consumers, corporations, municipalities, etc. We have
approximately 150 active customers, including the leading global equipment
providers, and our products are deployed in the networks of the major service
providers around the world.
TranSwitch
is a Delaware corporation incorporated on April 26, 1988. Our common stock
trades on The NASDAQ Capital Market under the symbol “TXCC.”
Our
products and services are compliant with relevant communications network
standards. We offer several products that combine multi-protocol
capabilities on a single chip, enabling our customers to develop network
equipment for triple play (voice, data and video) applications. A key attribute
of our products is their inherent flexibility. Many of our products incorporate
embedded programmable micro-processors, enabling us to rapidly accommodate new
customer requirements or evolving network standards by modifying the
functionality of the device via software instructions.
We bring
value to our customers through our communications systems expertise, very large
scale integration (“VLSI”) design skills and commitment to excellence in
customer support. Our emphasis on technical innovation results in defining and
developing products that permit our customers to achieve faster time-to-market
and to develop communications systems that offer a host of benefits such as
greater functionality, improved performance, lower power dissipation, reduced
system size and cost, and greater reliability for their customers.
Our
revenues were $56.1 million in 2009, $41.9 million in 2008 and $32.6 million in
2007. Despite our revenues being depressed by our world-wide
recession, we view 2009 as another successful year for us. During 2009 we
completed our integration of our acquisition of Centillium and further
diversified our product portfolio to include rapidly growing Fiber-to-the-Home
(FTTH) and VoIP solutions. The combination strengthens our leadership position
in the next-generation communications semiconductor market. The combined
companies will have greater scale, a significantly improved expense structure
and a truly global reach. In addition to growing our revenue streams, we are
focusing on improving our gross margin both by reducing costs on lower margin
products and working to increase sales of higher margin products.
We
continued our move toward profitability by reducing our operating loss from 2008
and 2007 both in dollar amount and as a percentage of revenue. This was achieved
through strict cost control measures and the implementation of a force reduction
plan in both TranSwitch and Centillium. In the fourth quarter of
2008, we were also able to enter into an agreement with certain holders of our
2010 Notes to purchase $15.0 million of the aggregate principal amount for $9.9
million in cash, plus accrued and unpaid interest. This enabled us to reduce our
long-term debt by 60% and also realize a $4.5 million gain. In the fourth
quarter of 2009, we entered into an agreement with our note holders to exchange
the remaining $10 million of 2010 notes for an equal aggregate principal amount
of new 5.45% notes maturing in September of 2011. These 2011 notes call for
monthly principal and interest payments that could, under certain conditions, be
paid in our stock.
On
December 31, 2009, we entered into a Common Stock Purchase Agreement with
Seaside 88, LP, a Florida limited partnership (“Seaside”), relating to the
offering and sale of up to 1,950,000 shares of our common
stock. The Common Stock Purchase Agreement requires us to issue
and sell, and Seaside to purchase, up to 75,000 shares of Common Stock once
every two (2) weeks, subject to the satisfaction of customary closing
conditions, beginning on January 4, 2010 and ending on or about the date that is
fifty (50) weeks subsequent to that initial closing. Such offering and
sale is made pursuant to our shelf registration statement on Form S-3 (File No.
333-162609), which was declared effective by the SEC on October 28, 2009.
The offering price of the Common Stock at each closing is an amount equal to the
lower of (i) the daily volume weighted average of actual trading prices of the
Common Stock on the trading market (the “VWAP”) for the ten consecutive trading
days immediately prior to a closing date multiplied by 0.875 and (ii) the VWAP
for the trading day immediately prior to a closing date multiplied by
0.90. In the event that the 3-Day VWAP, as defined in the Common
Stock Purchase Agreement, does not equal or exceed $1.00 (the “Floor”), as
calculated with respect to any subsequent closing date, then such subsequent
closing will not occur, and there will be one fewer subsequent closing and the
aggregate number of Shares to be purchased under the Common Stock Purchase
Agreement will be reduced by 75,000 shares for each subsequent closing that does
not occur because the Floor has not been reached. We have agreed to
indemnify and hold harmless Seaside against certain liabilities in connection
with the issuance and sale of the shares of our common stock under the Common
Stock Purchase Agreement. The price per share for the initial Closing
was $1.6025, and we raised gross proceeds of approximately $120,000 at such
closing, before estimated offering expenses of approximately
$33,545. Proceeds from subsequent closings are dependent on the VWAP
calculations as provided above.
-21-
CRITICAL
ACCOUNTING POLICIES AND USE OF ESTIMATES
Our
consolidated financial statements and related disclosures, which are prepared to
conform with accounting principles generally accepted in the United States of
America (U.S. GAAP), require us to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses during the
period reported. We are also required to disclose amounts of contingent assets
and liabilities at the date of the consolidated financial statements. Our actual
results in future periods could differ from those estimates and assumptions.
Estimates and assumptions are reviewed periodically, and the effects of
revisions are reflected in the consolidated financial statements in the period
they are determined to be necessary.
We
consider the most critical accounting policies and uses of estimates in our
consolidated financial statements to be those relating to:
(1)
recognizing net revenues, cost of revenues and gross profit;
(2)
estimating allowances for doubtful accounts;
(3)
estimating the derivative liability associated with our 5.45% Convertible Plus
Cash Notes due 2007;
(4)
estimating assumptions used in the calculation of stock-based
compensation;
(5)
estimating values for goodwill and long-lived assets;
(6)
estimating excess inventories;
(7)
estimating restructuring liabilities; and
(8)
estimating values of investments in non-publicly traded companies.
These
accounting policies, the bases for these estimates and their potential impact to
our consolidated financial statements, should any of these estimates change, are
further described as follows:
Net Revenues,
Cost of Revenues and Gross Profit. Net revenues
are primarily comprised of product shipments, principally to domestic and
international telecommunications and data communications OEMs and to
distributors. Net revenues from product sales are recognized at the time of
product shipment when the following criteria are met: (1) persuasive evidence of
an arrangement exists; (2) title and risk of loss transfers to the customer; (3)
the selling price is fixed or determinable; and (4) collectability is reasonably
assured. Agreements with certain distributors provide price protection and
return and allowance rights. With respect to recognizing revenues from our
distributors: (1) the prices are fixed at the date of shipment from our
facilities; (2) payment is not contractually or otherwise excused until the
product is resold; (3) we do not have any obligations for future performance
relating to the resale of the product; and (4) the amount of future returns,
allowances, refunds and costs to be incurred can be reasonably estimated and are
accrued at the time of shipment. Service revenues are recognized when the
following criteria are met: (1) persuasive evidence of an arrangement exists;
(2) we have performed a service in accordance with our contractual obligations;
(3) the fee is fixed or determinable; and (4) collectability is reasonably
assured.
At the
time of shipment, we record a reduction to revenue (with a related liability) to
accrue for future price protection. This liability is established based on
historical experience, contractually agreed-to provisions and future shipment
forecasts. Such accruals have been insignificant for the last three
years.
We also
accrue, at the time of shipment, a reduction to revenue (with a related
liability) and an inventory asset against product cost of revenues in order to
establish a provision for the gross margin related to future returns under our
distributor stock rotation program. Such accruals related to reductions of
revenue were $0.6 million and less than $0.1 million at December 31, 2009 and
2008, respectively. The accruals related to inventory assets are
insignificant to our financial position and results of operations for all
periods presented. Should our actual experience differ from our
estimated liabilities, there could be adjustments (either favorable or
unfavorable) to our net revenues, cost of revenues and gross
profits.
We
warranty our products for up to one year from the date of shipment. Warranty
expense is insignificant to all periods presented.
We
license HDMI and other intellectual property. Revenues from licensing
arrangements generally consist of multiple elements such as license,
implementation and maintenance services. The items (deliverables) included in
the arrangements are evaluated to determine whether they represent separate
units of accounting. We perform this evaluation at the inception of an
arrangement and as we deliver each item in the arrangement.
Generally,
we account for a deliverable (or a group of deliverables) separately if (1) the
delivered item(s) has standalone value to the customer, (2) there is objective
and reliable evidence of the fair value of the undelivered items included in the
arrangement, and (3) if we have given the customer a general right of return
relative to the delivered items, delivery or performance of the undelivered
items or services are probable and substantially in our control.
We
also recognize revenue from royalties upon notification of sale by our
licensees. The terms of the royalty agreements generally require licensees to
give us notification and to pay royalties within 45 days of the end of the
quarter during which the sales by the licensees take place.
Estimated
Allowances for Doubtful Accounts. We record allowances for
doubtful accounts for estimated losses based upon specifically identified
amounts that we believe to be uncollectible along with our assessment of the
general financial condition of our customer base. If our actual collections
experience changes, revisions to our allowances may be required. We have a
limited number of customers with individually large amounts due at any given
balance sheet date. Any unanticipated change in one of those customers’
creditworthiness or other matters affecting the collectibility of amounts due
from such customers could have a material effect on our results of operations in
the period in which such changes or events occur.
Derivative
Liability Associated with
our 5.45% Convertible Plus Cash Notes due 2007. The holder’s
conversion right contained in the terms governing our 5.45% Convertible Plus
Cash Notes due 2007 (the “Plus Cash Notes”) was not clearly and closely related
to the characteristics of the Plus Cash Notes upon issuance. Accordingly, this
feature qualified as an embedded derivative instrument and, because it does not
qualify for any scope exception, it is required to be accounted for separately
from the debt instrument and recorded as a derivative financial
instrument.
During
the years ended December 31, 2009 and 2008, there were no Plus Cash Notes
outstanding. During the year ended December 31, 2007, we recorded other income
of $1.0 million all of which related to the holder’s conversion right, to
reflect the change in fair value of our derivative liability.
We adjust
the derivative financial instruments to their estimated fair value and analyze
the instruments to determine their classification as a liability or equity. As
of December 31, 2009, 2008 and 2007, the estimated fair value of our derivative
liability was zero as these Plus Cash Notes due 2007 were no longer outstanding.
On July 6, 2007, the Company exchanged approximately $21.2 million aggregate
principal amount of its outstanding Plus Cash Notes for an equivalent principal
amount of a new series of 5.45% Convertible Notes due September 30, 2010 (the
“2010 Notes”). The remaining $8.9 million balance of the Plus Cash
Notes was redeemed at par value at the end of September, 2007. The
2010 Notes were subsequently exchanged in October 2009 for an equivalent
principal amount of 5.45% Convertible Notes due September 30,
2011. The estimated fair value of the holder’s conversion right was
determined using a lattice (trinomial) option-pricing model, while it was
estimated.
-22-
Stock-based
Compensation. Determining the amount of stock-based compensation
for awards granted includes selecting an appropriate model to calculate fair
value at the grant date. We have used the Black-Scholes option valuation model
to value employee stock option awards. Certain inputs to this valuation model
require considerable judgment. These inputs include estimating the volatility of
our stock, the expected life of the option awarded and the forfeiture rate. We
have estimated volatility, the expected life and the forfeiture rate based on
historical data. Volatility is estimated over a term that approximates the
expected life of the option awarded.
Goodwill and
Long-Lived Assets. Our goodwill is tested for impairment
annually or more frequently if events or changes in circumstances indicate that
the asset might be impaired. We perform impairment reviews using a
fair-value method and discounted cash flow models with estimated cash flows
based on internal forecasts which include terminal values based on current
market valuation metrics. The fair value represents the amount at
which a reporting unit could be bought or sold in a current transaction between
willing parties on an arms-length basis. In estimating fair value, we
use our common stock’s market price to determine fair value and other valuation
metrics. The estimated fair value is then compared with the carrying amount of
the reporting unit, including goodwill. In addition, we perform
discounted cash flow analysis on the entity to determine fair
value. We are subject to financial statement risk to the extent that
the carrying amount exceeds the estimated fair value.
During
the fourth quarter of 2009, impairment testing we performed indicated that the
estimated fair values of two reporting units tested were less than their
corresponding carrying amounts. As a result of the analyses performed, we
recorded a goodwill impairment charge of $10.1 million. The impaired goodwill
related to business acquisitions in 2007 and 2006.
Indefinite
lived intangible assets are subject to annual impairment testing, as
well. On an annual basis, the fair value of the indefinite lived
assets is evaluated by us to determine if an impairment charge is required. We
have only nominal amounts of indefinite lived assets.
We review
long-lived assets for impairment when events or changes in business
circumstances indicate the carrying amount of the assets may not be fully
recoverable. If such indicators are present, we perform undiscounted
operating cash flow analyses to determine if impairment exists. If
impairment is determined to exist, any related impairment loss is calculated
based on fair value.
A
considerable amount of management judgment and assumptions are required in
performing impairment tests. While we believe that our judgments and
assumptions were reasonable, different assumptions could change the estimated
fair values and, therefore, additional impairment charges could be
required.
Estimated Excess
Inventories. We periodically review our inventory
levels to determine if inventory is stated at the lower of cost or net
realizable value. The telecommunications and data communications industries have
experienced a significant downturn during the past few years and, as a result,
we have had to evaluate our inventory position based on known backlog of orders,
projected sales and marketing forecasts, shipment activity and inventory held at
our significant distributors. We recorded charges for excess and
obsolete inventories totaling approximately $0.7 million in 2009, $0.3 million
in 2008 and $0.4 million in 2007.
During
2009, 2008 and 2007, we recorded net product revenues of approximately $3.0
million, $4.8 million and $3.5 million, respectively, on shipments of excess and
obsolete inventory that had previously been written down to their estimated net
realizable value of zero. This resulted in almost 100% gross margin on these
product revenues. Had these products been sold at our historical average cost
basis, gross margin on these revenues would have been 51%, 64% and 64% in 2009,
2008 and 2007 respectively. We currently do not anticipate that a significant
amount of the excess and obsolete inventories subject to the write-downs
described above will be used in the future based upon our current demand
forecast. Should our actual future demand exceed the estimates that we used in
writing down our excess and obsolete inventories, we will recognize a favorable
impact to cost of revenues and gross profits. Should demand fall below our
current expectations, we may record additional inventory write-downs which will
result in a negative impact to cost of revenues and gross profits.
Estimated
Restructuring Liabilities. During 2009, we
recorded net restructuring credits of $6.3 million related to new sublease
agreements we entered into during 2009 for unused space in our Shelton,
Connecticut location which were partially offset by charges related to workforce
reductions and other restructuring adjustments. During 2008 and 2007, we
recorded restructuring charges and asset impairments totaling $3.8 million and
$1.5 million, respectively, related to employee termination benefits and costs
to exit certain facilities, net of sub-lease benefits. At December 31, 2009 and
2008, the restructuring liabilities were $12.4 million and $25.4 million,
respectively, on our consolidated balance sheets. Restructuring liabilities at
December 31, 2009 include approximately $12.1 million of liabilities for
facility lease costs (Refer to Note 16 – Restructuring and Asset Impairment
Charges of the Notes to Consolidated Financial Statements). These facility
operating leases expire in 2017. The future cash outlays for all of our
operating lease commitments are discussed in Note 17 of the Notes to
Consolidated Financial Statements. Certain assumptions are used by us
to derive this estimate, including future maintenance costs, price escalation
and sublease income derived from these facilities. Should we negotiate
additional sublease rental income agreements or reach a settlement with our
lessors to be released from our existing obligations, we could realize a
favorable benefit to our results of future operations. Should future lease,
maintenance or other costs related to these facilities exceed our estimates, we
could incur additional expenses in future periods.
Valuation of
Investments in Non-Publicly Traded Companies. Since
1999, we have been making strategic equity investments in non-publicly traded
companies that develop technologies that are complementary to our product road
map. Depending on our level of ownership and whether or not we have the ability
to exercise significant influence, we account for these investments on either
the cost or equity method, and review such investments periodically for
impairment. The appropriate reductions in carrying values are recorded when, and
if, necessary. The process of assessing whether a particular investment’s net
realizable value is less than its carrying cost requires a significant amount of
judgment. In making this judgment, we carefully consider the investee’s cash
position, projected cash flows (both short and long-term), financing needs, most
recent valuation data, the current investing environment, management / ownership
changes, and competition. This evaluation process is based on information that
we request from these privately held companies. This information is not subject
to the same disclosure and audit requirements as the reports required of U.S.
public companies, and as such, the reliability and accuracy of the data may
vary. Based on our evaluations, we recorded impairment charges related to our
investments in non-publicly traded companies of less than $0.1 million, zero and
$0.1 million during 2009, 2008 and 2007, respectively. The total investment in
non-public companies was $3.0 million as of both December 31, 2009 and 2008.
(For further discussion, please refer to Note 6. Investments in Non-Publicly
Traded Companies and Venture Capital Funds in our Consolidated Financial
Statements). We used the modified equity method of accounting to determine the
impairment loss for certain investments, as it was determined that no better
current evidence of the value of our cost method investments existed and we
believe that this gives us the best basis for our estimate given the historic
negative cash flows of these companies. The modified equity method of accounting
results in recording an impairment loss on a cost method investment equal to the
investor’s proportionate share of the investee’s losses as its contributed
capital is consumed to fund operating losses of the investee from the inception
of the investor’s investment.
-23-
RESULTS
OF OPERATIONS
The
results of operations that follow should be read in conjunction with our
critical accounting policies and estimates summarized above as well as our
consolidated financial statements and notes thereto contained in Item 8 of this
report. The following table sets forth certain consolidated statements of
operations data as a percentage of net revenues for the periods
indicated.
Years ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Net
revenues:
|
||||||||||||
Product
revenues
|
90 | % | 95 | % | 90 | % | ||||||
Service
revenues
|
10 | % | 5 | % | 10 | % | ||||||
Total
net revenues
|
100 | % | 100 | % | 100 | % | ||||||
Cost
of revenues:
|
||||||||||||
Product
cost of revenues
|
38 | % | 40 | % | 32 | % | ||||||
Provision
for excess and obsolete inventories
|
1 | % | 1 | % | 1 | % | ||||||
Service
cost of revenues
|
5 | % | 2 | % | 5 | % | ||||||
Total
cost of revenues
|
44 | % | 43 | % | 38 | % | ||||||
Gross
profit
|
56 | % | 57 | % | 62 | % | ||||||
Operating
expenses:
|
||||||||||||
Research
and development
|
34 | % | 58 | % | 67 | % | ||||||
Marketing
and sales
|
19 | % | 21 | % | 32 | % | ||||||
General
and administrative
|
14 | % | 16 | % | 17 | % | ||||||
Restructuring
charge and asset impairment, net
|
6 | % | 9 | % | 4 | % | ||||||
Total
operating expenses
|
73 | % | 104 | % | 120 | % | ||||||
Operating
loss
|
(17 | ) % | (47 | ) % | (58 | )% |
-24-
Comparison
of Fiscal Years 2009 and 2008
Net
Revenues. We have two product line categories: Network
Infrastructure and Customer Premises Equipment (CPE). Our Network Infrastructure
product lines include our Optical Transport, Carrier Ethernet, Media Gateway
using VoIP Technology and Broadband Access product line technologies and other
Non-Telecommunications products. The Optical Transport product line is
incorporated into OEM systems that improve the efficiency of fiber optic
networks and in the process increase the overall network capacity. Media
gateway/VoIP products are used in carrier-class and enterprise-class media
gateways and access gateways and used in residential gateway markets. The
Broadband Access product line is incorporated into OEM systems that allow
telecommunications service providers to transition their legacy voice networks
to support next generation services such as voice, data and video. The Carrier
Ethernet product line allows carriers to provide robust and differentiated
services using Ethernet technology in their wide-area networks. The
Non-Telecommunications product line consists of non-telecommunications ASIC
products. Our CPE product line category includes Multi-Service Communications
Processors used in broadband modems or to be added as part of a small office,
home office, or SOHO, network and HDMI, DisplayPort and Ethernet IP Cores which
have been incorporated into a number of consumer electronics and PC
appliances.
The
following table summarizes our net revenue mix by product line
category:
(Tabular
dollars in thousands)
|
Year
Ended
December 31, 2009
|
Year
Ended
December 31, 2008
|
||||||||||||||||||
Revenues
|
Percent of
Total
Revenues
|
Revenues
|
Percent of
Total
Revenues
|
Percentage
Increase
(Decrease)
in
Revenues
|
||||||||||||||||
Network
Infrastructure
|
$ | 34,988 | 62 | % | $ | 34,932 | 83 | % | — | |||||||||||
Customer
Premises Equipment
|
21,119 | 38 | % | 7,002 | 17 | % | 202 | % | ||||||||||||
Total
|
$ | 56,107 | 100 | % | $ | 41,934 | 100 | % | 34 | % |
Total net
revenues in 2009 were $56.1 million as compared to $41.9 million in 2008, an
increase of $14.2 million or 34%. Our product revenues for 2009 were
$50.7 million, a 27% increase compared to 2008 and our service revenues which
consist of design services performed for third parties on a contract basis and
HDMI and technology licenses were $5.4 million, a 180% increase compared to
2008. The increase in net revenue for 2009 compared to 2008 includes
approximately $21.9 million of increased sales as a result of the acquisition of
Centillium in the fourth quarter of 2008. This was partially offset
by decreased revenues from some of our legacy products and our
non-telecommunications ASIC products.
Our 2009
Network Infrastructure revenues of approximately $35.0 million were flat with
2008 revenues. These 2009 revenues included increased sales of our Entropia
products which were offset by decreased sales of our non-telecommunications ASIC
products and our E1Mx21 product. Our 2009 CPE revenues were approximately $21.1
million, a $14.1 million increase as compared to 2008 revenues. This increase
was attributable to increased sales from our Atlanta and Mustang
products.
For 2009
and 2008 international net revenues were approximately 70% and 85%,
respectively, of net revenues.
As of
December 31, 2009 our backlog was $11.3 million, as compared to $8.3 million as
of December 31, 2008. Backlog represents firm orders anticipated to be shipped,
and service revenue expected to be billed under existing contracts, during the
next 12 months. Our business and, to a large extent, that of the entire
communication semiconductor industry, is characterized by short-term order and
shipment schedules. Since orders constituting our 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 indicative of future
revenues.
Gross
Profit.
Gross profit was $31.5 million and $23.9 million for the years ended December
31, 2009 and 2008, respectively. Gross profit increased by approximately $7.6
million for 2009 as compared to 2008 while the gross profit as a percentage of
revenue decreased by approximately 1%. This is a result of increased
revenues from our newly acquired Centillium products.
During
the years ended December 31, 2009 and 2008, gross profit was affected favorably
in the amount of $1.3 million and $1.6 million, respectively, from the sales of
products that had previously been written down to a cost basis of zero. Also
during the years ended December 31, 2009 and 2008, we recorded provisions for
excess and obsolete inventories in the amount of $0.7 million and $0.3 million,
respectively. These charges had a negative impact on our gross
profit.
We
anticipate that gross profit will continue to be impacted by fluctuations in the
volume and mix of our product shipments as well as material costs, yield and the
fixed cost absorption of our production operations.
Research and
Development. Research and development expenses
consist primarily of salaries and related costs of employees engaged in
research, design and development activities, costs related to electronic design
automation tools, subcontracting and fabrication costs, depreciation and
amortization and facilities expenses. Research and development expenses for 2009
were $19.1 million which decreased $5.4 million, or 22% as compared to the prior
year. This decrease was a result of decreased depreciation for computer chip
design tools and decreases in facilities costs and salaries and employee related
costs as a result of workforce reductions and other cost cutting measures that
were implemented in 2008 partially offset by increased expenses due to the
acquisition of Centillium.
Marketing and
Sales. Marketing and sales expenses consist
primarily of personnel-related expenses, trade shows, travel expenses and
facilities expenses. Marketing and sales expenses for 2009 were $10.4 million
which increased $1.6 million, or 18% as compared to the prior year. This
increase was a result of increased commissions due to increased revenues and
increased salaries, amortization of purchase accounting intangibles and other
expenses due to the acquisition of Centillium. These expense
increases were partially offset by decreased employee related expenses as a
result of workforce reductions and other cost cutting measures that were
implemented in 2008.
General and
Administrative. General and administrative
(G&A) expenses consist primarily of personnel-related expenses, professional
and legal fees, and facilities expenses. G&A expenses were $8.0
million in 2009, an increase of approximately $1.4 million or 20% compared to
the prior year. The increase was a result of increased legal fees and
other increased expenses due to the acquisition of Centillium.
Restructuring
(Credits) Charges, net. During the years ended December
31, 2009 and 2008, we recorded net restructuring credits of approximately $6.3
million and net restructuring charges of $3.8 million, respectively. Information
on restructuring credits and charges for each of the last two years is located
in Note 16 of the Notes to Consolidated Financial Statements.
-25-
Impairment of
Goodwill. For 2009 and 2008, we
recorded goodwill impairment charges of $10.1 million and zero, respectively.
Information on the impairment of goodwill recorded during 2009 is located in
Note 1 and Note 9 of the Notes to Consolidated Financial
Statements.
Change in Fair
Value of the Derivative Liability. For 2009 and 2008, we
recorded other expense of zero and approximately $0.3 million, respectively, to
reflect the change in the fair value of the derivative liabilities.
During
the first quarter of 2008 we entered into a number of foreign exchange contracts
to purchase Indian rupees to fund our India operations. For the year ended
December 31, 2008, we recorded other expense of approximately $0.3 million to
reflect the change in the fair value of these derivative financial instruments.
There were no foreign exchange contracts outstanding at December 31, 2009 or
December 31, 2008.
Gain/Loss on
Extinguishment of Debt. We had no gain or loss on the
extinguishment of debt during 2009. On December 24, 2008, we entered
into an agreement with certain holders of our 5.45% Convertible Notes due 2010
(the “2010 Notes”) to purchase $15.0 million aggregate principal amount of the
Notes for $9.9 million in cash, plus accrued and unpaid interest. As
a result of this transaction, we recorded a $4.5 million gain on the
extinguishment of debt in 2008.
Interest Expense
net. Interest expense, net was approximately $0.7
million in 2009, a decrease of $0.3 million as compared to 2008.
Interest
expense decreased from $1.9 million in 2008 to $0.8 million in 2009 due to lower
debt balances resulting from the extinguishment of $15.0 million of our 2010
Notes during the fourth quarter of 2008 and payments made during 2009 on our
2011 Notes of approximately $1.2 million.
Interest
income decreased from $0.9 million in 2008 to $0.1 million in 2009 as a result
of lower market yields due to decreased interest rates and lower cash and
investment balances. At December 31, 2009 and 2008, the effective interest rates
on our interest-bearing securities were approximately 0.43% and 1.63%,
respectively.
Income Tax
Expense. Our income tax expense of $0.4 million in 2009 and
$0.5 million in 2008 is applicable to the operating results of certain of our
foreign subsidiaries. We have incurred significant taxable losses for
U.S. federal and state purposes. We have not recognized any income tax benefits
on those losses because their realization is uncertain.
Comparison
of Fiscal Years 2008 and 2007
Net
Revenues. We have two product line categories: Network
Infrastructure and Customer Premises Equipment (CPE). Our Network Infrastructure
product lines include our Optical Transport, Carrier Ethernet, Media Gateway
using VoIP Technology and Broadband Access product line technologies and other
Non-Telecommunications products. The Optical Transport product line is
incorporated into OEM systems that improve the efficiency of fiber optic
networks and in the process increase the overall network capacity. Media
gateway/VoIP products are used in carrier-class and enterprise-class media
gateways and access gateways and used in residential gateway markets. The
Broadband Access product line is incorporated into OEM systems that allow
telecommunications service providers to transition their legacy voice networks
to support next generation services such as voice, data and video. The Carrier
Ethernet product line allows carriers to provide robust and differentiated
services using Ethernet technology in their wide-area networks. The
Non-Telecommunications product line consists of non-telecommunications ASIC
products. Our CPE product line category includes Multi-Service Communications
Processors used in broadband modems or to be added as part of a small
office, home office, or SOHO, network and HDMI, DisplayPort and Ethernet IP
Cores which have been incorporated into a number of consumer electronics and PC
appliances. The following table summarizes our net revenue mix by
product line category:
(Tabular
dollars in thousands)
|
Year
Ended
December 31, 2008
|
Year
Ended
December 31, 2007
|
||||||||||||||||||
Revenues
|
Percent of
Total
Revenues
|
Revenues
|
Percent of
Total
Revenues
|
Percentage
Increase
(Decrease)
in
Revenues
|
||||||||||||||||
Network
Infrastructure
|
$ | 34,932 | 83 | % | $ | 29,836 | 92 | % | 17 | % | ||||||||||
Customer
Premises Equipment
|
7,002 | 17 | % | 2,729 | 8 | % | 157 | % | ||||||||||||
Total
|
$ | 41,934 | 100 | % | $ | 32,565 | 100 | % | 29 | % |
Total net
revenues in 2008 were $41.9 million as compared to $32.6 million in 2007, an
increase of $9.3 million or 29%. Our product revenues for 2008 were
$40.0 million, a 36% increase compared to 2007 and our service revenues which
consist of design services performed for third parties on a contract basis and
HDMI and technology licenses were $1.9 million, a 41% decrease compared to 2007.
The increase in net revenue for 2008 compared to 2007 includes approximately
$6.2 million of increased sales as a result of the acquisition of Centillium in
the fourth quarter of 2008.
Our 2008
Network Infrastructure revenues were approximately $34.9 million, a $5.1 million
increase as compared to 2007 revenues. These 2008 revenues included increased
sales of our non-telecommunications ASIC products and our Entropia, L3M, E1Mx21
and ET family products which were offset by decreased sales of our ASPEN, ASPEN
Express and CUBIT-PRO products. Our 2008 CPE revenues were approximately $7.0
million, a $4.3 million increase as compared to 2007 revenues. This increase was
attributable to increased sales from our Apollo, Atlanta and Mustang products,
which are new product lines from the acquisition of Centillium.
For 2008
and 2007 international net revenues were approximately 85% and 79%,
respectively, of net revenues.
As of
December 31, 2008 our backlog was $8.3 million, as compared to $4.6 million as
of December 31, 2007. Backlog represents firm orders anticipated to be shipped,
and service revenue expected to be billed under existing contracts, during the
next 12 months. Our business and, to a large extent, that of the entire
communication semiconductor industry, is characterized by short-term order and
shipment schedules. Since orders constituting our 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 indicative of future
revenues.
Gross
Profit. Gross profit was $23.9 million and $20.2 million for
the years ended December 31, 2008 and 2007, respectively. Gross profit increased
by approximately $3.7 million for 2008 as compared to 2007 while the gross
profit as a percentage of revenue decreased by approximately 5%. This
is a result of increased revenue from our lower margin ASIC and newly acquired
Centillium products. During the years ended December 31, 2008
and 2007, gross profit was affected favorably in the amount of $1.6 million and
$1.2 million, respectively, from the sales of products that had previously been
written down to a cost basis of zero. Also during the years ended December 31,
2008 and 2007, we recorded provisions for excess and obsolete inventories in the
amount of $0.3 million and $0.4 million, respectively. These charges had a
negative impact on our gross profit.
-26-
We
anticipate that gross profit will continue to be impacted by fluctuations in the
volume and mix of our product shipments as well as material costs, yield and the
fixed cost absorption of our production operations.
Research and
Development. Research and development expenses
consist primarily of salaries and related costs of employees engaged in
research, design and development activities, costs related to electronic design
automation tools, subcontracting and fabrication costs, depreciation and
amortization and facilities expenses. Research and development expenses for 2008
were $24.6 million which increased $2.9 million, or 13% as compared to the prior
year. This increase was a result of increased expenses due to the
acquisition of Centillium and increased expenses due to our HDMI development
program partially offset by decreased depreciation and amortization and
decreases in salaries and subcontracting costs as a result of workforce
reductions and other cost cutting measures that were implemented in 2007 and
2008.
Marketing and
Sales. Marketing and sales expenses consist
primarily of personnel-related, trade show, travel and facilities expenses.
Marketing and sales expenses for 2008 were $8.8 million which decreased $1.4
million, or 14% as compared to the prior year. These expense decreases were
primarily from lower salaries and employee related expenses partially offset by
increased marketing and sales expenses due to the acquisition of
Centillium.
General and
Administrative. General and administrative
(G&A) expenses consist primarily of personnel-related expenses, professional
and legal fees, and facilities expenses. G&A expenses were $6.7
million in 2008, an increase of approximately $1.1 million or 19% compared to
the prior year. The increase was due to increased expenses due to the
acquisition of Centillium.
Restructuring
Charges. We recorded restructuring charges of $3.8
million and $1.4 million for 2008 and 2007, respectively. Information
on restructuring charges and asset impairments for each of the last two years is
located in Note 16 of the Notes to Consolidated Financial
Statements.
Change in Fair
Value of the Derivative Liability. For 2008 and 2007, we
recorded other expense of approximately $0.3 million and other income of
approximately $1.0 million, respectively, to reflect the change in the fair
value of the derivative liabilities.
During
the first quarter of 2008 we entered into a number of foreign exchange contracts
to purchase Indian rupees to fund our India operations. For the year ended
December 31, 2008, we recorded other expense of approximately $0.3 million to
reflect the change in the fair value of these derivative financial instruments.
There were no foreign exchange contracts outstanding at December 31,
2008.
For the
year ended December 31, 2007, we recorded other income of approximately $1.0
million to reflect the change in the fair value of the derivative liability
resulting from the 5.45% Convertible Plus Cash Notes due 2007 (“Plus Cash
Notes”). (Refer to Note 15 – Convertible Notes of the Notes to
Consolidated Financial Statements). There were no Plus Cash Notes outstanding at
December 31, 2008 and 2007.
Gain/Loss on
Extinguishment of Debt. On December 24, 2008, we entered into
an agreement with certain holders of our 5.45% Convertible Notes due 2010 (the
“2010 Notes”) to purchase $15.0 million aggregate principal amount of the Notes
for $9.9 million in cash, plus accrued and unpaid interest. As a
result of this transaction, we recorded a $4.5 million gain on the
extinguishment of debt in 2008.
On July
6, 2007, we exchanged approximately $21.2 million aggregate principal amount of
our outstanding Plus Cash Notes for an equivalent principal amount of the 2010
Notes. As a result, we recognized a $0.4 million extinguishment loss
in 2007.
Interest Expense
net. Interest expense, net decreased approximately $0.1
million to $1.0 million in 2008.
Interest
expense decreased from $3.6 million in 2007 to $1.9 million in 2008 due to lower
debt balances resulting from the exchanges of our Plus Cash Notes in 2007, the
payment at maturity of the remaining outstanding Plus Cash Notes in 2007 and the
elimination of the debt discount associated with the Plus Cash Notes during
2007.
Interest
income decreased from $2.5 million in 2007 to $0.9 million in 2008 as a result
of lower market yields due to decreased interest rates and lower cash and
investment balances. At December 31, 2008 and 2007, the effective interest rates
on our interest-bearing securities were approximately 1.63% and 4.70%,
respectively.
Income Tax
Expense. Our income tax expense of $0.5 million in 2008 and
$0.3 million in 2007 is applicable to the operating results of certain of our
foreign subsidiaries. We have incurred significant taxable losses for
U.S. federal and state purposes. We have not recognized any income tax benefits
on those losses because their realization is uncertain.
LIQUIDITY
AND CAPITAL RESOURCES
As of
December 31, 2009, we had cash, cash equivalents, restricted cash and short-term
investments of approximately $5.1 million compared to $15.3 million as of
December 31, 2008. Further, our working capital was a negative ($2.7) million
compared to $8.7 million last year. Our primary source of liquidity is cash,
cash equivalents and a bank line of credit. We have used cash in our operating
activities in each of the last three years, including $9.1 million in 2009,
$18.5 million in 2008 and $12.8 million in 2007. During 2009 we reduced our
notes payable from $10.0 million as of December 31, 2008 to $8.8 million as of
December 31, 2009.
In the
fourth quarter 2008, we implemented restructuring plans that included the
elimination of approximately 76 positions, primarily in our Shelton,
Connecticut, Bedford, Massachusetts, Fremont, California, Eclubens, Switzerland,
New Delhi, India and Bangalore, India locations. We continued to reduce expenses
in 2009 and in the first quarter of 2010 we implemented another restructuring
plan that included the elimination of an additional 20 positions. We believe
that we have reduced our anticipated operating expenses to the point where we
can break even on an operating income basis, excluding stock compensation costs
and amortization of purchase accounting intangibles, at the rate of $13.0
million in revenue per quarter.
Also, we
intend to continue to assess our cost structure in relationship to our revenue
levels and to make appropriate adjustments to expense levels as required.
None-the-less we believe that our existing cash and cash equivalents and a bank
financing facility will be sufficient to fund operating activities and capital
expenditures, and provide adequate working capital through at least December 31,
2010.
If our
existing resources and cash generated from operations are insufficient to
satisfy liquidity requirements, we may seek to raise additional funds through
public or private debt or equity financings. The sale of equity or
debt securities could result in additional dilution to our stockholders, could
require us to pledge our intellectual property or other assets to secure the
financing, or could impose restrictive covenants on us. We cannot be
certain that additional financing will be available in amounts or on terms
acceptable to us, or at all. If we are unable to obtain this
additional financing, we may be required to reduce the scope of our planned
product development and sales and marketing efforts, which could harm our
business, financial condition and operating results, and/or cause us to sell
assets or otherwise restructure our business to remain viable.
-27-
Commitments
and Significant Contractual Obligations
In
October of 2009, we exchanged approximately $10.0 million aggregate principal
amount of our 2010 Notes due September 30, 2010 for an equal principal amount of
new 5.45% Convertible Notes due September 30, 2011 (2011 Notes). We have
existing commitments to make future interest payments on the 2011 Notes and to
pay principal on a monthly basis until September 2011. Over the remaining life
of the outstanding 2011 Notes, we expect to pay approximately $0.4 million in
interest and $8.8 million of principal.
We have
outstanding operating lease commitments of $28.0 million, payable over the next
eight years. Some of these commitments are for space that is not being utilized
and, for which, we recorded restructuring charges in prior years for excess
facilities. We are in the process of trying to sublease additional excess space
but it is unlikely that any sublease income generated will offset the entire
future commitment. As of December 31, 2009, we have approximately $12.0 million
in anticipated sub-lease income over the next five years relating to portions of
our excess facilities. We currently believe that we can fund these lease
commitments in the future. However, there can be no assurances that we will not
be required to seek additional capital or provide additional guarantees or
collateral on these obligations.
A summary
of our significant future contractual obligations and their payments follows (in
thousands):
Payments Due by Period
|
||||||||||||||||||||
Contractual Obligations
|
Total
|
2010
|
2011
&
2012
|
2013 &
2014
|
Thereafter
|
|||||||||||||||
Interest
on convertible notes
|
$ | 438 | $ | 352 | $ | 86 | $ | — | $ | — | ||||||||||
Principal
on convertible notes
|
8,762 | 5,004 | 3,758 | — | — | |||||||||||||||
Operating
lease obligations
|
28,036 | 5,506 | 8,536 | 6,601 | 7,393 | |||||||||||||||
Purchase
obligations
|
5,657 | 5,657 | — | — | — | |||||||||||||||
$ | 42,893 | $ | 16,519 | $ | 12,380 | $ | 6,601 | $ | 7,393 |
We also
have pledged approximately $2.7 million as collateral for stand-by letters of
credit that guarantee certain long-term property lease obligations and to
support customer credit requirements. This $2.7 million is in our bank accounts
and is included in our restricted cash as of December 31, 2009.
Recent
Accounting Pronouncements
Newly
issued accounting pronouncements that potentially impact our financial
statements are disclosed in the Notes to Consolidated Financial Statements for
the fiscal year ended December 31, 2009 included elsewhere
herein.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate
Risk. We have investments in money market accounts that earn
interest income that is a function of the market rates. As a result, we have
exposure to changes in interest rates. For example, if interest rates were to
decrease by one half percentage point from their current levels, our potential
interest income for 2010, assuming a constant cash balance, would decrease by
less than $0.1 million.
Foreign Currency Exchange
Risk. As substantially all of our net revenues are currently
made or denominated in U.S. dollars, a strengthening of the dollar could make
our products less competitive in foreign markets. Although we recognize our
revenues in U.S. dollars, we incur expenses in currencies other than U.S.
dollars. In 2009, operating expenses incurred in foreign currencies, excluding
impairment of goodwill, were approximately 58% of our total operating expenses.
Although we have not experienced significant foreign exchange rate losses to
date, we may in the future, especially to the extent that we do not engage in
hedging. We
do not enter into derivative financial instruments for trading or speculative
purposes. The economic impact of currency exchange rate movements on our
operating results is complex because such changes are often linked to
variability in real growth, inflation, interest rates, governmental actions and
other factors. These changes, if material, may cause us to adjust our financing
and operating strategies. Consequently, isolating the effect of changes in
currency does not incorporate these other important economic
factors.
Fair Market Value of Financial
Instruments. As of December 31, 2009, our debt consisted
exclusively of convertible notes due September 30, 2011 with interest at a fixed
rate of 5.45%. Consequently, we do not have significant cash flow exposure on
the interest payments on these notes. However, the Company does have
considerable exposure in the requirement to redeem these convertible notes
between now and September 30, 2011. There is no guarantee that the
Company will have either enough cash to pay down this debt, or the ability to
refinance this debt on terms acceptable to the Company. The fair
market value of our outstanding 5.45% Convertible Notes due September 30, 2011
was estimated based on current market conditions at approximately $8.8 million
at December 31, 2009. Among other factors, changes in interest rates and the
price of our common stock affect the fair value of our convertible notes. Refer
to critical accounting policies and use of estimates in “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” for additional
information associated with our 2010 Notes.
RECENT
DEVELOPMENTS
Except as
otherwise set forth in the Agreement, borrowings made pursuant to the Agreement
will bear interest at a rate equal to the higher of (i) the Prime Rate (as
announced by Bridge Bank) or (ii) 4%, plus, in either case, a margin of
2.5%. Bridge Bank is also entitled to the payment of certain fees and
expenses pursuant to the Financing Documents, including an annual fee equal to
$62,500 and an early termination fee of 1% of the gross amount of the
Facility.
The
Agreement contains customary representations, warranties, and affirmative and
negative covenants for facilities of this type, including certain restrictions
on dispositions of the Company’s assets, changes in business, and incurrence of
certain indebtedness and encumbrances. The Agreement also contains
customary events of default, including payment defaults and a breach of
representations and warranties and covenants. If an event of default
occurs and is continuing, Bridge Bank has customary rights and remedies under
the Agreement, including the right to declare all outstanding indebtedness under
the Facility immediately due and payable, ceasing to advance money or extend
credit, and rights of set-off.
-28-
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
Controls
and Procedures
Conclusion
Regarding the Effectiveness of Disclosure Controls and Procedures
Under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934,
as amended. Based upon that evaluation, our principal executive officer and
principal financial officer concluded that, as of the evaluation date, our
disclosure controls and procedures are effective to ensure that information
required to be disclosed in the reports that we file or submit under the
Securities Exchange Act of 1934 are recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission’s rules and forms.
Management’s
Annual Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act
Rules 13a-15(f). Under the supervision and with the participation of our
management, including our principal executive officer and principal financial
officer, we conducted an evaluation of the effectiveness of our internal control
over financial reporting based on the framework in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on our evaluation under the framework in Internal Control — Integrated
Framework, our management concluded that our internal control over
financial reporting was effective as of December 31, 2009.
The
independent registered public accounting firm of the Company has issued a report
on its assessment of the effectiveness of the Company’s internal control over
financial reporting as of December 31, 2009. That report appears
elsewhere herein.
Changes
in Internal Control over Financial Reporting
No change
in our internal control over financial reporting occurred during the quarter
ended December 31, 2009, that materially affected, or is reasonably likely to
materially affect, our internal control over financial
reporting.
-29-
PRICE
RANGE OF OUR COMMON STOCK AND DIVIDEND INFORMATION
Our
common stock is traded under the symbol “TXCC” on The Nasdaq Capital
Market. The
following table sets forth, for the periods indicated, the range of high and low
closing prices for our common stock. The closing prices indicated reflect the 1
for 8 reverse stock split that was effected on November 23, 2009.
High
|
Low
|
|||||||
Quarter
to date
|
||||||||
First
Quarter
|
$ | 3.34 | $ | 1.52 | ||||
Second
Quarter (through April 9, 2010)
|
$ | 2.95 | $ | 2.71 | ||||
Year
ended December 31, 2009
|
||||||||
First
Quarter
|
$ | 4.00 | $ | 1.60 | ||||
Second
Quarter
|
$ | 4.16 | $ | 2.40 | ||||
Third
Quarter
|
$ | 6.00 | $ | 3.36 | ||||
Fourth
Quarter
|
$ | 5.68 | $ | 1.66 | ||||
Year
ended December 31, 2008
|
||||||||
First
Quarter
|
$ | 7.04 | $ | 4.80 | ||||
Second
Quarter
|
$ | 7.36 | $ | 4.88 | ||||
Third
Quarter
|
$ | 8.96 | $ | 4.00 | ||||
Fourth
Quarter
|
$ | 4.00 | $ | 2.08 |
As of
April 9, 2010, there were approximately 135 holders of record and
approximately 16,107 beneficial stockholders of our common stock.
We have
never paid cash dividends on our common stock. We currently do not
anticipate paying any cash dividend in the foreseeable future. Any future declaration and
payment of dividends will be subject to the discretion of our Board of
Directors, will be subject to applicable law and will depend upon our results of
operations, earnings, financial condition, contractual limitations, cash
requirements, future prospects and any other factors deemed relevant by our
Board of Directors.
-30-
PROPERTIES
Our
headquarters is located in a suburban office park in Shelton, Connecticut. We
have additional sales offices and design centers located throughout the
world. The following is
a summary of our material offices and locations for which we have lease
commitments:
Location
|
Business
Use
|
Square
Footage
|
Lease
Expiration Dates
|
||||
Shelton,
Connecticut
|
Corporation
Headquarters, Product Development, Operations, Sales, Marketing and
Administration
|
18,561 |
November 2012
|
||||
Herzeliya,
Israel
|
Product
Development, Sales & Service
|
9,688 |
Less than 1 Year
|
||||
New
Delhi, India
|
Product
Development
|
16,804 |
January
2015
|
||||
Fremont,
California
|
Product
Development, Sales, Marketing and Administration
|
12,500 |
February
2011
|
||||
Bangalore,
India
|
Product
Development
|
12,378 |
February
2014
|
||||
Excess
property:
|
|||||||
Fremont,
California
|
Available
for Lease
|
91,500 |
February
2011
|
||||
Shelton,
Connecticut
|
Available
for Lease
|
118,335 |
November 2012—April 2017
|
Internationally,
we lease space in Japan, China, Taiwan, France and South Korea for sales
offices. Our current facilities are adequate for our needs.
See Note
17—Commitments and Contingencies of our Consolidated Financial Statements in the
Notes the Financial Statements filed as Exhibits to our Annual Report on Form
10-K incorporated herein by reference and filed as an attachment hereto, for
additional disclosures regarding our commitments under lease obligations. Also, refer to Note
16—Restructuring and Asset Impairment Charges in our Consolidated Financial
Statements regarding our restructuring charges during fiscal years 2007 through
2009 as we have recorded charges for future rent payments relating to excess
office space.
LEGAL
PROCEEDINGS
We are
not party to any material litigation proceedings.
From time
to time, we may be subject to other legal proceedings and claims in the ordinary
course of business. We are not currently aware of any such proceedings or claims
that we believe will have, individually or in the aggregate, a material adverse
effect on the business, financial condition or results of our
operations.
-31-
Board
of Directors
Information
regarding our current Directors, including their respective ages, the year in
which each first joined the Company and their principal occupations or
employment during the past five years, is provided below:
Committee
Participation
|
||||||||||||||
Nominating
|
|
|||||||||||||
&
Year
|
Corporate
|
Audit
and
|
||||||||||||
Name
|
Age
|
Appointed
|
Position
|
Compensation
|
Governance
|
Executive
|
Finance
|
|||||||
Mr.
Gerald F. Montry
|
71
|
2000
|
Chairman
|
X
|
C
|
C
|
||||||||
Mr.
Faraj Aalaei
|
48
|
2008
|
Director
|
|||||||||||
Mr.
Thomas H. Baer
|
73
|
2008
|
Director
|
X
|
C
|
X
|
||||||||
Mr.
Herbert Chen
|
49
|
2008
|
Director
|
X
|
|
|||||||||
Mr.
Michael Crawford
|
44
|
2008
|
Director
|
X
|
||||||||||
Dr.
Santanu Das
|
65
|
1988
|
Director
|
|||||||||||
Dr.
M. Ali Khatibzadeh
|
50
|
2009
|
Director
|
X
|
|
|||||||||
Mr.
James M. Pagos
|
62
|
1999
|
Director
|
C
|
X
|
X
|
||||||||
Mr.
Sam Srinivasan
|
65
|
2008
|
Director
|
X
|
X
|
(X)
|
Member
of Committee
|
(C)
|
Chairman
of Committee
|
There are
no family relationships among any of the directors or named executive officers
of the Corporation.
Mr. Gerald F. Montry became a
director of the Corporation in May 2000 and became Chairman in May 2008. Since
1998 Mr. Montry has been the Managing Partner of Mont Reuil & Co., a private
investment firm. From 2002 to 2008 Mr. Montry served as a member of the Board of
Directors of Intervoice Corporation, a developer of voice recognition and speech
automation applications and held positions of Chairman of the Board and Chairman
of the Audit Committee. From 1986 through its acquisition by Alcatel in 1998,
Mr. Montry served as Senior Vice President and Chief Financial Officer of DSC
Communications Corporation, a telecommunications equipment provider. He also
served as a member of the Board of Directors. Prior to his tenure at DSC, Mr.
Montry held management positions within the Aerospace, Defense and Computer
industries.
Mr. Faraj Aalaei became a
director of the Corporation in October 2008. He is currently the President and
CEO of Aquantia Corporation. Prior to this, Mr. Aalaei served as
Chief Executive Officer and was one of the founders of Centillium Corporation.
Mr. Aalaei served as the Vice President, Marketing and Business Development from
Centillium’s inception in February 1997 until January 2000, when he was named
Chief Executive Officer. Prior to co-founding Centillium, Mr. Aalaei was
Director of Access Products at Fujitsu Network Communications, Inc., a designer
and manufacturer of fiber-optic transmission and broadband switching platforms,
from October 1993 to February 1997. Mr. Aalaei received a B.S. in Electrical
Engineering Technology from Wentworth Institute of Technology, an M.S. in
Electrical Engineering from the University of Massachusetts and an M.B.A. from
the University of New Hampshire.
Mr. Thomas H. Baer became a
director of the Corporation in May 2008. Mr. Baer has served as a director of
Medici Arts, B.V, a Netherlands holding company since its creation in September
2004, and as Vice Chairman of Medici Arts, LLC since January 2007. Since
November, 2007, Mr. Baer has served as a special advisor to Ideation Acquisition
Corporation, a special purpose acquisition corporation seeking acquisitions in
the digital media space. Mr. Baer founded Baer & McGoldrick, now Schulte,
Roth and Zabel, a New York and London based law firm. From 1961 to 1966 Mr. Baer
served as an Assistant United States Attorney for the Southern District of New
York. Since 1983, Mr. Baer has been active as a motion picture producer and as
an executive in the entertainment and media industry in partnership with Michael
H. Steinhardt. Mr. Baer is a graduate of Tufts University and Yale Law
School.
Mr. Herbert Chen became a
director of the Corporation in May 2008. Mr. Chen is the co-founder and managing
member of Lattanzio Chen Management, LLC, an investment firm based in New York,
New York that he founded in 2005. He also founded the investment firm of Chen
Capital Management, Inc. in 1993. In addition Mr. Chen was a partner at
Steinhardt Partners, LP from 1991 to 1993. Mr. Chen does not sit on the board of
directors of any other corporation. Mr. Chen received a BA from Brown University
in 1982 and an MBA from the Wharton School in 1987.
Mr. Michael Crawford became a
director of the Corporation in December 2008. He is a Senior Analyst at B. Riley
& Co. and joined Riley Investment Management LLC as Research Director from
April 2007 to November 2008. B. Riley & Co. is a FINRA and SIPC member firm
providing research and trading ideas to institutional clients and high net worth
individuals, and investment banking services to a wide range of middle market
private and public companies. Riley Investment Management LLC is an investment
adviser, which provides investment management services and is the general
partner of Riley Investment Partners Master Fund, L.P. Mr. Crawford earned an
MBA at USC’s Marshall School of Business in 1998 and joined Seidler AMDEC
Research as a sell-side analyst before joining B. Riley & Co. as a Senior
Analyst in March 1999, where he covered a wide range of special situations
during a near six-year tenure. From January 2005 through March 2007, Mr.
Crawford served as Research Director of Barrington Wilshire, Inc., providing
services to its two managed hedge funds, Barrington Partners and Barrington
Investors. Prior to business school, Mr. Crawford worked in a variety of
capacities at Sumitomo Bank of California from 1990 to 1996, including public
affairs, fixed income portfolio management, trading, and as Assistant Corporate
Secretary. Mr. Crawford earned his Bachelor of Science from UC Berkeley in
1988.
Dr. Santanu Das, a founder of
the Corporation, has been a director of the Corporation since its inception in
1988. He was President and Chief Executive Officer of the Corporation from 1998
to December 2009. Prior to joining the Corporation, Dr. Das held various
positions, including President, with Spectrum Digital Corporation, where he
worked from 1986 through 1988. Prior to joining Spectrum Digital Corporation, he
held various positions, including Director of the Applied Technology Division of
ITT Corporation’s Advanced Technology Center.
Dr. M. Ali Khatibzadeh became
a director of the Corporation in December 2009. He has been President and Chief
Executive Officer of the Corporation since December 2009. Dr. Khatibzadeh has
over twenty years of engineering and general management experience in the
communications semiconductor industry. Prior to his appointment at the
Corporation, he was Senior Vice President and General Manager of the RF Products
Business Unit of Anadigics (NASDAQ: ANAD) from April 2009 to October 2009. He
also served Anadigics as Senior Vice President and General Manager of the
Wireless Business Unit from August 2005 to April 2009 and as Vice President of
the Wireless Business Unit from June 2000 to August 2005. Prior to Anadigics,
Dr. Khatibzadeh was Director of Technology for Ericsson in its American Business
Unit and Worldwide RF IC Design manager at Texas Instruments Wireless
Communications Business Unit. Dr. Khatibzadeh holds a Ph.D., M.S., and a B.S. in
Electrical Engineering as well as a B.S. in Physics from North Carolina State
University.
Mr. James M. Pagos became a
director of the Corporation in April 1999. Since May 2001, Mr. Pagos has been
the Chief Executive Officer of P TEK, LLC, a consulting and investment company.
From September 2006 to February 2008 Mr. Pagos was the Chief Executive Officer
and member of the Board of Renaissance Lighting, a solid state lighting fixture
and technology company located in Herndon, VA. From August 2003 to September
2006, Mr. Pagos was Chief Executive Officer and member of the Board of Vibrant
Solutions, Inc., a provider of performance improvement software and services to
the telecom industry. From November 1999 to April 2001, Mr. Pagos was the Chief
Executive Officer of Vectant, Inc., a global infrastructure and data network
services corporation. From 1972 to 1999, Mr. Pagos was employed by AT&T, a
telecommunications corporation, where he most recently served as Chief Operating
Officer of AT&T Solutions, the managed services division of AT&T. He
also served as Vice President of AT&T Global Services from 1994 until June
1998 and began his telecommunications career in 1972 with AT&T in New
England Telephone.
-32-
Mr. Sam
Srinivasan became a director of the Corporation in October
2008. From 2004 to 2009, he served on the board of SiRF Technology
Holdings, Inc., a semiconductor company. From 2006 to 2008, he served
on the board of Centillium Communications, Inc. From 2008 to 2009, he
served on the board of Leadis Technology, Inc. Currently, Mr.
Srinivasan serves as the Chairman of the Audit Committees of Inphi Corporation
and Beceem Communications, Inc., also. From May 2000 until March
2002, he served as Founder and Chairman of Health Language, Inc. From
November 1988 until March 1996, he served as Senior Vice President, Finance and
Chief Financial Officer of Cirrus Logic. From May 1984 until
November, 1988, he served as director of internal audits and subsequently as
Corporate Controller of Intel Corporation. Mr. Srinivasan holds an
MBA from Case Western Reserve University, Cleveland, Ohio and is a member of the
American Institute of Certified Public Accountants.
-33-
CORPORATE
GOVERNANCE AND BOARD MATTERS
Independence
of Members of the Board of Directors
The Board
of Directors has determined that each of Messrs. Montry, Baer, Chen, Crawford,
Pagos and Srinivasan has no relationship with the Corporation other than service
on the Board of Directors and is independent within the meaning of the
Corporation’s director independence standards and the director independence
standards of the NASDAQ Stock Market, Inc. (“NASDAQ”). Furthermore, the Board of
Directors has determined that each member of each of the committees of the Board
of Directors has no relationship with the Corporation other than service on the
Board of Directors and is independent within the meaning of the Corporation’s
and NASDAQ’s director independence standards.
The
business and affairs of the Corporation are managed under the direction of its
Board of Directors. The Board of Directors met six times in person, six times
via the telephone during the fiscal year ended December 31, 2009. Each of the
directors attended at least 75% of the aggregate of all meetings of the Board of
Directors and of all committees on which he serves. The Corporation does not
have a formal policy regarding attendance by members of the Board of Directors
at the Corporation’s annual meeting of stockholders, although it does encourage
attendance by the directors. Of the eleven members of the Board of Directors who
were serving as directors at the 2009 annual meeting of shareholders, all were
in attendance at such meeting. During 2009, the Board
of Directors held executive sessions on a regular basis that excluded the Chief
Executive Officer and President, who is a member of management and is not
independent.
Any
holder of the Corporation’s securities that wishes to communicate directly with
an individual member of the Board of Directors or the Board as a whole may do so
by sending such communication to the director or directors at TranSwitch
Corporation, Three Enterprise Drive, Shelton, CT 06484. For more information
regarding Security Holder—Board Communications please see the Policy Governing
Director Nominations and Security Holder—Board Communications at the Investor
Relations section of the Corporation’s website
http://www.transwitch.com.
Board
Leadership Structure
The
Corporation separates the roles of Chairman of the Board and Chief Executive
Officer. The Board feels that having separate positions allows each individual
to focus on the primary responsibility of their position. The CEO provides the
strategic vision for the Corporation and manages its day-to-day operations. The
Chairman provides guidance to the CEO and manages the activities of the
Board.
Risk
Oversight
The Board
of Directors has overall responsibility for risk oversight in the Corporation.
This responsibility is delegated to each committee of the Board, which focuses
on the risk in its particular scope. The Audit Committee assesses the risk in
the Corporation’s financial position and any risk in its system of internal
controls. The Compensation Committee examines the risk created by its employee
related policies. The Strategy and R&D Committee reviews the risk of the
Corporation’s strategic initiatives and product development
process.
Audit
Committee
The Audit
Committee of the Board of Directors, established in accordance with Section
3(a)(58)(A) of the Securities Exchange Act of 1934, as amended, currently
consisting of Messrs. Gerald F. Montry (Chairman), James M. Pagos, and Sam
Srinivasan oversees the accounting and financial reporting processes of the
Corporation and the audits of the financial statements of the Corporation. The
Audit Committee assists the Board of Directors in fulfilling its
responsibilities by reviewing with the Corporation’s independent auditors the
scope and timing of their audit services and any other services the independent
auditors are asked to perform and the independent auditor’s report on the
Corporation’s consolidated financial statements and its internal control over
financial reporting following completion of their audit. The Audit Committee
also (i) oversees the appointment, compensation, retention and oversight of the
work performed by any independent public accountants engaged by the Corporation,
(ii) serves as the Qualified Legal Compliance Committee of the Corporation in
accordance with Section 307 of the Sarbanes-Oxley Act of 2002 (the
“Sarbanes-Oxley Act”) and the rules and regulations promulgated by the SEC
thereunder, (iii) recommends, establishes and monitors procedures designed to
facilitate (a) the receipt, retention and treatment of complaints relating to
accounting, internal accounting controls or auditing matters and (b) the receipt
of confidential, anonymous submissions by employees of concerns regarding
questionable accounting or auditing matters, (iv) engages advisors as necessary,
and (vi) determines the funding from the Corporation that is necessary or
appropriate to carry out the Audit Committee’s duties. The Audit Committee met
thirteen times during the fiscal year ended December 31, 2009.
The Audit
Committee operates under a written charter adopted by the Board of Directors, a
current copy of which is available at the Investor Relations section of the
Corporation’s website at http://www.transwitch.com.
Compensation
Committee
The
Compensation Committee of the Board of Directors, consisting of Messrs. James M.
Pagos (Chairman), Thomas H. Baer, Michael Crawford and Gerald F. Montry, reviews
and evaluates the compensation and benefits of all officers of the Corporation,
reviews general policy matters relating to compensation and benefits of
employees of the Corporation and administers the Corporation’s 2008 Equity
Incentive Plan and the 2005 Employee Stock Purchase Plan. The Compensation
Committee met nine times during the fiscal year ended December 31,
2009.
The
Compensation Committee operates under a written charter adopted by the Board of
Directors, a current copy of which is available at the Investor Relations
section of the Corporation’s website at http://www.transwitch.com.
Nominating
and Corporate Governance Committee
The
Nominating and Corporate Governance Committee of the Board of Directors,
consisting of Messrs. James M. Pagos (Chairman), Thomas Baer and Sam Srinivasan,
is responsible for (i) reviewing and making recommendations to the Board of
Directors regarding the Board of Directors’ composition and structure, (ii)
establishing criteria for membership on the Board of Directors and evaluating
corporate policies relating to the recruitment of members of the Board of
Directors; and (iii) establishing, implementing and monitoring policies and
processes regarding principles of corporate governance in order to ensure the
Board of Directors’ compliance with its fiduciary duties to the Corporation and
its stockholders. The Nominating and Corporate Governance Committee met twice
during the fiscal year ended December 31, 2009. The Nominating and Corporate
Governance Committee will consider nominations for directors from the
stockholders delivered pursuant to the Policy Governing Director Nominations and
Security Holder – Board Communications which is available on the Corporation’s
website.
Stockholders
wishing to bring a nomination for a director candidate before a stockholders
meeting must give written notice to the Nominating and Corporate Governance
Committee c/o Mr. Robert A. Bosi, Vice President and CFO, TranSwitch
Corporation, Three Enterprise Drive, Shelton, CT 06484. The stockholder’s notice
must set forth all information relating to each person whom the stockholder
proposes to nominate that is required to be disclosed under applicable rules and
regulations of the SEC and the Policy Governing Director Nominations and
Security Holder-Board Communications.
The
Nominating and Corporate Governance Committee operates under a written charter
adopted by the Board of Directors, a current copy of which is available at the
Investor Relations section of the Corporation’s website at
http://www.transwitch.com. The policies regarding shareholder nomination of
directors can also be found at the Investor Relations section of the
Corporation’s website at http://www.transwitch.com.
For more
information regarding the governance of our Corporation, you are invited to
access the Investor Relations section of our website available at
http://www.transwitch.com.
-34-
Compensation
of Directors
Directors
who are not employees of the Corporation receive compensation in the form of
cash and Restricted Stock Units.
Cash
|
RSUs
|
|||||||
Annual
retainer
|
$ | 20,000 | $ | 40,000 | ||||
Board
Chair
|
$ | 20,000 | $ | 20,000 | ||||
Committee
Chair
|
$ | 5,000 | ||||||
Member
- Audit Committee
|
$ | 10,000 | $ | 10,000 | ||||
Member
- Compensation Committee
|
$ | 10,000 | $ | 8,000 | ||||
Member
– Other Committees
|
$ | 10,000 | $ | 7,000 |
Cash
compensation is paid quarterly. Restricted Stock Units are granted
semi-annually, at the December and May regularly scheduled Board meetings. The
amount of RSUs granted is determined by the closing stock price of the
Corporation’s Common Stock on the grant date. These RSUs vest 100% one year from
the grant date.
All
directors are reimbursed for reasonable out-of-pocket expenses incurred in
connection with attending Board and committee meetings. No employee of the
Corporation receives separate compensation for services rendered as a
director.
Dr. Das
has received no compensation for services as a director since his resignation as
President and CEO. Dr. Das received a severance payment of $350,000 pursuant to
a severance agreement with the Corporation that was effective on December 1,
2009. He currently has a consulting agreement with the Corporation
commencing December 2, 2009 under which he shall perform such duties and accept
such responsibilities as may reasonably be assigned to him by the Board and the
Chief Executive Officer. These duties have primarily involved working with Dr.
Khatibzadeh to ensure a smooth transition with customers, investors, and
employees. Payments to Dr. Das in 2009 under this agreement are shown under All
Other Compensation in the executive Summary Compensation Table.
Director
Compensation Table
Director
|
Fees
Earned or
Cash
Paid
$
|
Equity
Awards (1)
$
|
All
Other
Compensation
$
|
Total
$
|
||||||||||||
Mr.
Gerald F. Montry, Chairman (2)
|
76,358 | 65,998 | 0 | 142,356 | ||||||||||||
Mr.
James M. Pagos (3)
|
62,460 | 59,501 | 0 | 121,961 | ||||||||||||
Mr.
Herbert Chen (4)
|
45,255 | 50,500 | 0 | 95,755 | ||||||||||||
Mr.
Thomas H. Baer (5)
|
45,255 | 51,001 | 0 | 96,256 | ||||||||||||
Mr.
Faraj Aalaei (6)
|
30,000 | 43,499 | 13,771 | 87,270 | ||||||||||||
Mr.
Sam Srinivasan (7)
|
33,602 | 48,500 | 0 | 82,102 | ||||||||||||
Mr.
Michael Crawford (8)
|
30,000 | 44,000 | 0 | 74,000 | ||||||||||||
Dr.
Santanu Das (9)
|
0 | 0 | 0 | 0 | ||||||||||||
Dr.
Albert Paladino (10)
|
13,642 | 0 | 0 | 13,642 | ||||||||||||
Mr.
Alfred Boschulte (11)
|
13,642 | 0 | 0 | 13,642 | ||||||||||||
Mr.
Hagen Hultzsch (12)
|
11,694 | 0 | 0 | 11,694 |
(1)
|
The
assumptions used to calculate the value of stock awards are set forth
under Note 10 of the Notes to Consolidated Financial Statements included
in our Annual Report on Form 10-K filed with the SEC on March 16, 2010.
The calculation above is a FAS123R
calculation.
|
(2)
|
Mr.
Montry was granted 16,129 restricted stock units on May 21, 2009 and
10,699 restricted stock units on December 9, 2009. Both of these grants
will vest one year after the grant date. Mr. Montry has 14,400 stock
options outstanding as well as the 26,828 restricted stock
units.
|
(3)
|
Mr.
Pagos was granted 16,129 restricted stock units on May 21, 2009 and 8,025
restricted stock units on December 9, 2009. Both of these grants will vest
one year after the grant date. Mr. Pagos has 14,400 stock options
outstanding as well as the 24,154 restricted stock
units.
|
(4)
|
Mr.
Chen was granted 16,129 restricted stock units on May 21, 2009 and 4,321
restricted stock units on December 9, 2009. Both of these grants will vest
one year after the grant date. In addition to these 20,450 restricted
stock units, Mr. Chen has 4,687 options
outstanding.
|
(5)
|
Mr.
Baer was granted 16,129 restricted stock units on May 21, 2009 and 4,527
restricted stock units on December 9, 2009. Both of these grants will vest
one year after the grant date. In addition to these 20,656 restricted
stock units, Mr. Baer also has 4,687 stock options
outstanding.
|
(6)
|
Mr.
Aalaei was granted 16,129 restricted stock units on May 21, 2009 and 1,440
restricted stock units on December 9, 2009. Both of these grants will vest
one year after the grant date. In addition to these 17,569 restricted
stock units, Mr. Aalaei also has 294,850 stock options outstanding. On
August 6, 2009, Mr. Aalaei had 3,187 restricted stock units released. The
proceeds from this transaction was
$13,771.
|
(7)
|
Mr.
Srinivasan was granted 16,129 restricted stock units on May 21, 2009 and
3,498 restricted stock units on December 9, 2009. Both of these
grants will vest one year after the grant date. In addition to these
19,627 restricted stock units, Mr. Srinivasan also has 36,559 stock
options outstanding.
|
(8)
|
Mr.
Crawford currently serves as a Director but is not standing for election
at the Annual Meeting. He was granted 16,129 restricted stock
units on May 21, 2009 and 1,646 restricted stock units on December 9,
2009. In addition to these 17,775 restricted stock units, Mr. Crawford
also has 4,687 stock options
outstanding.
|
(9)
|
Dr.
Das currently serves as a Director but is not standing for election at the
Annual Meeting. He resigned as the CEO in December of 2009. He
received no stock options or awards in 2009. Payments to Dr. Das in 2009
for his service as CEO, pursuant to his severance agreement and under his
consulting agreement with the Corporation are shown in the Summary
Compensation Table for named executive officers under the Salary and All
Other Compensation columns.
|
(10)
|
Dr.
Paladino resigned as a Director in 2009. He received no stock options or
awards in 2009. He has 18,337 stock options
outstanding.
|
(11)
|
Mr.
Boschulte resigned as a Director in 2009. He received no stock
options or awards in 2009. Mr. Boschulte currently owns 14,400 outstanding
stock options.
|
(12)
|
Mr.
Hultzsch resigned from TranSwitch’s Board of Directors in 2009. Mr.
Hultzsch was granted 562 stock options on October 8, 2009 for
participation on a TranSwitch subsidiary Board of Directors. This award
will vest one year after the grant date. He has 14,962 stock options
outstanding and 0 restricted stock units
outstanding.
|
-35-
Compensation
Committee Interlocks and Insider Participation
Mr.
Alfred Boschulte (Chairman), Mr. Herbert Chen, Dr. Hagen Hultzsch, and Mr.
Michael Crawford, through May 20, 2009, and Messrs. James M. Pagos (Chairman),
Thomas, H. Baer, Michael Crawford, and Gerald F. Montry, after May 20, 2009,
comprised the Compensation Committee for fiscal year ended December 31, 2009. No
person who served as a member of the Compensation Committee was, during the past
fiscal year, an officer or employee of the Corporation or any of its
subsidiaries, was formerly an officer of the Corporation or any of its
subsidiaries, or had any relationship requiring disclosure herein. No executive
officer of the Corporation served as a member of the Compensation Committee (or
other Board committee performing equivalent functions or, in the absence of any
such committee, the entire Board of Directors) of another entity, one of whose
executive officers served as a director of the Corporation. Nor did any
executive officer of the Corporation serve as a director of another entity, one
of whose executive officers served on the Compensation Committee of the
Corporation.
Code
of Business Conduct and Ethics
The Board
of Directors adopted a Code of Business Conduct and Ethics (the “Ethics Code”)
for all employees, officers and directors. The Ethics Code meets the
requirements of regulations promulgated under the Securities Act of 1933, as
amended, and the Securities Exchange Act of 1934, as amended. We require all
employees to adhere to the Ethics Code in addressing the legal and ethical
issues encountered in conducting their work. The Ethics Code requires that our
employees avoid conflicts of interest, comply with all laws and other legal
requirements, conduct business in an honest and ethical manner and otherwise act
with integrity and in the Corporation’s best interest. In support of the Ethics
Code, the Corporation has provided its employees with numerous avenues for the
reporting of ethics violations or other similar concerns, including employee
reports and an anonymous telephone hotline. The Nominating and Corporate
Governance Committee monitors the implementation and enforcement of the Ethics
Code.
A current
copy of the Ethics Code is available at the Investor Relations section of the
Corporation’s website. A copy of the Ethics Code may also be obtained, free of
charge, from the Corporation upon a request directed to: TranSwitch Corporation,
Three Enterprise Drive, Shelton, CT 06484, Attention: Investor Relations. The
Corporation intends to disclose amendments to or waivers from a provision of the
Ethics Code, by posting such information on its website available at
http://www.transwitch.com.
-36-
The
following table sets forth as of the March 23, 2010 certain information
regarding the ownership of outstanding shares of Common Stock by (i) each person
who, to the knowledge of the Corporation, beneficially owns more than 5% of the
outstanding shares of Common Stock, (ii) each director of the Corporation, (iii)
each Named Executive Officer (as defined under “Compensation and Other
Information Concerning Named Executive Officers”) and (iv) all directors and
Named Executive Officers as a group. Unless otherwise indicated below, each
person listed below maintains a business address in the care of TranSwitch
Corporation, Three Enterprise Drive, Shelton, Connecticut 06484 and has sole
voting and investing power with respect to all shares of Common Stock
owned.
Name and Address of Beneficial
Owner
|
Amount
and Nature of
Beneficial Ownership (1)
|
Percent
of
Class (2)
|
||||||
Herbert
Chen (3)
Chen
Capital Management, Inc.
650
Madison Avenue, 17th Floor
New
York, NY 10022
|
|
2,500,438 | 12.16 | % | ||||
Michael
H. Steinhardt (4)
650
Madison Avenue, 17th Floor
New
York, NY 10022
|
1,783,623 | 8.67 | % | |||||
Brener
International Group (5)
421
N. Beverly Drive, Suite 300
Beverly
Hills, CA 90210
|
1,243,750 | 6.05 | % | |||||
Dr.
M. Ali Khatibzadeh (6)
|
254,800 | 1.24 | % | |||||
Dr.
Santanu Das (7)
|
194,975 | 1.00 | % | |||||
Mr.
Michael McCoy (8)
|
22,971 | * | ||||||
Mr.
Theodore Chung (9)
|
46,471 | * | ||||||
Mr.
Robert A. Bosi (10)
|
19,250 | * | ||||||
Mr.
Michael Macari (11)
|
62,208 | * | ||||||
Mr.
Kris Shankar (12)
|
46,082 | * | ||||||
Mr.
Gerald F. Montry (13)
|
136,926 | * | ||||||
Mr.
James M. Pagos (14)
|
42,254 | * | ||||||
Mr.
Thomas H. Baer (15)
|
24,378 | * | ||||||
Mr.
Faraj Aalaei (16)
|
356,084 | 1.73 | % | |||||
Mr.
Sam Srinivasan (17)
|
46,208 | * | ||||||
Mr.
Michael Crawford (18)
|
34,223 | * | ||||||
All
directors and executive officers as a group (14 persons)
|
3,787,268 | 17.73 | % |
*
|
Less
than 1% of the outstanding Common
Stock.
|
(1)
|
Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission (the “SEC”) and generally includes voting or
investment power with respect to securities. Shares of Common Stock
subject to options currently exercisable or exercisable within 60 days of
the Record Date (“Presently Exercisable Securities”) are deemed
outstanding for computing the percentage held by each person or entity
listed, but are not deemed outstanding for computing the percentage of any
other person or entity.
|
(2)
|
Percentage
of beneficial ownership is based on 20,542,924 shares of Common
Stock outstanding as of March 23,
2010.
|
(3)
|
In
calculating the beneficial ownership of this person, the Corporation has
relied upon the Form 4 filed by this entity with the SEC on June 16, 2008
adjusted for an 8 for 1 reverse stock split. According to this Form 4, Mr.
Chen directly owns 470,227 shares and indirectly owns 2,009,395 shares, of
which 9,753 shares are owned directly by his wife, 75 shares are owned
directly by his minor daughter, and 1,999,567 shares are held in accounts
of unregistered investment companies and managed accounts over which Mr.
Chen has investment control. In addition, Mr. Chen beneficially owns
20,816 shares issuable upon the exercise of Presently Exercisable
Securities.
|
(4)
|
In
calculating the beneficial ownership of this person, the Corporation has
relied upon the Schedule 13G, filed by him with the SEC on December 31,
2009. According to such Schedule 13G, Mr. Steinhardt shares voting and
dispositive power over the shares reported with Ilex Partners, L.L.C. and
Steinhardt Overseas Management,
L.P.
|
(5)
|
In
calculating the beneficial ownership of this entity, the Corporation has
relied upon the Schedule 13D, filed by this entity with the SEC on March
16, 2010, According to this Schedule 13D, Brener International Group, LLC
has sole voting and dispositive power over 393,750 shares; Marbre Servias,
Ltd. has sole voting and dispositive power over 837,500 shares; and Clive
Fleissig has sole voting and dispositive power over 12,500
shares.
|
(6)
|
Consists
of 254,800 shares owned and 0 shares issuable upon exercise of Presently
Exercisable Securities. 247,400 shares are owned directed by Dr.
Khatibzadeh and 7,400 shares are held by his minor daughter. Dr.
Khatibzadeh is the Corporation’s President and CEO and is also a Director
of the Corporation.
|
(7)
|
Consists
of 8,758 shares owned and 186,217 shares issuable upon exercise of
Presently Exercisable Securities. Dr. Das currently serves on the Board of
Directors of the Corporation.
|
(8)
|
Consists
of 9,650 shares owned and 13,321 shares issuable upon exercise of
Presently Exercisable Securities. Mr. McCoy is the Corporation’s Corporate
Secretary.
|
(9)
|
Consists
of 2,500 shares owned and 43,971 shares issuable upon exercise of
Presently Exercisable Securities. Mr. Chung serves as the Vice President -
Business Development.
|
(10)
|
Consists
of 13,000 shares owned and 6,250 shares issuable upon exercise of
Presently Exercisable Securities. Mr. Bosi is the Corporation’s Vice
President and Chief Financial
Officer.
|
(11)
|
Consists
of 167 shares owned and 62,041 shares issuable upon exercise of Presently
Exercisable Securities. Mr. Macari is the Corporation’s Vice President -
Engineering and Operations.
|
(12)
|
Consists
of 821 shares owned and 45,261 shares issuable upon exercise of Presently
Exercisable Securities. Mr. Shankar is the Corporation’s Vice President –
Worldwide Sales and Marketing.
|
(13)
|
Consists
of 106,397 shares owned and 30,529 shares issuable upon exercise of
Presently Exercisable Securities. Mr. Montry is the Chairman of the Board
of Directors of the Corporation.
|
(14)
|
Consists
of 11,725 shares owned and 42,254 shares issuable upon exercise of
Presently Exercisable Securities.
|
(15)
|
Consists
of 1,250 shares owned directly and 2,312 shares owned indirectly in
charitable remainder trust as well as 20,816 shares issuable upon exercise
of Presently Exercisable
Securities.
|
(16)
|
Consists
of 53,073 shares owned and 303,011 shares issuable upon exercise of
Presently Exercisable Securities.
|
(17)
|
Consists
of 747 shares owned and 45,461 shares issuable upon exercise of Presently
Exercisable Securities.
|
(18)
|
Consists
of 15,000 shares owned and 19,223 shares issuable upon exercise of
Presently Exercisable
Securities.
|
-37-
Compensation
Discussion and Analysis
Introduction
The
Compensation Committee of the Board of Directors (the “Compensation Committee”)
has the responsibility for establishing, implementing and monitoring the
Corporation’s executive compensation programs. The Compensation Committee is
responsible for ensuring that its total compensation paid to its executives is
competitive, reasonable, fair and adheres to the Corporation’s compensation
philosophy and objectives.
Throughout
this proxy statement, the individuals who served as the Corporation’s President
and Chief Executive Officer and the Corporation’s Chief Financial Officer during
fiscal years 2007, 2008 and 2009, as well as the other individuals included in
the Summary Compensation Table below are referred to as the “Named Executive
Officers.” The Corporation had several changes in fiscal 2009 to the individuals
serving as our Named Executive Officers. Dr. M. Ali Khatibzadeh was appointed
President and Chief Executive Officer effective December 1, 2009, replacing Dr.
Santanu Das, who resigned effective the same day. In May, the Board elected Kris
Shankar to serve as a Section 16 Corporate Officer. In August, the Board elected
Michael Macari to be a Section 16 Corporate Officer.
Compensation
Committee
All
members of the Compensation Committee meet the independence requirements as
determined in accordance with Securities and Exchange Commission, the National
Association of Securities Dealers and Internal Revenue Code rules. Members of
the Committee are appointed annually by the outside Directors of the Board. Each
member of the Committee will serve until his successor is appointed and
qualified, or until his earlier resignation or removal. The Compensation
Committee operates under a written charter adopted by our Board. The
Compensation Committee’s charter is available on the TranSwitch corporate
website under Investor Relations—Corporate Governance:
http://www.transwitch.com/investors/compensation/index.jsp.
Members
of the Committee have significant depth of experience relevant to compensation
matters at both the Board and corporate levels. They serve on other boards, and
have extensive knowledge of TranSwitch and the telecommunications industry,
which assists in their evaluation of the Named Executive Officers’ performance
and compensation. The Compensation Committee members and its Chairman are
selected by the Board of Directors following the annual meeting of the
shareholders and their own reelection at that time.
The
Compensation Committee’s role is generally one of oversight. Management is
responsible for designing and modifying salary ranges and grades, incentive
compensation programs, compensation strategy and practices, performance
evaluation systems, succession planning, and the conduct and funding of the
various retirement plans of the Corporation. In carrying out its
responsibilities, the Committee provides oversight, review, and consultation to
management.
The
Compensation Committee’s scope of authority includes discharging the Board of
Director’s responsibilities relating to corporate executive compensation,
reviewing and approving administration of the Corporation’s incentive
compensation and stock plans, and producing an annual report on executive
compensation for inclusion in the Corporation’s proxy statement. The Committee
reviews proposals and makes recommendations to the Corporation’s management on
company-wide compensation programs and practices.
Pursuant
to the charter of the Compensation Committee, the Compensation Committee has the
authority to retain a compensation consultant to advise the Committee on
executive compensation practices and policies, or any other matters within its
charter. In 2009, no compensation consultant was engaged for employee or
executive compensation.
Role
of Executives in Establishing Compensation
At the
invitation of the Compensation Committee, select executives attend Compensation
Committee meetings. The Corporation’s Chief Executive Officer (“CEO”) and other
members of management regularly attend meetings of the Compensation Committee.
The Chief Financial Officer prepares information for review with the CEO, which
he then presents to the Compensation Committee at each meeting. In addition, the
Compensation Committee periodically assigns special action items or compensation
programs to be researched and reported on to the Committee by
executives.
Each
year, management makes a general recommendation to the Compensation
Committee of reward actions for TranSwitch for the coming year. When making the
recommendation, the CEO and management consider recent trends in executive
compensation among other factors. During the fourth quarter, management presents
a proposal to the Compensation Committee for the upcoming year’s reward cycle.
This recommendation takes into account the status of the Corporation’s
profitability, performance, as well as retention and other talent management
issues.
As
further discussed below, following the presentation of trends and/or
compensation programs to the Compensation Committee, the Chief Executive Officer
meets with other members of management to make specific recommendations for each
executive officer, other than the Chief Executive Officer. The specific
recommendations are then presented to the Compensation Committee for review and
approval.
Compensation
Philosophy
The
Corporation’s executive compensation programs are designed to provide levels of
compensation that will allow the Corporation to attract, motivate and retain
qualified executives. It provides a competitive compensation package that
ultimately is based on individual and company performance. The Committee’s goal
is to establish performance criteria, evaluate executive performance against
those criteria, and establish base salary, annual bonuses and long-term
incentives for the Corporation’s key decision-makers. Bonuses and incentives are
designed to maximize the Corporation’s short- and long-term financial results
for the benefit of the Corporation’s stockholders.
Generally,
total compensation consists of base salary and equity awards that are targeted
at the median of the Peer Group (see discussion below). Typically, the
Corporation’s long-term compensation awards consist of equity awards in the form
of Restricted Stock Units, since the Corporation has not given cash bonuses in
recent years in order to achieve its financial and business goals.
Setting
Executive Compensation
The
Corporation has structured the Corporation’s base salaries and non-cash
executive compensation to motivate executives to achieve the business goals set
by the Corporation and reward the executives for achieving such goals. In making
compensation decisions, the Committee compares each element of total
compensation against a peer group of publicly-traded telecommunications and
semiconductor companies (collectively, the Peer Group). The Peer Group, which is
periodically reviewed and updated by the Committee, consists of companies
against which the Committee believes the Corporation competes for talent and for
stockholder investment. In developing the Peer Group, the management team
provides the Compensation Committee with a Peer Group that is partly derived
from a survey of various public companies purchased from Radford Surveys and
Consulting. The Peer Group consists of the following companies: Applied Micro
Circuits Corporation, California Micro Devices Corporation, Cavium Networks
Inc., Entropic Communications Inc., Exar Corporation, Finisar Corporation,
Mindspeed Technologies Inc., PMC-Sierra Inc., Silicon Image Inc., and ZiLOG,
Inc.
The
Committee reviews and approves corporate goals and objectives relevant to
compensation of the President and Chief Executive Officer, makes a performance
appraisal in light of those goals and objectives, and establishes and approves
the appropriate level of base compensation, bonus and incentive compensation.
Based on such evaluations, the Vice President - Business Development, the Vice
President – Engineering and Operations, and the Vice President – Worldwide Sales
and Marketing received special merit bonuses in 2009. In determining the
long-term incentive component of compensation of the President and Chief
Executive Officer, the Committee considers the Corporation’s performance and
relative shareholder return, the value of similar incentive plan awards to Chief
Executive Officers and Presidents at comparable companies, and the awards given
to the Corporation’s Chief Executive Officer and President in past years. The
Committee then presents its recommendation to the Board of Directors for final
approval and ratification. In conjunction with the President and Chief Executive
Officer, the Committee directs the management succession planning, particularly
for Chief Executive Officer succession.
-38-
With the
exception of the President and Chief Executive Officer, the Committee, in
consultation with management, evaluates the performance of the Corporation’s
other Named Executive Officers and makes recommendations to the Board regarding
the appropriate level of base compensation, bonus, and incentive compensation
for such officers.
With
respect to the Chief Executive Officer, the Committee, in consultation with
management, reviews and approves annually any employment agreements, severance
agreements and change in control agreements or provisions, when and if
appropriate, and any special or supplemental benefits.
In
consultation with management, the Committee designs and approves incentive
plans, including any equity-based compensation, to allow the Corporation to
attract and retain talented personnel and align the pay of such personnel with
the long-term interests of shareholders. In addition, the Committee submits each
equity-based compensation plan and each material modification thereof to the
Board for its approval. The Committee takes actions that may be necessary or
advisable to implement and administer the Corporation’s incentive compensation
plans, all in accordance with the terms of such plans. The Committee evaluates
and recommends to the full Board the appropriate level of director compensation
and takes primary responsibility for ensuring that any payments to directors,
other than in their capacity as directors, are fully and properly disclosed. The
Committee regularly communicates with the Board in order to ensure that the
Board is fully informed of the Corporation’s compensation policies and other
issues within the Committee’s jurisdiction. The Committee exercises such
additional powers as may be reasonably necessary or desirable, in the
Committee’s discretion, to fulfill its responsibilities and duties under its
Charter.
2009
Executive Compensation Components
The
following is a summary of the principal components of compensation for Named
Executive Officers. There are four major elements that compromise the
Corporation’s compensation of Named Executive Officers: (i) base salary, (ii)
incentive plans, (iii) perquisites and (iv) retirement benefits provided under a
401(k) plan.
Base
salary
The
Corporation provides Named Executive Officers and other employees with base
salary to compensate them for services rendered during the fiscal year. Base
salary ranges for Named Executive Officers are determined for each executive
based on his or her position and responsibility by using market
data.
During
its review of base salaries for executives, the Committee primarily
considers:
•
|
market
data;
|
•
|
internal
review of the executive’s compensation, both individually and relative to
other executive officers; and
|
•
|
individual
performance of the executive.
|
Salary
levels are typically considered annually as part of the Corporation’s
performance review process as well as upon a promotion or other change in job
responsibility. Merit based increases to salaries are based on the Committee’s
assessment of the individual’s performance.
Short-Term
Incentive Plan
The
Short-Term Incentive Plan gives the Committee the latitude to design stock-based
incentive compensation programs to promote high performance and achievement of
corporate goals by all employees, encourage the growth of stockholder value, and
allow all employees to participate in the long-term growth and profitability of
the Corporation.
The
Short-Term Incentive Plan assists the Corporation to:
•
|
enhance
the link between the creation of stockholder value and short-term
executive incentive compensation;
|
•
|
provide
an opportunity for increased equity ownership by executives;
and
|
•
|
maintain
competitive levels of total
compensation.
|
Management
presents an incentive plan to the Compensation Committee each year designed to
provide awards to all employees, including Named Executive Officers. The plan
for non-sales employees is a 100% equity based plan while the plan for sales
employees (described for Mr. Shankar below) is a combination of cash and equity
awards. The awards to the Chief Executive Officer and Named Executive Officers
under the Short-Term Incentive Plan are contingent upon actual results meeting
key target metrics established by the Compensation Committee. These key targets
are designed in a way to challenge management to achieve the Corporation’s
goals. They are achievable yet ambitious enough so that in any given year not
all of them will be achieved. For 2009, the Compensation Committee,
in consultation with the CEO, determined that the metric for corporate results
would be non-GAAP Operating Income, consistent with the Company’s goal of
attaining profitability. Achievement of non-GAAP Operating Income target is
weighted 80% of award potential and achievement of the executive officers’
individual goals is weighted at 20% of award potential.
Under the
terms of the 2009 Short-Term Incentive Plan, the Corporation’s former President
and CEO, Dr. Das, had a target award of Restricted Stock Units equivalent to 50%
of his base salary. Due to his resignation on December 1, 2009, he did not
receive any award under the plan.
The
Corporation’s new President and CEO, Dr. Khatibzadeh, was not eligible to
participate in the 2009 Short-Term Incentive Plan. He will be eligible to
participate in the 2010 Plan.
Under the
terms of the Short-Term Incentive Plan, each of the other Named Executive
Officers, except for Mr. Shankar, had a target award of Restricted Stock Units
equivalent to 40% of his base salary. Since the corporate key metric of non-GAAP
Operating Income was not achieved, no Named Executive Officer received any award
based on this measurement, which was weighted at 80% of the target. Relative to
the 20% of target that was based on achievement of individual goals, no awards
for 2009 were made as of this date.
Mr.
Shankar, as the Vice President – Worldwide Sales & Marketing, has an annual
cash bonus target of 40% of his base salary, plus up to an additional 1,250
stock options. The 40% target is weighted 50% on the achievement of revenue
goals and the 50% on the achievement of design win goals. The additional stock
options are weighted 100% on the achievement of design win goals. For the first
three quarters of 2009, Mr. Shankar received $41,370 under the plan. In 2010, he
received $8,881 for fourth quarter 2009 results. In 2009, Mr. Shankar was
granted 437 stock options for the first three quarterly results and was granted
100 stock options in April 2010 for fourth quarter results.
The Board
grants stock options and Restricted Stock Units at regularly scheduled Board
meetings. Options are awarded at the closing price of the Corporation’s Common
Stock on the date of the grant. In certain limited circumstances, the Committee
may grant options to an executive at an exercise price in excess of the closing
price of the Corporation’s Common Stock on the grant date. The Committee has
never granted options with an exercise price that is less than the closing price
of the Corporation’s Common Stock on the grant date, nor has it granted options
which are priced on a date other than the grant date.
The stock
options granted pursuant to the Short-Term Incentive Plan by the Committee vest
over a two year period, 12.5% every 90 days. The Restricted Stock Units granted
pursuant to the Short-Term Incentive Plan by the Committee vest 100% one year
following the grant date. Unless otherwise modified by the Board, vesting ceases
upon termination of employment and exercise rights cease 90 days after
termination of employment, except in the case of death (subject to a one year
limitation), disability or retirement. Prior to the exercise of an option, the
holder has no rights as a stockholder with respect to the shares subject to such
option, including voting rights and the right to receive dividends or dividend
equivalents.
-39-
The
Compensation Committee has adopted a policy regarding the recovery or adjustment
of performance incentive plan awards, already paid, in the event relevant
corporate performance measures are restated in a manner that would have reduced
a previously granted award’s size or payment. To the extent permitted by
governing law, the Board will seek reimbursement of incentive compensation paid
to any executive officer in the event of a restatement of the Corporation’s
financial results that would have reduced a previously granted award’s size or
payment. In that event, the discretion of the Compensation Committee depending
on the specific circumstances, the Board will seek to recover either (i) the
entire amount of the incentive award or (ii) the amount of the award paid to an
executive officer which is in excess of the amount that would have been paid
based on the restated financial results.
Executive
performance evaluations, including for the Named Executive Officers, take place
every year and are completed during the first quarter. To help achieve the
Corporation’s strategic goals and annual objectives, the Corporation has
developed an integrated performance management program, which has an overall
purpose to strengthen results at the individual and organizational level. The
program is designed to align individual performance with strategic business
goals and annual objectives. It is intended to foster two-way communication to
provide all employees, including executives, with the resources, information and
support needed to be successful. The performance management program’s primary
objectives are to ensure that individual contributions and results are directed
toward achieving the Corporation’s business plan based on its strategic and
tactical goals. It also ensures that rewards are clearly linked to performance
and recognizes outstanding performance with corresponding compensation action.
The process begins with establishing individual and corporate performance
objectives for senior executive officers during the fourth quarter of each year
for the following year. These goals are based on the Corporation’s annual
operating plan which is reviewed and approved by the Board of
Directors.
Each
executive may complete an optional self assessment that provides feedback from
his or her perspective relevant to job responsibilities and achievements. If
completed, the self assessment would then be provided to the Chief Executive
Officer by his direct reports. Otherwise, the Chief Executive Officer completes
a performance evaluation, as well as a goals and training form, which directly
link to the annual Operating Plan on a strategic, tactical and operational
effectiveness basis. The Operating Plan reflects each business unit and the
Chief Executive Officer uses these strategic and tactical objectives to measure
the performance of the heads of each business unit. Qualitative assessment is
completed as well based on set performance factors which encompass
corporate-wide competencies that all employees are expected to not only possess,
but to regularly demonstrate on the job. Each performance factor category
requires a performance rating. The results provide guidelines for compensation
decisions and development planning as necessary.
The Chief
Executive Officer’s performance is evaluated first by the Chairman of the Board
of Directors with input from all independent Board members. The Chief Executive
Officer is also evaluated on performance against the Operating Plan which is
summarized in the annual score card in the Short-Term Incentive Plan results.
The scorecard contains a percent achievement reached for each corporate metric
as well as an overall weighted average achievement percentage on all corporate
performance goals. The Chief Executive Officer provides this information to the
Chairman of the Board. The Chairman reviews this with the other Board members,
obtains their feedback on the Chief Executive Officer’s performance and
completes the review. The performance evaluation is discussed at a private
meeting between the Chief Executive Officer and Chairman of the Board. The Board
frequently discusses with the Chief Executive Officer the performance of the
Named Executive Officers. The Chief Executive Officer incorporates this feedback
into the Named Executive Officer evaluations, and other officers of the
Corporation.
For 2010,
the Committee has changed the Short-Term Incentive Plan for non-sales employees
in order to align the Plan with the objectives of the 2010 Operating Plan. The
target award for the President and CEO is 57% of his base salary, per the terms
of his employment agreement. The target award for the other Named Executive
Officers remains at 40%. All awards will be made in Restricted Stock Units,
vesting in one year from the date of grant. For Dr. Khatibzadeh and Mr. Bosi,
the key metrics are the annual corporate revenue goal, weighted at 75%, and the
annual corporate non-GAAP Operating Income goal, weighted at 25%. For Mr. Chung
and Mr. Macari, the key metric is the achievement of their department goals as
outlined in the 2010 Operating Plan, weighted at 100%. At the end of the year,
the percent achievement relative to goal is calculated for each executive. This
percent is then multiplied times the target award to determine the dollar amount
of the actual award. This dollar amount is then converted into Restricted Stock
Units based on the closing stock price at the end of the day on the grant
date.
For 2010,
the Committee has also changed the Short-Term Incentive Plan for sales
employees. Mr. Shankar will receive a cash commission based on a percentage of
all revenue generated above the corporate baseline forecast. For design wins, he
will receive Restricted Stock Units awarded upon the achievement of specific
design wins to targeted customers. The definition of design wins has been
changed to give greater rewards to wins that result in revenue from expected
near-term production of customers’ products. Restricted Stock Units granted
under this plan will vest 100% one year after the grant date.
Long-Term
Incentive Plan
The
Long-Term Incentive Plan gives the Committee the latitude to design stock-based
incentive compensation programs to enable the Corporation to attract and retain
key employees, encourage the growth of stockholder value, and allow these
employees to participate in the long-term growth and profitability of the
Corporation.
The
Long-Term Incentive Plan assists the Corporation to:
•
|
enhance
the link between the creation of stockholder value and long-term executive
incentive compensation;
|
•
|
provide
an opportunity for increased equity ownership by executives;
and
|
•
|
maintain
competitive levels of total
compensation.
|
The
Long-Term Incentive Plan grants Restricted Stock Units to Named Executive
Officers solely at the discretion of the Compensation Committee and the Board.
The President and CEO makes recommendations to the Committee on the awards for
officers other than himself. These Restricted Stock Units vest 100% three years
from the grant date.
In
October 2009, the Board granted the following amounts of Restricted Stock Units
pursuant to the Long-Term Incentive Plan under the 2008 Plan to these Named
Executive Officers: Mr. Bosi, 21,304, Mr. Chung, 18,116, Mr. Macari, 18,116, and
Mr. Shankar, 18,116.
Perquisites
The
Corporation provides Named Executive Officers with perquisites and other
personal benefits that the Corporation and the Committee believe are reasonable
and consistent with its overall compensation program to better enable the
Corporation to attract and retain superior employees for key positions. The
Committee periodically reviews the levels of perquisites and other personal
benefits provided to Named Executive Officers.
The Named
Executive Officers are provided with basic life insurance coverage equal to
twice their base salary. In addition, for 2008 and 2009, executive term life
insurance coverage equal to $1,000,000 for the Chief Executive Officer and
$500,000 for the Vice President – Business Development and for the Vice
President – Engineering and Operations was provided. The Corporation has entered
into agreements containing termination or change-in-control severance
provisions with its Chief Executive Officer, its Chief Financial officer, and
its Vice President – Worldwide Sales and Marketing. The termination
or change-in-control severance provisions were designed to promote
stability and continuity of senior management. Information regarding applicable
payments under such agreements is provided under the heading “Potential Payments
upon Termination or Change-in-Control” below.
-40-
Retirement
Benefits
The
Corporation sponsors a 401(k) retirement plan that permits the Named Executive
Officers to electively defer a portion of their salary on a pre-tax basis into
the plan. The Corporation matches 50% of contributions by all participants,
including the Named Executive Officers, to the 401(k) plan including the Named
Executive Officers, up to a maximum of 6% of covered compensation. This match
was suspended effective July 1, 2009. No other qualified or non-qualified
retirement plans are sponsored by the Corporation.
Deductibility
of Executive Compensation
As part
of its role, the Committee reviews and considers the deductibility of executive
compensation under Section 162(m) of the Code, which provides that the
Corporation may not deduct compensation of more than $1,000,000 that is paid to
certain individuals. The Corporation believes that compensation paid under the
Corporation’s incentive plans are generally fully deductible for federal income
tax purposes. However, in certain situations, the Committee may approve
compensation that will not meet these requirements in order to ensure
competitive levels of total compensation for its executive
officers.
Assessment
of Risk
In the
design of executive compensation plans, the Committee considers the desired
behavior the Committee wants to incent and how that behavior relates to
increasing shareholder value. The Committee does not feel that there are any
compensation-related risks that are reasonably likely to have a material effect
on the Corporation.
Certain
key aspects of our compensation plans address potential risks:
|
-
|
The
structure of our incentive plans is the same for all employees worldwide,
including executives. The Board reviews and approves the incentive plans
annually. All awards that involve equity grants require Board
approval.
|
|
-
|
The
Short-Term Incentive Plan does focus on the execution of the current
year’s Operating Plan and its awards are tied to key short-term (annual)
financial metrics (e.g., revenue and profitability) in that Plan. The
Committee believes that the target amount of compensation in the
Short-Term Incentive Plan is large enough to incent desired employee
behavior but not so large, as a percent of an employee’s total
compensation, as to encourage excessive risk taking to achieve the
targets. In addition, the Board monitors performance to the Operating Plan
on a regular basis and can adjust the Short-Term Incentive Plan if
necessary.
|
|
-
|
The
awards in the Short-Term Incentive Plan for non-sales personnel are in the
form of Restricted Stock Units which vest after one year, promoting equity
ownership by officers and employees and supporting the creation of
shareholder value.
|
|
-
|
Cash
compensation for sales personnel for revenue generation is a very small
percentage of the revenue, and is only paid on the amount of revenue that
exceeds the baseline revenue forecast. Commissions are only paid after
revenue is recognized.
|
|
-
|
Compensation
for design wins for sales personnel is now paid 100% in Restricted Stock
Units rather than in cash and options. These RSUs vest in one year and the
focus of the Plan component for design wins is now production-ready wins
to targeted customers in order to align with the interest of the
shareholders by creating near-term as well as long-term revenue
streams.
|
|
-
|
Our
Long-Term Incentive Plan with its three year cliff vesting aligns the
interests of officers and employees with long-term shareholder interests
and supports employee retention. The timing and amount of awards under the
Long-Term Incentive Plan are totally at the discretion of the
Board.
|
-41-
EQUITY
COMPENSATION AND PLAN INFORMATION
We
maintain a number of equity compensation plans for employees, officers,
directors and others whose efforts contribute to our success. The table below
sets forth certain information as of our fiscal year ended December 31, 2009
regarding the shares of our common stock available for grant or granted under
equity incentive plans that (i) were approved by our stockholders, and (ii) were
not approved by our stockholders.
Plan Category
|
Number Of
Securities To Be
Issued Upon Exercise
Of Outstanding
Options,
Warrants And Rights
|
Weighted-Average
Exercise Price
of Outstanding
Options,
Warrants and Rights
|
Number Of Securities
Remaining Available For
Future Issuance Under
Equity Compensation
Plans (excluding
securities reflected in
column (a))
|
|||||||||
(a)
|
(b)
|
(c)
|
||||||||||
Equity
compensation plans approved by security holders
(1)
|
2,674,014 | (3) | $ | 9.55 | (3) | 1,211,752 | ||||||
Equity
compensation plans not approved by security
holders (2)
|
377,129 | $ | 10.41 | 0 | ||||||||
Total
|
3,051,143 | $ | 9.65 | 1,211,752 |
(1)
|
Consists
of the 1995 Plan, the 1995 Non-Employee Director Stock Option Plan and the
2005 Employee Stock Purchase Plan (the “Purchase Plan”). As of May 22,
2008, with the inception of our 2008 Equity Incentive Plan, options and
awards may no longer be granted from our 1995
Plan.
|
(2)
|
Consists
of the 2000 Plan and shares subject to outstanding options granted under
equity compensation plans assumed by us in connection with mergers and
acquisitions of the companies which originally granted those options. No
additional options may be granted under the assumed plans. Also no options
may be issued from the 2000 Plan with the inception of the 2008 Equity
Incentive Plan on May 22, 2008.
|
(3)
|
Excludes
purchase rights accruing under the Purchase Plan which has a
stockholder-approved reserve of 125,000 shares. Under the Purchase Plan,
each eligible employee is able to purchase up to 125 shares of our common
stock at semi-annual intervals each year at a purchase price per share
equal to 85% of the lower of the fair market value of our common stock on
the first or last trading day of a purchase
period.
|
2000 Stock Option
Plan. The purpose of the 2000 Plan adopted by our Board of Directors on
July 14, 2000 and amended on December 21, 2001, was to promote our
long-term success, by providing financial incentives to employees and
consultants of the Corporation who are in positions to make significant
contributions toward such success except that no member of our Board of
Directors or officer of the Corporation appointed by the Board of Directors
shall be eligible for grants of options under the 2000 Plan. The 2000 Plan is
designed to attract individuals of outstanding ability to become or to continue
as employees or consultants, to enable such individuals to acquire or increase
proprietary through the ownership of shares of our Common Stock, and to render
superior performance during their associations with us, by providing
opportunities to participate in the ownership of our future growth through the
granting of NQSOs. The 2000 Plan is administered by our Board of Directors or,
at its option, a committee appointed by our Board of Directors. A total of
1,250,000 shares of common stock were reserved for issuance under the 2000 Plan.
In April 2008, our Board of Directors determined that no further awards would be
made under this plan and that all remaining 303,379 shares available for
issuance under the 2000 Plan that are not subject to outstanding stock option
awards would be eligible for issuance under the 2008 Equity Incentive
Plan.
1999 Stock
Incentive Plan of Onex Communications Corporation. The purpose of the
1999 Stock Incentive Plan of Onex Communications Corporation (the “Onex Plan”)
was to advance the interests of the shareholders by enhancing the Onex
Communications Corporation’s ability to attract, retain and motivate persons who
make (or are expected to make) important contributions to Onex Communications
Corporation by providing those persons with opportunities for equity ownership
and performance-based incentives and thereby to better align the interests of
those persons with those of the shareholders. All of Onex Communications
Corporation’s employees, officers, directors, consultants and advisors were
eligible to be granted options, restricted, stock, or other stock-based awards
under the Onex Plan. We assumed the Onex Plan in connection with our acquisition
of Onex Communications Corporation in 2001. No additional awards may be granted
under the Onex Plan.
-42-
COMPENSATION
AND OTHER INFORMATION CONCERNING NAMED EXECUTIVE OFFICERS
Named
Executive Officers
Listed
below are the Corporation’s Named Executive Officers and their respective
backgrounds, excluding Dr. M. Ali Khatibzadeh who is listed above under
Directors.
Mr. Robert A. Bosi, 54, Vice President and Chief
Financial Officer, has over 30 years of financial management experience. He has
served in this position since January 4, 2008. Prior to joining the Corporation,
Mr. Bosi held the positions of VP-Finance/Chief Financial Officer for
Curtiss-Wright Corporation from 1991 to 2001 and VP-Chief Financial Officer for
Vesper Corporation from 2002 to 2004. Since 2004 Mr. Bosi has been a partner
with Tatum LLC where he filled the positions of Interim Senior Vice President
and Chief Financial Officer of Concord Camera Corporation from 2004 to 2005 and
Acting Chief Financial Officer of Monitor Oil PLC from 2006 to 2007. Mr. Bosi
has a B.A. in accounting from William Paterson University and an MBA from
Fairleigh Dickinson University.
Mr. Theodore Chung, 36, Vice President of
Business Development, also served as Interim Chief Financial Officer and
Treasurer from January 12, 2007 through January 4, 2008. Prior to joining the
Corporation in 2001, Mr. Chung was Director, Business Development for Lydstrom,
Inc, a maker of internet-enabled set-top boxes. From 1997-2000, he was with
Fahnestock & Co., where he worked in Structured Finance. Mr. Chung resigned
from the position of Interim Chief Financial Officer on January 4, 2008 and is
currently serving as the company’s Vice President – Business
Development.
Mr. Michael McCoy, 61, Vice President and
Corporate Secretary, was also Interim Chief Accounting Officer
from January 12, 2007 to January 4, 2008. Mr. McCoy is a founder of
TranSwitch and has been involved with the Corporation, in several roles, since
1988. From 1980 to 1988 Mr. McCoy was employed by ITT’s Advanced Technology
Center, now part of Alcatel, where he was the Division Controller. Prior to
that, he was at United Technologies in finance. Mr. McCoy is a graduate of Kent
State University. Mr. McCoy resigned from his position of Vice President and
Interim Chief Accounting Officer on January 4, 2008 and is now the company’s
Corporate Secretary.
Mr. Michael Macari, 58, Vice
President – Engineering and Operations, has over 25 years of semiconductor
industry experience in product and test engineering, design, supply chain
management, quality and reliability. Prior to joining TranSwitch in 1999, he
spent 13 years at General DataComm where he held positions including director of
VLSI and executive director of Technology Services. In that capacity he was
responsible for VLSI design, test and manufacturing, CAD and Information
Technology. Prior to General DataComm, Mr. Macari was the manager of LSI Test
and Reliability at ITT. He holds a BS degree in Electrical Engineering from
Fairleigh Dickinson University and a MBA from the University of New
Haven.
Mr. Kris Shankar, 45, Vice
President – Worldwide Sales and Marketing, has over 21 years of technical and
management experience in the telecommunications industry. During this tenure, he
was involved in the planning, design and deployment of a number of custom
silicon-based products such as Digital Loop Carriers, Class-V switches, DSLAMs,
ATM concentrators, OC3-OC192 SONET multiplexers and 2.4Tb/s ultra long-haul DWDM
equipment. He joined Centillium Communications in 2004 and has continued with
the Corporation following the acquisition of Centillium by the Corporation in
2008. Prior to 2004, he was Chief Technology Officer and a co-founder of
Metro-Optix, a venture-funded optical startup acquired by Xtera Communications.
Prior to Metro-Optix, Mr. Shankar held a number of technical and management
positions with Nortel Networks, Fujitsu Network Communications and Ericsson. He
received his B.E. (Honors) from Regional Engineering College, Trichy, India and
his M.S.E.E. from the University of Houston. He serves on the technical advisory
board of Panorama Capital, a technology investment firm based in Menlo Park,
CA.
Management
Transition
In
December 2009, we announced a management transition. We named Dr. M Ali
Khatibzadeh as President and Chief Executive Officer of the Corporation when
former President and Chief Executive Officer Dr. Santanu Das stepped
down. Dr. Khatibzadeh was also appointed as a member of the board of
directors of the Corporation.
Dr.
Khatibzadeh has over twenty years of engineering and general management
experience in the communications semiconductor industry. Prior to his
appointment at the Corporation, he was Senior Vice President and General Manager
of the RF Products Business Unit of Anadigics (NASDAQ: ANAD) from April 2009 to
October 2009. He also served Anadigics as Senior Vice President and General
Manager of the Wireless Business Unit from August 2005 to April 2009 and as Vice
President of the Wireless Business Unit from June 2000 to August 2005. Prior to
Anadigics, Dr. Khatibzadeh was Director of Technology for Ericsson in its
American Business Unit and Worldwide RF IC Design manager at Texas Instruments
Wireless Communications Business Unit. Dr. Khatibzadeh holds a Ph.D., M.S., and
a B.S. in Electrical Engineering as well as a B.S. in Physics from North
Carolina State University.
-43-
Executive
Compensation
The
following table sets forth the compensation earned by the Corporation’s Chief
Executive Officer and each of the other executive officers designated “Named
Executive Officers” by the Corporation (collectively, the “Named Executive
Officers”) for services rendered in all capacities to the Corporation for the
fiscal years ended December 31, 2007, 2008, and 2009. No Named Executive Officer
received any salary increase in 2009.
Executive Summary Compensation Table
|
||||||||||||||||||||||
Name and Principal Position
|
Year
|
Salary $
|
Bonus $
|
Option
Awards $ (1)
|
All Other
Compensation $ (2)
|
Total $
|
||||||||||||||||
Dr.
M. Ali Khatibzadeh (3)
|
2009
|
29,167 | 0 | 654,066 | 0 | 683,233 | ||||||||||||||||
President
and Chief Executive Officer
|
||||||||||||||||||||||
Dr.
Santanu Das (4)
|
2009
|
322,179 | 0 | 908 | 379,349 | 702,436 | ||||||||||||||||
President
and Chief Executive Officer
|
2008
|
350,000 | 0 | 104,315 | 17,170 | 471,485 | ||||||||||||||||
2007
|
350,000 | 0 | 171,351 | 18,670 | 540,021 | |||||||||||||||||
Mr.
Robert Bosi (5)
|
2009
|
336,000 | 0 | 146,388 | 5,004 | 487,392 | ||||||||||||||||
Vice
President and Chief Financial Officer,
|
2008
|
336,000 | 0 | 0 | 3,360 | 339,360 | ||||||||||||||||
Principal
Accounting Officer
|
||||||||||||||||||||||
Mr.
Theodore Chung (6)
|
2009
|
155,000 | 90,000 | 113,293 | 3,146 | 361,439 | ||||||||||||||||
Vice
President–Business Development,
|
2008
|
155,000 | 37,000 | 45,030 | 5,419 | 242,449 | ||||||||||||||||
2007
|
146,250 | 55,000 | 69,455 | 4,197 | 274,902 | |||||||||||||||||
Mr.
Michael McCoy (7)
|
2009
|
20,000 | 0 | 0 | 0 | 20,000 | ||||||||||||||||
Corporate
Secretary
|
2008
|
20,000 | 0 | 5,758 | 79 | 25,837 | ||||||||||||||||
2007
|
40,000 | 0 | 16,025 | 1,406 | 57,431 | |||||||||||||||||
Mr.
Michael Macari (8)
|
2009
|
155,000 | 70,000 | 117,673 | 6,247 | 348,920 | ||||||||||||||||
Vice
President – Engineering and Operations
|
2008
|
155,000 | 35,000 | 4,965 | 7,910 | 202,875 | ||||||||||||||||
2007
|
155,000 | 0 | 64,650 | 7,910 | 227,560 | |||||||||||||||||
Mr.
Kris Shankar (9)
|
2009
|
204,359 | 61,370 | 119,992 | 7,187 | 392,908 | ||||||||||||||||
Vice
President – Worldwide Sales and Marketing
|
2008
|
210,238 | 33,140 | 50,389 | 438 | 294,205 | ||||||||||||||||
2007
|
203,962 | 14,139 | 5,640 | 429 | 224,170 |
(1)
|
The
assumptions used to calculate the value of stock awards are set forth
under Note 10 of the Notes to Consolidated Financial Statements included
in our Annual Report on Form 10-K filed with the SEC on March 16,
2010.
|
(2)
|
Includes
401(k) matching contributions and/or life insurance
payments.
|
(3)
|
Dr.
Khatibzadeh was appointed President and Chief Executive Officer on
December 1, 2009.
|
(4)
|
Dr.
Das resigned as President and Chief Executive Officer on December 1, 2009.
Dr. Das received a severance payment of $350,000 pursuant to a severance
agreement with the Corporation that was effective on December 1,
2009. He currently has a two year consulting agreement with the
Corporation commencing December 2, 2009 under which he shall be paid
$200,000 to perform such duties and accept such responsibilities as may
reasonably be assigned to him by the Board and the Chief Executive
Officer. Such agreement is terminable by the Company after one
year. Payments to Dr. Das in 2009 under the severance
agreement and the consulting agreement are shown above under All Other
Compensation. Dr. Das received no compensation for his service as a
Director.
|
(5)
|
Mr.
Bosi was appointed Vice President and Chief Financial Officer on January
4, 2008.
|
(6)
|
Mr.
Chung received special merit bonuses, pursuant to the Short-Term Incentive
Plan of $12,000 on March 31, 2008, $25,000 on August 15, 2008, $20,000 on
January 15, 2009, and $70,000 on April 13, 2009. Mr. Chung resigned as the
Corporation’s Interim Chief Financial Officer on January 4, 2008 and is
currently serving as the Vice President – Business
Development.
|
(7)
|
Mr.
McCoy was appointed Interim Chief Accounting Officer on January 12, 2007
and resigned from this position on January 4, 2008. He currently serves as
the Corporate Secretary.
|
(8)
|
Mr.
Macari received special merit bonuses pursuant to the Short-Term Incentive
Plan of $15,000 on March 31, 2008, $20,000 on December 31, 2008, $35,000
on July 1, 2009, and $35,000 on October 1,
2009.
|
(9)
|
Mr.
Shankar received bonuses of $14,139 in 2007 and $33,140 in 2008 under the
Centillium Executive Bonus Plan. In 2009, he received $41,370 from the
TranSwitch Short-Term Incentive Plan and a special merit bonus of $20,000
on October 1, 2009.
|
-44-
Grants
Of Plan Based Awards
The
following table contains information concerning the equity incentive plan awards
for each Named Executive Officer granted during the fiscal year ended December
31, 2009.
Stock
Options Awarded
Name
|
Grant Date
|
All Other Option
Awards: Securities
Underlying Options (#)
|
Exercise or Base Price of
Option Awards ($)
|
Grant Date Fair Value
of Stock and Option
Awards ($)
|
||||||||||
M.
Ali Khatibzadeh (1)
|
12/09/09
|
187,500 | 2.43 | 319,941 | ||||||||||
Santanu
Das (2)
|
03/18/09
|
911 | 2.00 | 908 | ||||||||||
Robert
Bosi (3)
|
03/18/09
|
25,000 | 2.00 | 28,788 | ||||||||||
Theodore
Chung (4)
|
01/15/09
|
9,375 | 2.64 | 12,952 | ||||||||||
03/18/09
|
341 | 2.00 | 341 | |||||||||||
Michael
McCoy
|
None
|
|||||||||||||
Michael
Macari (5)
|
01/15/09
|
12,500 | 2.64 | 17,269 | ||||||||||
03/18/09
|
405 | 2.00 | 404 | |||||||||||
Kris
Shankar (6)
|
05/21/09
|
112 | 2.48 | 152 | ||||||||||
08/06/09
|
225 | 4.32 | 535 | |||||||||||
10/08/09
|
5,000 | 5.52 | 19,152 | |||||||||||
12/09/09
|
100 | 2.43 | 151 |
|
(1)
|
Dr.
Khatibzadeh was granted an initial equity grant of stock options on
December 9, 2009.
|
|
(2)
|
Dr.
Das was granted options pursuant to the Corporation’s Management Incentive
Plan on March 18, 2009 for the 4th
quarter of 2008.
|
|
(3)
|
Mr.
Bosi was granted new hire stock options on March 18, 2009 Mr.
Bosi’s hire date was January 4, 2008 but the options were not granted
until March 2009.These options will vest 25% annually over four
years.
|
|
(4)
|
Mr.
Chung was granted special performance stock options on January 15, 2009
and stock options pursuant to the Corporation’s Management Incentive Plan
on March 18, 2009 for the 4th
quarter of 2008. The Special Performance Grant of January 15,
2009 will vest 12.5% every 90 days over two years. The Management
Incentive Plan grant of March 18, 2009 will have immediate vesting of 50%
of the grant with the remainder vesting between 15 and 24 months of the
grant date.
|
|
(5)
|
Mr.
Macari was granted special performance stock options on January 15, 2009
and stock options pursuant to the Corporation’s Management Incentive Plan
on March 18, 2009 for the 4th
quarter of 2008. The special performance grant of January 15, 2009 will
vest 12.5% every 90 days over two years. 50% of the Management Incentive
Plan grant of March 18, 2009 will vest immediately with the remainder
vesting between 15 and 24 months.
|
|
(6)
|
Mr.
Shankar was granted special performance stock options on October 8, 2009,
stock options pursuant to the Corporation’s Sales Incentive Plan and
granted under the 2008 Plan on May 21, August 6, and December 9, 2009 for
the 1st,
2nd,
and 3rd
quarters of 2009, respectively. Mr. Shankar’s retention options will vest
25% every year over 4 years. Options granted under the company’s Sales
Incentive Plan will vest 12.5% every 90 days over two
years.
|
Restricted
Stock Units Awarded
Name
|
Grant Date
|
Securities Underlying
Stock Awards (#)
|
Grant Date Fair Value of
Stock and Option Awards
($)
|
|||||||
M.
Ali Khatibzadeh (1)
|
12/09/09
|
137,500 | 334,125 | |||||||
Santanu
Das (2)
|
None
|
|||||||||
Robert
Bosi (3)
|
10/08/09
|
21,304 | 117,600 | |||||||
Theodore
Chung (4)
|
10/08/09
|
18,116 | 100,000 | |||||||
Michael
McCoy
|
None
|
|||||||||
Michael
Macari (5)
|
10/08/09
|
18,116 | 100,000 | |||||||
Kris
Shankar (6)
|
10/08/09
|
18,116 | 100,000 |
|
(1)
|
Dr.
Khatibzadeh was granted an initial equity grant of RSUs on December 9,
2009. These RSUs will vest 25% annually on December 1 over four
years.
|
|
(2)
|
Mr.
Bosi was granted Restricted Stock Units pursuant to the Long-Term
Incentive Plan under the 2008 Plan on October 8, 2009. These
Restricted Stock Units will vest 100% 3 years from the grant
date.
|
|
(3)
|
Mr.
Chung was granted Restricted Stock Units pursuant to the Long-Term
Incentive Plan under the 2008 Plan on October 8, 2009. These Restricted
Stock Units will vest 100% 3 years from the grant
date.
|
-45-
|
(4)
|
Mr.
Macari was granted Restricted Stock Units pursuant to the Long-Term
Incentive Plan under the 2008 Plan on October 8, 2009. These Restricted
Stock Units will vest 100% 3 years from the grant
date.
|
|
(5)
|
Mr.
Shankar was granted Restricted Stock Units pursuant to the Long-Term
Incentive Plan under the 2008 Plan on October 8, 2009. These Restricted
Stock Units will vest 100% 3 years from the grant
date.
|
-46-
Outstanding
Options & Restricted Stock Unit Awards At Fiscal Year-End
The
following table contains information concerning the unexercised options and
restricted stock unit awards for each Named Executive Officer as of December 31,
2009:
Stock
Options
Number of Securities
|
Number of Securities
|
||||||||||||
Underlying
|
Underlying
|
Option
|
|||||||||||
Unexercised Options
|
Unexercised Options
|
Option Exercise
|
Expiration
|
||||||||||
Name
|
(Exercisable)
|
(Unexercisable)
|
Price
|
Date
|
|||||||||
Khatibzadeh,
Mohammad Ali
|
0 | 164,608 | $ | 2.4300 |
12/9/2016
|
||||||||
0 | 22,892 | $ | 2.4300 |
12/9/2016
|
|||||||||
Totals Khatibzadeh
|
0 | 187,500 | |||||||||||
Das,
Santanu
|
1,106 | 0 | $ | 31.5200 |
9/21/2011
|
||||||||
3,125 | 0 | $ | 7.3600 |
1/22/2010
|
|||||||||
9,375 | 0 | $ | 7.3600 |
1/22/2010
|
|||||||||
3,750 | 0 | $ | 7.3600 |
1/22/2010
|
|||||||||
6,250 | 0 | $ | 7.5200 |
5/22/2010
|
|||||||||
6,675 | 0 | $ | 12.4100 |
8/12/2010
|
|||||||||
10,000 | 0 | $ | 19.7600 |
10/8/2010
|
|||||||||
6,250 | 0 | $ | 19.7600 |
10/8/2010
|
|||||||||
3,875 | 0 | $ | 17.5200 |
12/11/2010
|
|||||||||
125 | 0 | $ | 17.5200 |
12/11/2010
|
|||||||||
11,375 | 0 | $ | 27.1200 |
1/15/2011
|
|||||||||
3,750 | 0 | $ | 12.4000 |
5/20/2011
|
|||||||||
6,250 | 0 | $ | 12.4000 |
5/20/2011
|
|||||||||
3,656 | 0 | $ | 12.0000 |
8/5/2011
|
|||||||||
6,093 | 0 | $ | 12.0000 |
8/5/2011
|
|||||||||
390 | 0 | $ | 12.0000 |
8/5/2011
|
|||||||||
2,734 | 0 | $ | 12.0000 |
8/5/2011
|
|||||||||
3,537 | 0 | $ | 10.2400 |
10/14/2011
|
|||||||||
3,537 | 0 | $ | 10.2400 |
10/14/2011
|
|||||||||
3,187 | 0 | $ | 8.9600 |
1/20/2012
|
|||||||||
3,187 | 0 | $ | 8.9600 |
1/20/2012
|
|||||||||
5,800 | 0 | $ | 13.4400 |
5/19/2012
|
|||||||||
5,187 | 0 | $ | 13.2800 |
8/10/2012
|
|||||||||
2,087 | 0 | $ | 11.7600 |
10/13/2012
|
|||||||||
2,087 | 0 | $ | 11.7600 |
10/13/2012
|
|||||||||
3,237 | 0 | $ | 14.7200 |
1/26/2013
|
|||||||||
2,587 | 0 | $ | 14.3200 |
3/1/2013
|
|||||||||
3,307 | 0 | $ | 16.8800 |
5/18/2013
|
|||||||||
2,470 | 0 | $ | 13.2800 |
8/10/2013
|
|||||||||
2,435 | 0 | $ | 13.2800 |
8/10/2013
|
|||||||||
1,584 | 0 | $ | 11.8400 |
10/12/2013
|
|||||||||
7,616 | 0 | $ | 12.4000 |
12/12/2013
|
|||||||||
911 | 0 | $ | 2.0000 |
3/18/2016
|
|||||||||
1,345 | 0 | $ | 2.3200 |
12/11/2015
|
|||||||||
1,345 | 0 | $ | 2.3200 |
12/11/2015
|
|||||||||
9,912 | 0 | $ | 14.3200 |
3/1/2013
|
|||||||||
3,629 | 0 | $ | 16.8800 |
5/18/2013
|
|||||||||
4,883 | 0 | $ | 12.4000 |
12/12/2013
|
|||||||||
918 | 0 | $ | 13.2000 |
5/24/2014
|
|||||||||
6,428 | 0 | $ | 13.2000 |
5/24/2014
|
|||||||||
703 | 0 | $ | 12.6400 |
8/7/2014
|
|||||||||
1,171 | 0 | $ | 12.6400 |
8/7/2014
|
|||||||||
421 | 0 | $ | 5.5200 |
3/18/2015
|
|||||||||
421 | 0 | $ | 5.5200 |
3/18/2015
|
|||||||||
421 | 0 | $ | 5.5200 |
3/18/2015
|
|||||||||
421 | 0 | $ | 5.5200 |
3/18/2015
|
|||||||||
478 | 0 | $ | 6.0000 |
5/22/2015
|
|||||||||
478 | 0 | $ | 6.0000 |
5/22/2015
|
|||||||||
7,015 | 0 | $ | 6.0000 |
5/22/2018
|
|||||||||
2,984 | 0 | $ | 6.0000 |
5/22/2018
|
|||||||||
1,322 | 0 | $ | 5.1200 |
8/7/2015
|
-47-
1,322 | 0 | $ | 5.1200 |
8/7/2015
|
|||||||||
1,584 | 0 | $ | 11.8400 |
10/12/2013
|
|||||||||
1,111 | 0 | $ | 10.8000 |
11/10/2009
|
|||||||||
370 | 0 | $ | 16.2400 |
12/5/2010
|
|||||||||
Totals
Das
|
186,217 | 0 | |||||||||||
Bosi,
Robert
|
6,250 | 18,750 | $ | 2.0000 |
3/18/2016
|
||||||||
Totals
Bosi
|
6,250 | 18,750 | |||||||||||
Chung,
Theodore
|
1,250 | 0 | $ | 19.7600 |
10/8/2010
|
||||||||
750 | 0 | $ | 12.4000 |
5/20/2011
|
|||||||||
1,250 | 0 | $ | 12.4000 |
5/20/2011
|
|||||||||
737 | 0 | $ | 12.0000 |
8/5/2011
|
|||||||||
269 | 0 | $ | 10.2400 |
10/14/2011
|
|||||||||
975 | 0 | $ | 13.4400 |
5/19/2012
|
|||||||||
875 | 0 | $ | 13.2800 |
8/10/2012
|
|||||||||
1,250 | 0 | $ | 13.2800 |
8/10/2012
|
|||||||||
725 | 0 | $ | 11.7600 |
10/13/2012
|
|||||||||
625 | 0 | $ | 13.2000 |
12/27/2012
|
|||||||||
525 | 0 | $ | 14.7200 |
1/26/2013
|
|||||||||
2,500 | 0 | $ | 14.3200 |
3/1/2013
|
|||||||||
1,737 | 0 | $ | 16.8800 |
5/18/2013
|
|||||||||
1,231 | 0 | $ | 13.2800 |
8/10/2013
|
|||||||||
793 | 0 | $ | 11.8400 |
10/12/2013
|
|||||||||
3,125 | 0 | $ | 12.4000 |
12/12/2013
|
|||||||||
4,688 | 4,687 | $ | 2.6400 |
1/15/2016
|
|||||||||
171 | 170 | $ | 2.0000 |
3/18/2016
|
|||||||||
505 | 503 | $ | 2.3200 |
12/11/2015
|
|||||||||
2,500 | 0 | $ | 12.4000 |
4/5/2014
|
|||||||||
2,448 | 0 | $ | 13.2000 |
5/24/2014
|
|||||||||
1,875 | 0 | $ | 12.6400 |
8/7/2014
|
|||||||||
625 | 0 | $ | 12.6400 |
8/7/2014
|
|||||||||
281 | 0 | $ | 8.4000 |
11/5/2014
|
|||||||||
1,094 | 156 | $ | 5.5200 |
3/18/2015
|
|||||||||
246 | 35 | $ | 5.5200 |
3/18/2015
|
|||||||||
314 | 44 | $ | 6.0000 |
5/22/2015
|
|||||||||
7,032 | 2,343 | $ | 5.1200 |
8/7/2015
|
|||||||||
746 | 246 | $ | 5.1200 |
8/7/2015
|
|||||||||
Totals
Chung
|
41,142 | 8,184 | |||||||||||
Macari,
Michael L
|
2,012 | 0 | $ | 12.4000 |
8/12/2010
|
||||||||
1,875 | 0 | $ | 7.5200 |
5/22/2010
|
|||||||||
3,037 | 0 | $ | 19.7600 |
10/8/2010
|
|||||||||
1,250 | 0 | $ | 19.7600 |
10/8/2010
|
|||||||||
3,412 | 0 | $ | 27.1200 |
1/15/2011
|
|||||||||
1,125 | 0 | $ | 12.4000 |
5/20/2011
|
|||||||||
1,875 | 0 | $ | 12.4000 |
5/20/2011
|
|||||||||
1,096 | 0 | $ | 12.0000 |
8/5/2011
|
|||||||||
1,828 | 0 | $ | 12.0000 |
8/5/2011
|
|||||||||
625 | 0 | $ | 12.0000 |
8/5/2011
|
|||||||||
4,375 | 0 | $ | 12.0000 |
8/5/2011
|
|||||||||
1,062 | 0 | $ | 10.2400 |
10/14/2011
|
|||||||||
1,062 | 0 | $ | 10.2400 |
10/14/2011
|
|||||||||
956 | 0 | $ | 8.9600 |
1/20/2012
|
|||||||||
956 | 0 | $ | 8.9600 |
1/20/2012
|
|||||||||
850 | 0 | $ | 13.4400 |
5/19/2012
|
|||||||||
850 | 0 | $ | 13.4400 |
5/19/2012
|
|||||||||
1,640 | 0 | $ | 13.2800 |
8/10/2012
|
|||||||||
234 | 0 | $ | 13.2800 |
8/10/2012
|
|||||||||
756 | 0 | $ | 13.2800 |
8/10/2012
|
|||||||||
756 | 0 | $ | 13.2800 |
8/10/2012
|
|||||||||
668 | 0 | $ | 11.7600 |
10/13/2012
|
|||||||||
668 | 0 | $ | 11.7600 |
10/13/2012
|
|||||||||
1,875 | 0 | $ | 14.0000 |
12/16/2012
|
|||||||||
987 | 0 | $ | 14.7200 |
1/26/2013
|
|||||||||
2,500 | 0 | $ | 14.3200 |
3/1/2013
|
|||||||||
2,312 | 0 | $ | 16.8800 |
5/18/2013
|
|||||||||
912 | 0 | $ | 13.2800 |
8/10/2013
|
-48-
700 | 0 | $ | 13.2800 |
8/10/2013
|
|||||||||
575 | 0 | $ | 11.8400 |
10/12/2013
|
|||||||||
6,252 | 6,248 | $ | 2.6400 |
1/15/2016
|
|||||||||
203 | 202 | $ | 2.0000 |
3/18/2016
|
|||||||||
439 | 438 | $ | 2.3200 |
12/11/2015
|
|||||||||
5,000 | 0 | $ | 12.4000 |
4/5/2014
|
|||||||||
917 | 0 | $ | 13.2000 |
5/24/2014
|
|||||||||
1,517 | 0 | $ | 13.2000 |
5/24/2014
|
|||||||||
357 | 0 | $ | 12.6400 |
8/7/2014
|
|||||||||
357 | 0 | $ | 12.6400 |
8/7/2014
|
|||||||||
46 | 0 | $ | 8.4000 |
11/5/2014
|
|||||||||
328 | 0 | $ | 8.4000 |
11/5/2014
|
|||||||||
329 | 46 | $ | 5.5200 |
3/18/2015
|
|||||||||
372 | 53 | $ | 6.0000 |
5/22/2015
|
|||||||||
642 | 213 | $ | 5.1200 |
8/7/2015
|
|||||||||
575 | 0 | $ | 11.8400 |
10/12/2013
|
|||||||||
Totals
Macari
|
60,163 | 7,200 | |||||||||||
Shankar,
Kris
|
42 | 70 | $ | 2.4800 |
5/21/2016
|
||||||||
57 | 168 | $ | 4.3200 |
8/6/2016
|
|||||||||
0 | 5,000 | $ | 5.5200 |
10/8/2016
|
|||||||||
13 | 87 | $ | 2.4300 |
12/9/2016
|
|||||||||
2,500 | 7,500 | $ | 2.3200 |
12/11/2015
|
|||||||||
20,005 | 0 | $ | 16.6400 |
7/23/2014
|
|||||||||
2,414 | 0 | $ | 13.5200 |
7/27/2015
|
|||||||||
2,930 | 563 | $ | 13.6000 |
7/20/2016
|
|||||||||
1,915 | 0 | $ | 13.6000 |
7/20/2016
|
|||||||||
4,118 | 2,257 | $ | 8.1600 |
8/6/2017
|
|||||||||
4,428 | 5,231 | $ | 4.3200 |
4/21/2018
|
|||||||||
3,176 | 0 | $ | 16.6400 |
7/23/2014
|
|||||||||
2,414 | 0 | $ | 13.5200 |
7/27/2015
|
|||||||||
Totals
Shankar
|
44,012 | 20,876 | |||||||||||
McCoy,
Michael C
|
512 | 0 | $ | 12.4000 |
8/12/2010
|
||||||||
468 | 0 | $ | 7.5200 |
5/22/2010
|
|||||||||
625 | 0 | $ | 19.7600 |
10/8/2010
|
|||||||||
1,875 | 0 | $ | 19.7600 |
10/8/2010
|
|||||||||
762 | 0 | $ | 19.7600 |
10/8/2010
|
|||||||||
862 | 0 | $ | 27.1200 |
1/15/2011
|
|||||||||
281 | 0 | $ | 12.4000 |
5/20/2011
|
|||||||||
468 | 0 | $ | 12.4000 |
5/20/2011
|
|||||||||
276 | 0 | $ | 12.0000 |
8/5/2011
|
|||||||||
461 | 0 | $ | 12.0000 |
8/5/2011
|
|||||||||
78 | 0 | $ | 12.0000 |
8/5/2011
|
|||||||||
546 | 0 | $ | 12.0000 |
8/5/2011
|
|||||||||
268 | 0 | $ | 10.2400 |
10/14/2011
|
|||||||||
268 | 0 | $ | 10.2400 |
10/14/2011
|
|||||||||
243 | 0 | $ | 8.9600 |
1/20/2012
|
|||||||||
243 | 0 | $ | 8.9600 |
1/20/2012
|
|||||||||
243 | 0 | $ | 13.4400 |
5/19/2012
|
|||||||||
243 | 0 | $ | 13.4400 |
5/19/2012
|
|||||||||
218 | 0 | $ | 13.2800 |
8/10/2012
|
|||||||||
218 | 0 | $ | 13.2800 |
8/10/2012
|
|||||||||
181 | 0 | $ | 11.7600 |
10/13/2012
|
|||||||||
181 | 0 | $ | 11.7600 |
10/13/2012
|
|||||||||
262 | 0 | $ | 14.7200 |
1/26/2013
|
|||||||||
581 | 0 | $ | 16.8800 |
5/18/2013
|
|||||||||
412 | 0 | $ | 13.2800 |
8/10/2013
|
|||||||||
268 | 0 | $ | 11.8400 |
10/12/2013
|
|||||||||
190 | 0 | $ | 11.0400 |
1/26/2014
|
|||||||||
1,250 | 0 | $ | 11.0400 |
1/26/2014
|
|||||||||
612 | 0 | $ | 13.2000 |
5/24/2014
|
|||||||||
156 | 0 | $ | 12.6400 |
8/7/2014
|
|||||||||
70 | 0 | $ | 8.4000 |
11/5/2014
|
|||||||||
Totals
McCoy
|
13,321 | 0 |
-49-
Restricted Stock
Units
Number of Securities
|
Number of Securities
|
||||||||||||
Underlying
|
Underlying
|
||||||||||||
Name
|
Unreleased Awards
|
Awards
|
Release Price
|
Expiration Date
|
|||||||||
|
|||||||||||||
Khatibzadeh,
Mohammad Ali
|
0 | 137,500 | $ | 0.0000 |
None
|
||||||||
Totals Khatibzadeh
|
0 | 137,500 | |||||||||||
Bosi,
Robert
|
0 | 21,304 | $ | 0.0000 |
None
|
||||||||
Totals
Bosi
|
0 | 21,304 | |||||||||||
Chung,
Theodore
|
0 | 18,116 | $ | 0.0000 |
None
|
||||||||
Totals
Chung
|
0 | 18,116 | |||||||||||
Macari,
Michael L
|
0 | 18,116 | $ | 0.0000 |
None
|
||||||||
Totals
Macari
|
0 | 18,116 | |||||||||||
Shankar,
Kris
|
0 | 1,642 | $ | 0.0000 |
None
|
||||||||
0 | 18,116 | $ | 0.0000 |
None
|
|||||||||
Totals
Shankar
|
0 | 19,758 |
Option
Exercises And Stock Vested
The
following table sets forth information regarding the exercise of stock options
and the vesting of restricted stock units for each of named executive officers
during 2009.
Option
Awards
|
Stock
Awards
|
|||||||||||||||
Name
|
Number
of
Shares
Acquired
on
Exercise (#)
|
Value
Realized
on
Exercise
($)(1)
|
Number
of Shares
Acquired
on
Vesting
(#)
|
Value
Realized
on
Vesting
($)(2)
|
||||||||||||
Dr.
Santanu Das
|
1,000 | 1,500 | — | — | ||||||||||||
Michael
Macari
|
167 | 314 | — | — | ||||||||||||
Kris
Shankar
|
— | — | 821 | 3,547 |
|
(1)
|
The
dollar amounts shown for option awards are determined by multiplying the
number of shares of the Common Stock acquired upon exercise of the option
the difference between the per-share closing price of the Common Stock on
the date of exercise and the exercise price of the
options.
|
|
(2)
|
The
dollar amounts shown for stock awards are determined by multiplying the
number of shares or units, as applicable, that vested by the per-share
closing price of the Common Stock on the vesting
date.
|
-50-
Potential
Payments upon Termination or Change-in-Control Payments
The
following table sets forth information regarding payments upon termination or
upon Change-in Control for named executive officers with written agreements.
Terms of these agreements are given below the table.
Executive
|
2009 Base
Salary($)
|
Amount of
Short-Term
Incentive
Award during
last 12
months
|
Total
Termination or
Change of
Control
Payment ($)(1)
|
|||||||||
M.
Ali Khatibzadeh, President and Chief Executive Officer
|
350,000 | N/A | 350,000 | |||||||||
Robert
A. Bosi, Vice President and Chief Financial Officer
|
336,000 | N/A | 168,000 | |||||||||
Kris
Shankar, Vice President – Worldwide Sales and Marketing
|
224,360 | N/A | 224,360 |
(1)
Assumes a change of control occurred on December 31, 2009.
President and Chief
Executive Officer
The Chief
Executive Officer has a written employment agreement, dated November 5, 2009.
The agreement is in effect for 24 months and continues each year to be in effect
afterward without any further action by either party unless either party gives
written notice of termination to the other not later than thirty days before the
renewal date.
There are
three conditions under which the Chief Executive Officer will be entitled to
separation benefits in the event of a termination: (i) Termination without
cause; (ii) Termination for Good Reason; and (iii) Termination as a result of
Change in Control, each as further described below:
|
(i)
|
Termination
without cause is any reason other than (i) termination on the termination
date of the agreement, (ii) death of the Chief Executive Officer, (iii)
voluntary termination by the Chief Executive Officer, (iv) disability of
the Chief Executive Officer, (v) termination for cause, (vi) termination
for Good Reason, and (vii) termination as result of Change in
Control.
|
|
(ii)
|
The
Chief Executive Officer may terminate the employment agreement for Good
Reason, subject to certain time requirements, following the occurrence,
without his prior written consent, of any of the following events (“Good
Reason Event”): (A) he is demoted from the position he held at
the effective date of the agreement or the responsibilities which are
assigned to him at the effective date or the titles which he holds at the
effective date are materially adversely changed; or (B) there is a
material reduction in his total compensation, provided such material
reduction is also not made to the compensation of similarly situated
executives of the Corporation.
|
|
(iii)
|
Termination
as a result of Change in Control is termination following the occurrence
of any of the following events: (A) acquisition by a third party of 51% or
more of the combined voting power of the Corporation’s outstanding
securities, (B) change within a two year period of the directors who
constitute at least a majority of the members of the directors of the
Corporation, (C) a corporate transaction including but not limited to a
merger or consolidation, (D) liquidation of the Corporation and (E)
certain other events as set forth in the employment
agreement.
|
In the
event the Chief Executive Officer is terminated under any of the three
conditions above, the Corporation shall pay him a sum equal to the sum of (i)
the entire amount of his annual base salary as in effect immediately prior to
the termination, and (ii) a cash amount equal to the Short-Term Incentive Award
that he earned in the last 12 months prior to termination. If the termination is
within the first two years of the agreement, fifty percent of the unvested stock
options and fifty percent of the unvested RSUs awarded in the Chief Executive
Officer’s initial equity grant on December 9, 2009 shall vest upon termination.
If the termination is on or after the first two years of the agreement, one
hundred percent of the unvested stock options and one hundred percent of the
unvested RSUs awarded in the Chief Executive Officer’s initial equity grant on
December 9, 2009 shall vest upon termination. The Chief Executive
Officer would also have the right to continue to participate in certain health
and dental plans, subject to certain limitations, upon such
termination.
Vice President and Chief
Financial Officer
The Vice
President and Chief Financial Officer has a written executive agreement, dated
February 13, 2009. The agreement continues in effect until terminated by the
Corporation.
If the
Vice President and Chief Financial Officer is terminated for just cause, he will
not be entitled to receive any severance or other termination
benefits.
At the
election of the Corporation for reason other than just cause, the Corporation
may immediately terminate the employment of the Vice President and Chief
Financial Officer by giving written notice of its intention to terminate. In
this case, the Vice President and Chief Financial Officer is entitled to
severance payments equal to the sum of 6 months’ salary. In addition, the
Corporation shall pay his normal post-termination benefits in accordance with
the Corporation’s retirement, insurance and other benefit plans and
arrangements.
Vice President – Worldwide
Sales and Marketing
The Vice
President – Worldwide Sales and Marketing has a written executive agreement,
dated October 27, 2008. The agreement continues in effect until October 24,
2010. This agreement incorporates provisions from the Change of Control
Severance Agreement between the Vice President – Worldwide Sales and Marketing
and Centillium Communications, Inc., signed August 28, 2006,
Under the
terms of the agreement, if the Vice President – Worldwide Sales and Marketing is
involuntarily terminated on or before April 24, 2010 other than for cause, or
for voluntary termination for Good Reason on or before April 24, 2010, he will
be entitled to the following separation benefits:
|
(i)
|
A
lump sum severance payment equal to 100% of the his annual base salary in
effect on October 24, 2008 or the date of termination, whichever is
greater, payable within 30 days of
separation;
|
|
(ii)
|
Accelerated
vesting by twelve months in addition to the vesting under the relevant
vesting schedule of any options, restricted stock, or restricted stock
units granted after August 28,
2006;
|
|
(iii)
|
Corporation-paid
health, dental, and vision benefits substantially similar to those he was
receiving immediately prior to August 28, 2006 until the earlier of twelve
months from the date of termination or until the date under which he
becomes covered under another employer’s group health
plan.
|
-51-
If the
Vice President – Worldwide Sales and Marketing is involuntarily terminated
during the period of April 24, 2010 to October 24, 2010, he will receive three
months’ severance pay in addition to the standard severance benefit in effect at
such time. The severance pay will be based on the rate of his salary in effect
on his last date of employment and will be paid at the Corporation’s discretion
in either a lump sum or in accordance with the Corporation’s payroll
practices.
If the
Vice President – Worldwide Sales and Marketing is involuntarily terminated after
October 24, 2010, he will receive four months’ severance pay.
-52-
THE
RIGHTS OFFERING
The
Subscription Rights
We are
distributing to the record holders of our common stock as of 5:00 p.m., Eastern
Time, on [— ],
2010, subscription rights to purchase shares of our common stock at a
price of $[— ] per share.
The subscription rights entitle the holders of our common stock to purchase an
aggregate of approximately [— ] shares of
our common stock for an aggregate purchase price of $10 million.
Each
holder of record of our common stock will receive one subscription right for
each full share of our common stock owned by such holder as of 5:00 p.m.,
Eastern Time, on [— ], 2010. Each
subscription right entitles the holder to a basic subscription right to purchase
[— ]
shares and an over-subscription privilege.
We are
not requiring an overall minimum subscription to complete the rights offering.
We may cancel the rights offering at any time for any reason before the rights
offering expires. If we cancel the rights offering, we will issue a press
release notifying stockholders of the cancellation, and the subscription agent
will return all subscription payments to the subscribers, without interest or
penalty, as soon as practicable.
Basic
Subscription Rights
You may
purchase [—] shares of our
common stock per basic subscription right, subject to delivery of the required
documents and payment of the subscription price of $[— ] per share,
before the rights offering expires. You may exercise all or a portion of your
basic subscription rights, or you may choose not to exercise any of your
subscription rights. If you do not exercise all of your basic subscription
rights in full, you will not be entitled to purchase any shares under your
over-subscription privilege.
We will
not issue or pay cash in place of fractional rights or fractional shares.
Instead, we will round up any fractional rights to the nearest whole right, or
any resulting fractional shares to the nearest whole share. We will deliver
certificates representing shares or credit your account at your record holder
with shares of our common stock that you purchased with your basic subscription
rights as soon as practicable following the expiration of the rights
offering.
Over-Subscription
Privilege
If you
purchase all of the shares available to you pursuant to your basic subscription
rights, you may also choose to purchase a portion of any shares that other
stockholders do not purchase by exercising their basic subscription rights. If
sufficient shares are available, we will seek to honor the over-subscription
requests in full. If over-subscription requests exceed the number of shares
available, however, we will allocate the available shares pro rata among the
stockholders exercising the over-subscription privilege in proportion to the
number of shares of our common stock each of those stockholders owned on the
record date, relative to the number of shares owned on the record date by all
stockholders exercising the over-subscription privilege. If this pro rata
allocation results in any stockholder receiving a greater number of shares than
the stockholder subscribed for pursuant to the exercise of the over-subscription
privilege, then such stockholder will be allocated only that number of shares
for which the stockholder oversubscribed, and the remaining shares will be
allocated among all other stockholders exercising the over-subscription
privilege on the same pro rata basis described above. The proration process will
be repeated until all shares have been allocated.
Computershare
Trust Company, N.A., our subscription agent for the rights offering, will
determine the over-subscription allocation based on the formula described
above.
To
properly exercise your over-subscription privilege, you must deliver the
subscription payment related to your over-subscription privilege before the
rights offering expires. Because we will not know the total number
of unsubscribed shares before the rights offering expires, if you wish to
maximize the number of shares you purchase pursuant to your over-subscription
privilege, you will need to deliver payment in an amount equal to the aggregate
subscription price for the maximum number of shares that may be available to you
(i.e., for the maximum number of shares available to you, assuming you exercise
all of your basic subscription rights and are allotted the full amount of your
over-subscription without reduction).
We can
provide no assurances that you will actually be entitled to purchase the number
of shares issuable upon the exercise of your over-subscription privilege in full
at the expiration of the rights offering. We will not be able to satisfy any
orders for shares pursuant to the over-subscription privilege if all of our
stockholders exercise their basic subscription rights in full, and we will only
honor an over-subscription privilege to the extent sufficient shares are
available following the exercise of basic subscription rights.
To the
extent the aggregate subscription price of the actual number of unsubscribed
shares available to you pursuant to the over-subscription privilege is less than
the amount you actually paid in connection with the exercise of the
over-subscription privilege, you will be allocated only the number of
unsubscribed shares available to you, and any excess subscription payments will
be returned to you, without interest or penalty, as soon as
practicable.
To the
extent the amount you actually paid in connection with the exercise of the
over-subscription privilege is less than the aggregate subscription price of the
maximum number of unsubscribed shares available to you pursuant to the
over-subscription privilege, you will be allocated the number of unsubscribed
shares for which you actually paid in connection with the over-subscription
privilege.
We will
deliver certificates or DRS statements representing shares or credit the account
of your record holder with shares of our common stock that you purchased with
the over-subscription privilege as soon as practicable after the expiration of
the rights offering.
Limitation
on the Purchase of Shares
You may
only purchase the number of whole shares of common stock purchasable upon
exercise of the number of basic subscription rights distributed to you in the
rights offering, plus the maximum amount of over- subscription privilege shares
available, if any. Accordingly, the number of shares of common stock that you
may purchase in the rights offering is limited by the number of shares of our
common stock you held on the record date and by the extent to which other
stockholders exercise their subscription rights and over-subscription
privileges, which we cannot determine prior to completion of the rights
offering. We reserve the right to reject any or all subscriptions not
properly submitted or the acceptance of which would, in the opinion of our
counsel, be unlawful or trigger the “poison pill” through the purchase of 15% or
more of our outstanding common stock as set forth in our rights agreement dated
as of October 1, 2001, as amended on February 24, 2006 with Computershare Trust
Company, N.A., as rights agent.
Determination
of Subscription Price
We
established a special committee, comprising of three members of our board
of directors, all of whom are independent directors. In determining the
subscription price, the special committee is considering a number of factors,
including: the price at which our shareholders might be willing to participate
in the rights offering, historical and current trading prices for our common
stock, the need for capital and alternatives available to us for raising
capital, potential market conditions, and the desire to provide an opportunity
to our shareholders to participate in the rights offering on a pro rata basis.
In conjunction with its review of these factors, the special committee also
reviewed our history and prospects, including our past and present earnings, our
prospects for future earnings, and the outlook for our industry, our current
financial condition and considered data relating to a range of discounts to
market value represented by the subscription prices in various prior rights
offerings. The special committee determined that the subscription
price should be designed to provide an incentive to our current stockholders to
exercise their rights. The special committee also obtained advice
from Needham & Company, LLC, our financial advisor with respect to financing
alternatives, including the rights offering, on a number of these
issues.
-53-
The
subscription price does not necessarily bear any relationship to any other
established criteria for value. You should not consider the subscription price
as an indication of value of the Company or our common stock. You should not
assume or expect that, after the rights offering, our shares of common stock
will trade at or above the subscription price in any given time period. The
market price of our common stock may decline during or after the rights
offering, and you may not be able to sell the underlying shares of our common
stock purchased during the rights offering at a price equal to or greater than
the subscription price. You should obtain a current quote for our common stock
before exercising your subscription rights and make your own assessment of our
business and financial condition, our prospects for the future, and the terms of
this rights offering.
Reasons
for the Rights Offering
The
purpose of this rights offering is to raise equity capital in a cost-effective
manner that gives all of our shareholders the opportunity to
participate. The net proceeds will be used for working capital and
other general corporate purposes. Working capital and other general corporate
purposes may include research and development expenditures, capital expenditures
and any other purpose that we may specify in any prospectus supplement,
including the repayment of up to $7.5 million principal amount outstanding of
certain indebtedness of the Company under our 5.45% Convertible Notes due
2011.
Our board
of directors has chosen the structure of a rights offering to raise capital to
allow existing stockholders to purchase additional shares of our common stock
based on their pro rata ownership percentage.
Directors’
and Executive Officers’ Participation
We expect
that our directors and executive officers, together with their affiliates, to
participate in the rights offering at various levels, but they are not required
to so do. We expect that one or more directors may exercise their
over-subscription privileges. Directors and executive officers, as a group, have
collectively committed to participate, such that we expect insider ownership to
remain at or above existing levels. If the offering is fully subscribed we
anticipate that directors and executive officers will purchase approximately
$[— ] of
common stock. Any such purchases will be made for investment purposes and not
with a view to resale and will be on the same terms and conditions as applicable
to any other subscriber in the offering.
Although
directors and executive officers will be investing their own money in the rights
offering, our board of directors is making no recommendation regarding your
exercise of the subscription rights. You are urged to make your decision based
on your own assessment of our common stock, our business and the rights
offering. Please see “Risk Factors” for a discussion of some of the risks
involved in investing in our common stock.
Effect
of Rights Offering on Existing Shareholders
The
ownership interests and voting interests of the existing stockholders who do not
exercise their basic subscription rights will be diluted. See “Questions and Answers
Related to the Rights Offering.”
Method
of Exercising Subscription Rights
The
exercise of subscription rights is irrevocable and may not be cancelled or
modified. All questions as to the validity, form, eligibility, including times
of receipt and matters pertaining to beneficial ownership, and the acceptance of
rights certificates and the subscription price will be determined by us, which
determinations will be final and binding. No alternative, conditional, or
contingent subscriptions will be accepted. We reserve the right to reject any or
all subscriptions not properly submitted or the acceptance of which would, in
the opinion of our counsel, be unlawful or trigger the “poison pill” set forth
in our rights agreement dated as of October 1, 2001, as amended on February 24,
2006 with Computershare Trust Company, N.A., as rights agent. You may exercise
your subscription rights as follows:
Subscription
by Registered Holders
If you
hold a TranSwitch stock certificate, the number of shares you may purchase
pursuant to your basic subscription rights is indicated on the enclosed rights
certificate. You may exercise your subscription rights by properly completing
and executing the rights certificate and forwarding it, together with your full
payment, to the subscription agent at the address given below under
“—Subscription Agent,” to be received before 5:00 p.m., Eastern Time, on [— ],
2010. Rights holders who fully exercise all basic subscription rights
issued to them may participate in the over-subscription right by indicating on
their rights certificate the number of shares they are willing to acquire. If
sufficient remaining shares are available after the basic subscription, all
over-subscriptions will be honored in full. Otherwise, remaining shares will be
allocated on a pro rata basis as described under “Over-Subscription Privilege”
above.
Subscription
by Beneficial Owners
If you
are a beneficial owner of shares of our common stock that are registered in the
name of a broker, dealer, custodian bank or other nominee, you will not receive
a rights certificate. Instead, the Company will issue one subscription right to
the nominee record holder for each share of our common stock that you own at the
record date. If you are not contacted by your nominee, you should promptly
contact your nominee in order to subscribe for shares in the rights offering and
follow the instructions provided by your nominee.
Payment
Method
Payments
must be made in full in U.S. currency by check or bank draft payable to
“Computershare Trust Company, N.A.(acting as Subscription Agent for TranSwitch
Corporation)”, drawn upon a U.S. bank.
Payment
received after the expiration of the rights offering will not be honored, and
the subscription agent will return your payment to you, without interest, as
soon as practicable. The subscription agent will be deemed to receive payment
upon:
|
•
|
clearance
of any uncertified check deposited by the subscription agent;
or
|
|
•
|
receipt
by the subscription agent of any certified check or bank draft, drawn upon
a U.S. bank.
|
If you
elect to exercise your subscription rights, you should consider using a
certified check or bank draft to ensure that the subscription agent receives
your funds before the rights offering expires. If you send an uncertified check,
payment will not be deemed to have been received by the subscription agent until
the check has cleared. The clearinghouse may require five or more business days.
Accordingly, holders who wish to pay the subscription price by means of an
uncertified personal check should make payment sufficiently in advance of the
expiration of the rights offering to ensure that the payment is received and
clears by that date. If you send a certified check or bank draft, drawn upon a
U.S. bank, payment will be deemed to have been received by the subscription
agent immediately upon receipt of such instrument.
-54-
You
should read the instruction letter accompanying the rights certificate carefully
and strictly follow it. DO NOT
SEND RIGHTS CERTIFICATES OR PAYMENTS DIRECTLY TO US. We will
not consider your subscription received until the subscription agent has
received delivery of a properly completed and duly executed rights certificate
and payment of the full subscription amount. The risk of delivery of all
documents and payments is borne by you or your nominee, not by the subscription
agent or us.
The
method of delivery of rights certificates and payment of the subscription amount
to the subscription agent will be at the risk of the holders of subscription
rights. If sent by mail, we recommend that you send those certificates and
payments by registered mail, properly insured, with return receipt requested,
and that you allow a sufficient number of days to ensure delivery to the
subscription agent and clearance of payment before the rights offering
expires.
Medallion
Guarantee May Be Required
Your
signature on your rights certificate must be guaranteed by an eligible
institution, such as a member firm of a registered national securities exchange
or a member of the Financial Industry Regulatory Authority, Inc., or a
commercial bank or trust company having an office or correspondent in the United
States, subject to standards and procedures adopted by the subscription agent,
unless:
•
|
you
provide on the rights certificate that shares are to be delivered to you
as record holder of those subscription rights;
or
|
•
|
you
are an eligible institution.
|
Missing
or Incomplete Rights Certificate or Payment
If you
fail to complete and sign the required rights certificates or otherwise fail to
follow the subscription procedures that apply to the exercise of your
subscription rights before the rights offering expires, the subscription agent
will reject your subscription or accept it to the extent of the payment
received. Neither we nor our subscription agent undertakes any responsibility or
action to contact you concerning an incomplete or incorrect rights certificate,
nor are we under any obligation to correct such forms. We have the sole
discretion to determine whether a subscription exercise properly complies with
the subscription procedures.
If you
send a payment that is insufficient to purchase the number of shares you
requested, or if the number of shares you requested is not specified in the
forms, the payment received will be applied to exercise your subscription rights
to the fullest extent possible based on the amount of the payment received,
subject to the availability of shares under the over-subscription privilege and
the elimination of fractional shares. Any excess subscription payments received
by the subscription agent will be returned, without interest or penalty, as soon
as practicable following the expiration of the rights offering.
Expiration
Date and Cancellation Rights
The
subscription period, during which you may exercise your subscription rights,
expires at 5:00 p.m., Eastern Time, on [—], 2010, which
is the expiration of the rights offering. If you do not exercise your
subscription rights before that time, your subscription rights will expire and
will no longer be exercisable. We will not be required to issue shares to you if
the subscription agent receives your rights certificate or your subscription
payment after that time. We have the option to extend the rights offering,
although we do not presently intend to do so. We may extend the rights offering
by giving oral or written notice to the subscription agent before the rights
offering expires, but in no event will we extend the rights offering beyond
[— ],
2010. If we elect to extend the rights offering, we will issue a press release
announcing the extension no later than 9:00 a.m., Eastern Time, on the next
business day after the most recently announced expiration date of the rights
offering.
If you
hold your shares of common stock in the name of a broker, dealer, custodian bank
or other nominee, the nominee will exercise the subscription rights on your
behalf in accordance with your instructions. Please note that the nominee may
establish a deadline that may be before the 5:00 p.m., Eastern Time, [— ], 2010,
expiration date that we have established for the rights offering.
We may
cancel the rights offering at any time and for any reason prior to the time the
rights offering expires. If we cancel the rights offering, we will issue a press
release notifying stockholders of the cancellation, and the subscription agent
will return all subscription payments to subscribers, without interest or
penalty, as soon as practicable.
Unexercised
Subscription Rights
In the
event all or any portion of the subscription rights are not exercised prior to
the expiration of the rights offering, any such unexercised rights will
terminate automatically and have no value. Thereafter, no additional shares of
common stock will be issued by the Company in connection with this rights
offering.
Subscription
Agent
The
subscription agent for this offering is Computershare Trust Company, N.A.. The
address to which rights certificates and payments should be mailed or delivered
by overnight courier is provided below. If sent by mail, we recommend that you
send documents and payments by registered mail, properly insured, with return
receipt requested, and that you allow a sufficient number of days to ensure
delivery to the subscription agent and clearance or payment before the rights
offering expires. Do not send or deliver these materials to us or the
Bank.
By mail:
|
|
By overnight courier:
|
Computershare
Trust Company, N.A.
Attn: Corporate Actions Voluntary Offer P.O. Box 43011 Providence, RI 02940-3011 |
Computershare
Trust Company, N.A.
Attn: Corporate Actions Voluntary Offer 250 Royall Street Suite V Canton, MA 02021 |
If you
deliver subscription documents or rights certificates in a manner different than
that described in this prospectus, we may not honor the exercise of your
subscription rights.
Information
Agent
The
Company’s information agent for the rights offering is Georgeson, Inc.. If you
have any questions regarding the rights offering, completing a rights
certificate or submitting payment in the rights offering, please contact
Georgeson, Inc. at (888) 867-6856 (toll-free) or, for banks and brokers, at
(212) 440-9800 (call collect).
-55-
Any
questions regarding the Company may be directed to Robert Bosi, our Chief
Financial Officer, at (3203) 929-8810, Monday through Friday between 8:00 a.m.
and 5:00 p.m., Eastern Time.
Fees
and Expenses
We will
pay all fees charged by the subscription agent, which we estimate will total
$[—].
You are
responsible for paying any other commissions, fees, taxes or other expenses that
you may incur in connection with the exercise of your subscription
rights.
No
Fractional Shares
All
shares will be sold at a purchase price of $[—] per share. We
will not issue fractional shares.
Notice to
Nominees
If you are a broker, custodian bank or
other nominee holder that holds shares of our common stock for the account of
others on the record date, you should notify the beneficial owners of the shares
for whom you are the nominee of the rights offering as soon as possible to learn
their intentions with respect to exercising their subscription rights. You
should obtain instructions from the beneficial owners of our common stock. If a
beneficial owner of our common stock so instructs, you should complete the
rights certificate and submit it to the subscription agent with the proper
subscription payment by the expiration date. You may exercise the number
of subscription
rights to which all beneficial owners in the aggregate otherwise would have been
entitled had they been direct holders of our common stock on the record date,
provided that you, as a nominee record holder, make a proper showing to the
subscription agent by submitting the form entitled “Nominee Holder
Certification,” which is provided with your rights offering materials. If you
did not receive this form, you should contact the company’s information agent to
request a copy.
Beneficial
Owners
If you
are a beneficial owner of shares of our common stock and will receive your
subscription rights through a broker, custodian bank or other nominee, we will
ask your nominee to notify you of the rights offering. If you wish to exercise
your subscription rights, you will need to have your nominee act for you, as
described above. To indicate your decision with respect to your subscription
rights, you should follow the instructions of your nominee. If you wish instead
to obtain a separate rights certificate, you should contact your nominee as soon
as possible and request that a rights certificate be issued to you. You should
contact your nominee if you do not receive notice of the rights offering, but
you believe you are entitled to participate in the rights offering. We are not
responsible if you do not receive the notice by mail or otherwise from your
nominee or if you receive notice without sufficient time to respond to your
nominee by the deadline established by your nominee, which may be before the
5:00 p.m., Eastern Time, [— ], 2010,
expiration date.
The
Rights are Not Tradable, but are Transferable
The
subscription rights may be sold, transferred or assigned in whole or in part.
Subscription rights, however, will not be listed for trading on the NASDAQ
Capital Market, any other stock exchange or market, or on the OTC Bulletin
Board. Any transferee of any of your subscription rights must exercise those
rights in the same way and subject to the same conditions as apply to when
exercising the transferred rights.
Subscription
rights, whether or not transferred, must be exercised prior to the expiration of
the rights offering or they will terminate. It should be noted that the resale
restrictions of Rule 144 will apply to the transfer of subscription rights by
affiliates of the Company and to recipients of rights transferred from such
affiliates. The resale restrictions of Rule 144 also will apply to shares of
common stock purchased by affiliates as a result of the exercise of rights
associated with restricted shares. Please see the section of this prospectus
entitled “The Rights Offering - Rule 144” for additional
information. Practically speaking, the subscription agent must
receive a proper transfer of a rights certificate from a transferor by [—], 2010 for the
transferee to be able to properly exercise the transferee’s own re-issued rights
certificate by [—],
2010.
Rule
144
The
common stock sold in this offering will be transferable without restrictions or
further registration under the Securities Act of 1933, as amended, except for
any of our shares purchased by an affiliate which will be subject to the resale
limitations of Rule 144 promulgated under the Act. The resale restrictions
of Rule 144 also will apply to the transfer of subscription rights by
affiliates of the Company and to recipients of rights transferred from such
affiliates.
Restricted
securities may be sold in the public market only if their sales are registered
under the Securities Act or are sold pursuant to an exemption from registration
under Rule 144 under the Securities Act. Shares held by our affiliates may
be sold subject to compliance with Rule 144 of the Securities Act. In
general, under Rule 144 as currently in effect, a person who is not as
“affiliate,” as that term is defined in Rule 144, of the Company at any
time during the three months preceding a sale, and who has beneficially owned
restricted shares of our common stock to be sold for at least six months, would
be entitled to sell an unlimited number of such shares, provided current public
information about us is available. In addition, under Rule 144, a person
who is not one of our affiliates at any time during the three months preceding a
sale, and who has beneficially owned restricted shares of our common stock to be
sold for at least one year, would be entitled to sell an unlimited number of
shares immediately upon the closing of this offering without regard to whether
current public information about us is available.
Our
affiliates who have beneficially owned shares of our common stock for at least
six months are entitled to sell within any three-month period a number of shares
that does not exceed the greater of:
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one
percent of the number of shares of our common stock then outstanding;
and
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the
average weekly trading volume of our common stock on The NASDAQ Capital
Market during the four calendar weeks preceding the filing of a notice on
Form 144 with respect to the
sale.
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Validity
of Subscriptions
We will
resolve all questions regarding the validity and form of the exercise of your
subscription rights, including time of receipt and eligibility to participate in
the rights offering. Our determination will be final and binding. Once made,
subscriptions and directions are irrevocable, and we will not accept any
alternative, conditional or contingent subscriptions or directions. We reserve
the absolute right to reject any subscriptions or directions not properly
submitted or the acceptance of which would be unlawful. You must resolve any
irregularities in connection with your subscriptions before the subscription
period expires, unless we waive them in our sole discretion. Neither we nor the
subscription agent is under any duty to notify you or your representative of
defects in your subscriptions. A subscription will be considered accepted,
subject to our right to withdraw or cancel the rights offering, only when the
subscription agent receives a properly completed and duly executed rights
certificate and any other required documents and the full subscription payment
including final clearance of any uncertified check. Our interpretations of the
terms and conditions of the rights offering will be final and
binding.
Return
of Funds
The
subscription agent will hold funds received in payment for shares in a
segregated account pending completion of the rights offering. The subscription
agent will hold this money in escrow until the rights offering is completed or
is withdrawn and cancelled. If the rights offering is cancelled for any reason,
all subscription payments received by the subscription agent will be returned,
without interest or penalty, as soon as practicable.
-56-
Shareholder
Rights
You will
have no rights as a holder of the shares of our common stock you purchase in the
rights offering until certificates representing the shares of our common stock
are issued to you, or your account at your nominee is credited with the shares
of our common stock purchased in the rights offering.
No
Revocation or Change
Once you
submit the rights certificate or have instructed your nominee of your
subscription request, you are not allowed to revoke or change the exercise or
request a refund of monies paid. All exercises of subscription rights are
irrevocable, even if you learn information about us that you consider to be
unfavorable. You should not exercise your subscription rights unless you are
certain that you wish to purchase shares at the subscription price.
Foreign
Shareholders
We will
not mail this prospectus or rights certificates to stockholders with addresses
that are outside the United States or that have a military post office or a
foreign post office address. The subscription agent will hold these rights
certificates for their account. To exercise subscription rights, our foreign
stockholders must notify the subscription agent prior to 11:00 a.m.,
Eastern Time, at least three business days prior to the expiration of the rights
offering and demonstrate to the satisfaction of the subscription agent that the
exercise of such subscription rights does not violate the laws of the
jurisdiction of such stockholder.
U.S.
Federal Income Tax Treatment of Rights Distribution
For U.S.
federal income tax purposes, you should not recognize income or loss upon
receipt or exercise of these subscription rights to purchase our shares for the
reasons described below in “Certain U.S. Federal Income Tax
Consequences.”
No
Recommendation to Rights Holders
Our board
of directors is not making a recommendation regarding your exercise of the
subscription rights. Shareholders who exercise subscription rights risk
investment loss on money invested. The market price for our common stock may
decline to a price that is less than the subscription price and, if you purchase
shares at the subscription price, you may not be able to sell the shares in the
future at the same price or a higher price. You should make your decision based
on your assessment of our business and financial condition, our prospects for
the future and the terms of this rights offering. Please see “Risk Factors” for
a discussion of some of the risks involved in investing in our common
stock.
Shares
of Our Common Stock Outstanding After the Rights Offering
As of
April 9, 2010, 20,619,417 shares of our common stock were issued and
outstanding. If the rights offering is fully subscribed through the exercise of
the subscription rights, then an additional [—] shares of our
common stock will be issued and outstanding after the closing of the rights
offering, for a total of [—] shares of
common stock outstanding. The preceding sentence assumes that, during the rights
offering, we issue no other shares of our common stock and that no options for
our common stock are exercised.
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CERTAIN
U.S. FEDERAL INCOME TAX CONSEQUENCES
The
following discussion is a summary of certain United States federal income tax
consequences to U.S. holders (as defined below) of the receipt, ownership and
disposition of the subscription rights acquired in the rights offering and the
ownership of shares of common stock received upon exercise of the subscription
rights or, if applicable, upon exercise of the over-subscription privilege. This
discussion is based upon the provisions of the United States Internal Revenue
Code of 1986, as amended (the “Code”), regulations promulgated by the Treasury
Department thereunder, and administrative rulings and judicial decisions, in
each case as of the date hereof. These authorities are subject to differing
interpretations and may be changed, perhaps retroactively, resulting in United
States federal income tax consequences different from those discussed below. We
have not sought any ruling from the United States Internal Revenue Service
(“IRS”) with respect to the statements made and the conclusions reached in this
discussion, and there can be no assurance that the IRS will agree with such
statements and conclusions. This discussion applies only to U.S. holders who
acquire the subscription rights in the rights offering. Further, this discussion
assumes that the subscription rights or shares of common stock issued upon
exercise of the subscription rights or, if applicable, the over-subscription
privilege will be held exclusively as capital assets within the meaning of
Section 1221 of the Code. In addition, this summary does not address all
tax considerations that may be applicable to your particular circumstances or to
you if you are a U.S. holder that may be subject to special tax rules,
including, without limitation:
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banks,
insurance companies or other financial
institutions;
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regulated
investment companies;
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real
estate investment trusts;
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dealers
in securities or commodities;
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traders
in securities that elect to use a mark-to-market method of accounting for
securities holdings;
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tax-exempt
organizations;
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persons
liable for alternative minimum tax;
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persons
that hold shares of common stock as part of a straddle or a hedging or
conversion transaction;
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retirement
plans, individual retirement accounts, or other tax deferred
accounts;
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partnerships
or other entities treated as partnerships for United States federal income
tax purposes; or
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persons
whose “functional currency” is not the United States
dollar
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You are a
U.S. holder if you are a beneficial owner of subscription rights or shares of
common stock and you are:
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an
individual citizen or resident of the United
States,
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a
corporation (or any other entity treated as a corporation for United
States federal income tax purposes) created or organized in or under the
laws of the United States, any state thereof or the District of
Columbia,
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an
estate whose income is subject to United States federal income tax
regardless of its source, or
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a
trust if it (1) is subject to the primary supervision of a court
within the United States and one or more “United States persons,” as
defined in the Code, have the authority to control all substantial
decisions of the trust or (2) has a valid election in effect under
applicable Treasury Department regulations to be treated as a United
States person.
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If a
partnership (including any entity treated as a partnership for United States
federal income tax purposes) receives the subscription rights or holds shares of
common stock received upon exercise of the subscription rights or the
over-subscription privilege, the tax treatment of a partner in a partnership
generally will depend upon the status of the partner and the activities of the
partnership. Such a partner or partnership should consult its own tax advisor as
to the United States federal income tax consequences of the receipt and
ownership of the subscription rights or the ownership of shares of common stock
received upon exercise of the subscription rights or, if applicable, upon
exercise of the over-subscription privilege.
This
discussion addresses only certain aspects of United States federal income
taxation. This discussion also does not address any federal non-income, state,
local or foreign tax considerations to U.S. holders, nor does it address any tax
considerations to persons other than U.S. holders. You should consult
your own tax advisor regarding the United States federal, state, local, non-U.S.
and other tax consequences of the receipt, ownership and disposition of the
subscription rights acquired in the rights offering and the ownership of shares
of common stock received upon exercise of the subscription rights or, if
applicable, upon exercise of the over-subscription privilege.
Taxation
of Subscription Rights
Receipt
of Subscription Rights
Your
receipt of subscription rights in the rights offering should be treated as a
nontaxable distribution for United States federal income tax purposes under
Section 305(a) of the Code because the distribution of the subscription rights
should not be deemed a “disproportionate distribution” under Section 305(b), as
described below. This position is not binding on the IRS, or the
courts, however. If this position is finally determined by the IRS or a
court to be incorrect, the fair market value of the subscription rights would be
taxable to holders of our common stock as a dividend to the extent of the
holder’s pro rata share
of our current and accumulated earnings and profits, if any, with any excess
being treated as a return of capital to the extent thereof and then as capital
gain. The distribution of the subscription rights would be taxable under
Section 305(b) of the Code if it were a distribution or part of a series of
distributions, including deemed distributions, that have the effect of the
receipt of cash or other property by some of our shareholders and an increase in
the proportionate interest of other shareholders in our assets or earnings and
profits, if any. Distributions having this effect are referred to as
“disproportionate distributions.”
The
discussion below assumes that the receipt of subscription rights will be treated
as a nontaxable distribution.
Tax
Basis and Holding Period of Subscription Rights
Your tax
basis of the subscription rights for United States federal income tax purposes
will depend on the fair market value of the subscription rights you receive and
the fair market value of your existing shares of common stock on the date you
receive the subscription rights.
-58-
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If
the fair market value of the subscription rights you receive is 15% or
more of the fair market value of your existing shares of common stock on
the date you receive the subscription rights, then you must allocate the
tax basis of your existing shares of common stock between the existing
shares of common stock and the subscription rights you receive in
proportion to their respective fair market values determined on the date
you receive the subscription
rights.
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If
the fair market value of the subscription rights you receive is less than
15% of the fair market value of your existing shares of common stock on
the date you receive the subscription rights, the subscription rights will
be allocated a zero tax basis, unless you elect to allocate the tax basis
of your existing shares of common stock between the existing shares of
common stock and the subscription rights you receive in proportion to
their respective fair market values determined on the date you receive the
subscription rights. If you choose to allocate the tax basis between your
existing shares of common stock and the subscription rights, you must make
this election on a statement included with your United States federal
income tax return for the taxable year in which you receive the
subscription rights. Such an election is
irrevocable.
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The fair
market value of the subscription rights on the date the subscription rights are
distributed is uncertain, and we have not obtained, and do not intend to obtain,
an appraisal of the fair market value of the subscription rights on that date.
In determining the fair market value of the subscription rights, you should
consider all relevant facts and circumstances, including any difference between
the subscription price of the subscription rights and the trading price of our
common stock on the date that the subscription rights are distributed, the
length of the period during which the subscription rights may be exercised and
the fact that the subscription rights are transferable.
Your
holding period of the subscription rights will include your holding period of
the shares of common stock with respect to which the subscription rights were
distributed.
Exercise
of Subscription Rights
You
generally will not recognize gain or loss upon exercise of the subscription
rights. The tax basis of the shares of common stock you receive upon exercise of
the subscription rights or, if applicable, upon exercise of the
over-subscription privilege generally will equal the sum of (i) the
subscription price and (ii) the tax basis, if any, of the subscription
rights as determined above. Your holding period of the shares of common stock
you receive upon exercise of the subscription rights or, if applicable, upon
exercise of the over-subscription privilege will begin on the date the
subscriptions rights are exercised.
Expiration
of Subscription Rights
If you do
not exercise the subscription rights, you should not recognize a gain or loss
for United States federal income tax purposes and any portion of the tax basis
of your existing shares of common stock previously allocated to the subscription
rights not exercised, if any, will be re-allocated to the existing common
stock.
Sale
or Other Disposition of Subscription Rights
If you
sell or otherwise dispose of the subscription rights received in the rights
offering prior to the expiration date, you will recognize capital gain or loss
equal to the difference between (a) the proceeds of sale and (b) your
tax basis, if any, in the subscription rights being sold or otherwise disposed
of (determined as described above). Any capital gain or loss will be
long-term capital gain or loss if the holding period for the subscription
rights, determined as described in “—Tax Basis and Holding Period of the
Subscription Rights” above, exceeds one year at the time of
disposition.
Taxation
of Common Stock
Distributions
with respect to shares of common stock received upon exercise of the
subscription rights or the over-subscription privilege will be taxable as
dividend income when actually or constructively received to the extent of our
current or accumulated earnings and profits, if any, as determined for United
States federal income tax purposes. To the extent that the amount of a
distribution exceeds our current and accumulated earnings and profits, the
distribution will be treated first as a tax-free return of capital to the extent
of your adjusted tax basis of such shares of common stock and thereafter as
capital gain.
Subject
to certain exceptions for short-term and hedged positions, distributions
constituting dividend income received by certain non-corporate U.S. holders,
including individuals, in respect of the shares of common stock in taxable years
beginning before January 1, 2011 are generally taxed at a maximum rate of
15%. Similarly, subject to similar exceptions for short-term and hedged
positions, distributions on the shares of common stock constituting dividend
income paid to U.S. holders that are domestic corporations generally will
qualify for the dividends-received deduction. You should consult your own tax
advisor regarding the availability of the reduced dividend tax rate and the
dividends-received deduction in light of your particular
circumstances.
If you
sell or otherwise dispose of any shares of the common stock, you will generally
recognize capital gain or loss equal to the difference between your amount
realized and your adjusted tax basis of such shares of common stock. Such
capital gain or loss will be long-term capital gain or loss if your holding
period for such shares of common stock is more than one year. Long-term capital
gain of a non-corporate U.S. holder, including individuals, that is recognized
in taxable years beginning before January 1, 2011 is generally taxed at a
maximum rate of 15%. The deductibility of capital losses is subject to
limitations.
Information
Reporting and Backup Withholding
In
general, payments made to you of proceeds from the sale of subscription rights
or rights shares may be subject to information reporting to the IRS and possible
U.S. federal backup withholding (currently at a rate of 28%). Backup
withholding will not apply if you furnish a correct taxpayer identification
number (certified on the IRS Form W-9) or otherwise establish that you are
exempt from backup withholding. Backup withholding is not an additional
tax. Amounts withheld as backup withholding may be credited against your
U.S. federal income tax liability. You may obtain a refund of any excess
amounts withheld under the backup withholding rules by timely filing the
appropriate claim for refund with the IRS and furnishing any required
information.
You
should consult your own tax advisor regarding your qualification for an
exemption from backup withholding and the procedures for obtaining such an
exemption, if applicable.
THIS
SUMMARY IS ONLY A GENERAL DISCUSSION AND IS NOT INTENDED TO BE, AND SHOULD NOT
BE CONSTRUED TO BE, LEGAL, OR TAX ADVICE. THE U.S. FEDERAL INCOME TAX
TREATMENT OF THE SUNSCRIPTION RIGHTS IS COMPLEX AND POTENTIALLY UNFAVORABLE TO
U.S. HOLDERS. ACCORDINGLY, EACH U.S. HOLDER WHO ACQUIRES RIGHTS IS
STRONGLY URGED TO CONSULT HIS, HER OR ITS OWN TAX ADVISER WITH RESPECT TO THE
U.S. FEDERAL, STATE, LOCAL AND FOREIGN INCOME, ESTATE AND OTHER TAX CONSEQUENCES
OF THE ACQUISITION OF THE RIGHTS, WITH SPECIFIC REFERENCE TO SUCH PERSON’S
PARTICULAR FACTS AND CIRCUMSTANCES.
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USE
OF PROCEEDS
We
currently intend to use the estimated net proceeds from the sale of these
securities for working capital and other general corporate purposes. Working
capital and other general corporate purposes may include research and
development expenditures, capital expenditures and any other purpose that we may
specify in any prospectus supplement, including repayment of $7.5 million
principal amount outstanding as of March 31, 2010 of certain indebtedness of the
Company under our 5.45% Convertible Notes due 2011. We have not yet determined
the amount of net proceeds to be used specifically for any of the foregoing
purposes. Accordingly, our management will have significant discretion and
flexibility in applying the net proceeds from the sale of these securities.
Pending any use, as described above, we intend to invest the net proceeds in
high-quality, short-term, interest-bearing securities. Our plans to use the
estimated net proceeds from the sale of these securities may change, and if they
do, we will update this information in a prospectus supplement.
-60-
PLAN
OF DISTRIBUTION
Overview
We will
distribute the subscription rights certificates and copies of this prospectus to
individuals who owned shares of our common stock at 5:00 p.m. Eastern Time on
[●], 2010. If you wish to exercise your subscription rights and purchase shares,
you should complete the rights certificate and return it with payment for the
shares to the subscription agent at the following address:
By mail:
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By overnight courier:
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Computershare
Trust Company, N.A.
Attn: Corporate Actions Voluntary Offer P.O. Box 43011 Providence, RI 02940-3011 |
Computershare
Trust Company, N.A.
Attn: Corporate Actions Voluntary Offer 250 Royall Street Suite V Canton, MA 02021 |
See “The Rights
Offering—Method of Exercising Subscription Rights.” If you have any questions
about whether your completed rights certificate or payment has been received,
you may call our information agent, Georgeson, Inc., at (888) 867-6856
(toll-free) or, for banks and brokers, at (212) 440-9800 (call
collect).
Financial
Advisor
We have
not engaged any dealer-manager or any broker-dealer to engage in solicitation of
the exercise of rights or to underwrite the rights offering. However,
we have engaged Needham & Company, LLC as our financial advisor in
connection with financing alternatives, including the rights offering, for which
it will be paid a customary fee. Needham & Company has not prepared any
report or opinion constituting a recommendation to us or any subscriber for our
shares of common stock., nor has Needham & Company prepared an
opinion as to the purchase price or terms of the rights
offering. Needham & Company expresses no opinion and makes no
recommendation to the holders of our common stock as to the purchase by any
person of any shares of our common stock. Needham & Company also expresses
no opinion as to the prices at which common stock to be distributed in
connection with the rights offering may trade if and when they are issued or at
any future time.
Needham
& Company does not have any obligation or commitment to sell any shares of
common stock in the rights offering or to acquire any shares for its own account
or with a view to their distribution or otherwise act in any other capacity
whatsoever as an underwriter or agent.
We have
agreed to indemnify Needham & Company against certain liabilities, including
liabilities under the Securities Act of 1933, as amended, and to contribute to
payments that Needham & Company may be required to make in respect of these
liabilities.
Directors,
Executive Officers and Employees
We are
offering shares directly to you pursuant to the rights offering. Our directors
and executive officers may participate in the solicitation of our stockholders
for the exercise of subscription rights for the purchase of shares. We will
reimburse these persons for their reasonable out-of-pocket expenses incurred in
connection with any solicitation. Other employees of TranSwitch may assist in
the rights offering in ministerial capacities, providing clerical work in
effecting an exercise of subscription rights or answering questions of a
ministerial nature. Other questions from prospective purchasers will be directed
to our executive officers. Our other employees have been instructed not to
solicit the exercise of subscription rights for the purchase of shares or to
provide advice regarding the exercise of subscription rights. None of our
officers, directors or employees will be compensated in connection with their
participation in the offering by the payment of commissions or other
remuneration based either directly or indirectly on the transactions in the
subscription rights or shares.
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DESCRIPTION
OF COMMON STOCK
The
following summary of the terms of our common stock is subject to and qualified
in its entirety by reference to our amended and restated certificate of
incorporation, as amended, and by-laws, copies of which are on file with the SEC
as exhibits to previous SEC filings. This summary may not contain all the
information that is important to you. Please refer to “Where You Can
Find More Information” below for directions on obtaining these
documents.
We
currently have authority to issue 301,000,000 shares of stock: 300,000,000
shares of common stock par value of $0.001 per share and 1,000,000 shares of
preferred stock par value of $0.01 per share. As of April 9, 2010, we
had 20,619,417 shares of common stock outstanding. We have proposed
an amendment to our amended and restated certificate of incorporation, as
amended to our stockholders for their consideration at our annual meeting of
stockholders to be held on May 20, 2010 to reduce the number of shares of our
authorized capital stock from 301,000,000 shares to 37,625,000 to reflect the
reverse stock split effected on November 23, 2009.
Subject
to preferences that may apply to shares of preferred stock outstanding at the
time, the holders of outstanding shares of common stock are entitled to receive
dividends out of assets legally available for payment of dividends, as the board
may from time to time determine. Each stockholder is entitled to one vote for
each share of common stock held on all matters submitted to a vote of
stockholders. Our certificate of incorporation does not provide for cumulative
voting for the election of directors, which means that the holders of a majority
of the shares voted can elect all of the directors then standing for election.
The common stock is not subject to conversion or redemption. Each outstanding
share of common stock offered by this prospectus will, when issued, be fully
paid and nonassessable.
Rights
Plan
We
entered into a rights agreement on October 1, 2001, which was subsequently
amended on February 24, 2006, pursuant to which our board of directors enacted a
stockholder rights plan and declared a dividend of one preferred share purchase
right for each outstanding share of our common stock outstanding at the close of
business on October 1, 2001 to the stockholders of record on that date. Each
stockholder of record as of October 1, 2001 received a summary of the rights and
any new stock certificates issued after the record date contain a legend
describing the rights. Each preferred share purchase right entitles the
registered holder to purchase from us one one-thousandth of a share of our
Series A Junior Participating Preferred Stock, par value $0.01 per share, at a
price of $400.00 per one one-thousandth of a Preferred share of Preferred Stock,
subject to adjustment, upon the occurrence of certain triggering events,
including the purchase of 15% or more of our outstanding common stock by a third
party. Until a triggering event occurs, the common stockholders have no right to
purchase shares under the stockholder rights plan. If the right to purchase the
preferred stock is triggered, the common stockholders will have the ability to
purchase a sufficient amount of stock to significantly dilute the 15% or greater
holder.
Transfer
Agent and Registrar
The
transfer agent and registrar for our common stock is Computershare Trust
Company, N.A. Its telephone number is (781) 575-2000.
Listing
Our
common stock is listed on The NASDAQ Capital Market under the symbol
“TXCC.”
The
following paragraphs summarize certain provisions of the Delaware General
Corporation Law and our certificate of incorporation and by-laws. The summary is
subject to and qualified in its entirety by reference to the Delaware General
Corporation Law and to our certificate of incorporation and by-laws, copies of
which are on file with the SEC. Please refer to “Where You Can Find More
Information” below for directions on obtaining these documents.
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CERTAIN
ANTI-TAKEOVER PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BY-LAWS
AND DELAWARE LAW
Blank
Check Preferred Stock.
We have
shares of preferred stock available for future issuance without stockholder
approval. The existence of authorized but unissued shares of preferred stock may
enable our board of directors to render more difficult or to discourage an
attempt to obtain control of us by means of a merger, tender offer, proxy
contest or otherwise. For example, if in the due exercise of its fiduciary
obligations, our board of directors were to determine that a takeover proposal
is not in the best interests of us or our stockholders, our board of directors
could cause shares of preferred stock to be issued without stockholder approval
in one or more private offerings or other transactions that might dilute the
voting or other rights of the proposed acquirer or insurgent stockholder or
stockholder group. In this regard, our certificate of incorporation grants our
board of directors broad power to establish the rights and preferences of
authorized and unissued shares of preferred stock. The issuance of shares of
preferred stock could decrease the amount of earnings and assets available for
distribution to holders of shares of common stock. The issuance may also
adversely affect the rights and powers, including voting rights, of these
holders and may have the effect of delaying, deterring or preventing a change in
control of us.
Section 203
of the Delaware General Corporation Law
Section 203
of the Delaware General Corporation Law is applicable to corporate takeovers of
Delaware corporations. Subject to exceptions enumerated in Section 203,
Section 203 provides that a corporation shall not engage in any business
combination with any “interested stockholder” for a three-year period following
the date that the stockholder becomes an interested stockholder
unless:
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prior
to that date, the board of directors of the corporation approved either
the business combination or the transaction that resulted in the
stockholder becoming an interested
stockholder;
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upon
consummation of the transaction that resulted in the stockholder becoming
an interested stockholder, the interested stockholder owned at least 85%
of the voting stock of the corporation outstanding at the time the
transaction commenced, though some shares may be excluded from the
calculation; and
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on
or subsequent to that date, the business combination is approved by the
board of directors of the corporation and by the affirmative votes of
holders of at least two-thirds of the outstanding voting stock that is not
owned by the interested
stockholder.
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Except as
specified in Section 203, an interested stockholder is generally defined to
include any person who, together with any affiliates or associates of that
person, beneficially owns, directly or indirectly, 15% or more of the
outstanding voting stock of the corporation, or is an affiliate or associate of
the corporation and was the owner of 15% or more of the outstanding voting stock
of the corporation, any time within three years immediately prior to the
relevant date. Under some circumstances, Section 203 makes it more
difficult for an interested stockholder to effect various business combinations
with a corporation for a three-year period. Our certificate of incorporation and
by-laws do not exclude TranSwitch from the restrictions imposed under
Section 203. We expect that the provisions of Section 203 may
encourage companies interested in acquiring us to negotiate in advance with our
board of directors. These provisions may have the effect of deterring hostile
takeovers or delaying changes in control of TranSwitch, which could depress the
market price of our stock and which could deprive stockholders of opportunities
to realize a premium on shares of our stock held by them.
Certain
Provisions in our Certificate of Incorporation and By-laws
The
following is a summary of certain provisions of our certificate of
incorporation and our by-laws. This summary does not purport to be complete and
is qualified in its entirety by reference to the corporate law of Delaware and
our certificate of incorporation and by-laws.
Our
certificate of incorporation and by-laws contain various provisions intended to
promote the stability of our stockholder base and render more difficult certain
unsolicited or hostile attempts to take us over that could disrupt TranSwitch,
divert the attention of our directors, officers and employees and adversely
affect the independence and integrity of our business.
Pursuant
to our certificate of incorporation, the number of directors is fixed by our
board of directors. Pursuant to our by-laws, directors elected by stockholders
at an annual meeting of stockholders will be elected by a plurality of all votes
cast.
Our
by-laws provide that a special meeting of stockholders may be called only by the
Chairman of the board of directors, a majority of the board of directors or the
President of TranSwitch. Stockholders are not permitted to call, or to require
that the board of directors call, a special meeting of stockholders. Moreover,
the business permitted to be conducted at any special meeting of stockholders is
limited to the business brought before the meeting pursuant to the notice of the
meeting given by us. In addition, our certificate of incorporation provides that
any action taken by our stockholders must be effected at an annual or special
meeting of stockholders and may not be taken by written consent instead of a
meeting. Our by-laws establish an advance notice procedure for stockholders to
nominate candidates for election as directors or to bring other business before
meetings of our stockholders.
Our
certificate of incorporation requires the affirmative vote of the holders of at
least 75% of the shares of all classes of stock entitled to vote for the
election of directors, voting together as a single class, to amend or repeal any
provision of our by-laws, amend or repeal the provision of our certificate of
incorporation relating to amendments to our by-laws or adopt any provision
inconsistent with such provisions.
Our
certificate of incorporation requires the affirmative vote of the holders of at
least 75% of the shares of all classes of stock entitled to vote for the
election of directors, voting together as a single class, to amend or repeal the
provisions of our certificate of incorporation relating to the election of
directors or adopt any provision inconsistent with such
provisions.
-63-
LEGAL
MATTERS
Certain
legal matters, including the legality of the securities offered, will be passed
upon for us by Brown Rudnick LLP, Boston, Massachusetts. If the securities are
distributed in an underwritten offering, certain legal matters will be passed
upon for the underwriters by counsel identified in the applicable prospectus
supplement.
EXPERTS
The
consolidated financial statements of TranSwitch Corporation and subsidiaries
(TranSwitch) as of December 31, 2009 and 2008, and for each of the years in
the three-year period ended December 31, 2009, the related financial
statement schedule, and management’s assessment of the effectiveness of internal
control over financial reporting as of December 31, 2009 have
been included herein in reliance on the report of UHY LLP, independent
registered public accounting firm, also included herein and given on the
authority of such firm as experts in accounting and
auditing.
-64-
WHERE
YOU CAN FIND MORE INFORMATION
This
prospectus is part of a Registration Statement on Form S-1 filed by us with the
Securities and Exchange Commission (“SEC”) under the Securities Act of 1933, as
amended. This prospectus does not contain all of the information set forth in
the Registration Statement, certain parts of which are omitted in accordance
with the rules and regulations of the SEC. For further information with respect
to us and the securities offered by this prospectus, reference is made to the
Registration Statement, including the exhibits to the Registration Statement and
documents incorporated by reference. Statements contained in this prospectus
concerning the provisions of such documents are summaries only and each such
statement is qualified in its entirety by reference to the copy of the
applicable document filed with the SEC.
We file
periodic reports, proxy statements and other information with the SEC. Our SEC
filings are available to the public over the Internet at the SEC’s web site at
http://www.sec.gov. You may also inspect and copy these materials at the SEC’s
public reference facilities at 100 F Street, N.E., Room 1580, Washington, D.C.
20549. You can also obtain copies of such material at prescribed rates by
writing to the Public Reference Section of the SEC at 100 F Street, N.E.,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference facilities.
Our
Internet address is www.transwitch.com. The
information on our Internet website is not incorporated by reference in this
prospectus.
INCORPORATION
OF DOCUMENTS BY REFERENCE
We
“incorporate by reference” into this prospectus information we file with the
SEC, which means that we can disclose important information to you by referring
you to documents incorporated by reference. The information incorporated by
reference is an important part of this prospectus. Some information contained in
this prospectus updates the information incorporated by reference. In the case
of a conflict or inconsistency between information set forth in this prospectus
and information incorporated by reference into this prospectus, you should rely
on the information contained in the document that was filed later.
Other
than any portions of any such documents that` are not deemed “filed” under the
Securities Exchange Act of 1934 (“Exchange Act”) in accordance with the Exchange
Act and applicable SEC rules, we incorporate by reference the documents listed
below:
|
•
|
Annual
Report on Form 10-K for the year ended December 31, 2009, as
filed with the SEC on March 16, 2010 including information specifically
incorporated by reference into our Form 10-K from our definitive Proxy
Statement for our 2009 annual meeting of
stockholders;
|
|
•
|
Current
Reports on Form 8-K as filed with the SEC on January 4, 2010 and March 22,
2010; and
|
|
•
|
The
description of our Capital Stock contained in our registration statement
on Form 8-A, dated April 28,
1995.
|
You may
request a copy of these documents, which will be provided to you at no cost, by
contacting:
TranSwitch
Corporation
Three
Enterprise Drive
Shelton,
Connecticut 06484
Attn:
Investor Relations Department
(203) 929-8810
You
should rely only on the information contained in this prospectus, including
information incorporated by reference as described above, or any prospectus
supplement that we have specifically referred you to. We have not authorized
anyone else to provide you with different information. You should not assume
that the information in this prospectus or any prospectus supplement is accurate
as of any date other than the date on the front of those documents or that any
document incorporated by reference is accurate as of any date other than its
filing date. You should not consider this prospectus to be an offer or
solicitation relating to the securities in any jurisdiction in which such an
offer or solicitation relating to the securities is not authorized. Furthermore,
you should not consider this prospectus to be an offer or solicitation relating
to the securities if the person making the offer or solicitation is not
qualified to do so, or if it is unlawful for you to receive such an offer or
solicitation.
-65-
TRANSWITCH
CORPORATION AND SUBSIDIARIES
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
AND
FINANCIAL STATEMENT SCHEDULE
|
|
Page
|
Financial
Statements:
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
F-2
|
Consolidated
Balance Sheets as of December 31, 2009 and 2008
|
|
F-3
|
Consolidated
Statements of Operations for the years ended December 31, 2009, 2008 and
2007
|
|
F-4
|
Consolidated
Statements of Stockholders’ Equity and Comprehensive Loss for the years
ended December 31, 2009, 2008 and 2007
|
|
F-5
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2009, 2008 and
2007
|
|
F-6
|
Notes
to Consolidated Financial Statements
|
|
F-7
|
Financial
Statement Schedule:
|
|
|
Schedule
II, Valuation and Qualifying Accounts
|
|
F-27
|
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Stockholders and Board of Directors
TranSwitch
Corporation
We have
audited the accompanying consolidated balance sheets of TranSwitch Corporation
and subsidiaries (the Company) as of December 31, 2009 and 2008, and the related
consolidated statements of operations, stockholders' equity and comprehensive
loss, and cash flows for each of the years in the three-year period ended
December 31, 2009. Our audit also included the financial statement
schedule listed in the Index at Item 8. We have also audited the Company’s
internal control over financial reporting as of December 31, 2009, based on the
criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). These financial statements and schedule
are the responsibility of the Company's management. Further, the
Company’s management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting included in Management’s Annual Report on
Internal Control over Financial Reporting under Item 9A. Our responsibility is
to express an opinion on these financial statements and schedules, and an
opinion on the Company’s internal control over financial reporting based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 2009 and 2008, and the results of its operations and its cash flows for each
of the years in the three-year period ended December 31, 2009 in conformity with
accounting principles generally accepted in the United States of
America. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly, in all material respects, the information set forth
therein. Further, in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2009, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
As
discussed in Note 12, the Company adopted, as required, new accounting standards
for uncertain tax positions effective January 1,
2007.
/s/ UHY
LLP
New
Haven, Connecticut
March 16,
2010
F-2
TRANSWITCH
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(dollars
in thousands, except par value)
December 31,
2009
|
December 31,
2008
|
|||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 2,343 | $ | 7,462 | ||||
Restricted
cash
|
2,732 | 4,852 | ||||||
Short-term
investments
|
- | 2,970 | ||||||
Accounts
receivable (net of allowance for doubtful accounts of $516 in 2009 and
$536 in 2008)
|
11,667 | 12,865 | ||||||
Inventories
|
4,183 | 4,504 | ||||||
Prepaid
expenses and other current assets
|
2,299 | 2,526 | ||||||
Total
current assets
|
23,224 | 35,179 | ||||||
Property
and equipment, net
|
1,268 | 2,029 | ||||||
Goodwill
|
14,144 | 25,079 | ||||||
Other
intangible assets, net
|
9,840 | 11,454 | ||||||
Investments
in non-publicly traded companies
|
2,989 | 2,963 | ||||||
Deferred
financing costs, net
|
193 | 403 | ||||||
Other
assets
|
1,298 | 1,320 | ||||||
Total
assets
|
$ | 52,956 | $ | 78,427 | ||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 4,949 | $ | 4,240 | ||||
Accrued
expenses and other current liabilities
|
15,977 | 22,231 | ||||||
Current
portion of 5.45% Convertible Notes due 2011
|
5,004 | - | ||||||
Total
current liabilities
|
25,930 | 26,471 | ||||||
Restructuring
liabilities
|
10,593 | 19,664 | ||||||
5.45%
Convertible Notes due 2010
|
- | 10,013 | ||||||
5.45%
Convertible Notes due 2011, less current portion
|
3,758 | - | ||||||
Total
liabilities
|
40,281 | 56,148 | ||||||
Commitments
and contingencies
|
||||||||
Stockholders’
equity:
|
||||||||
Common
stock, $.001 par value: authorized - 300,000,000 shares; issued -
20,012,521 shares at December 31, 2009 and 19,834,292 shares at
December 31, 2008
|
20 | 20 | ||||||
Additional
paid-in capital
|
382,935 | 381,523 | ||||||
Accumulated
other comprehensive income – currency translation
|
551 | 36 | ||||||
Common
stock held in treasury (20,794 shares), at cost
|
(118 | ) | (118 | ) | ||||
Accumulated
deficit
|
(370,713 | ) | (359,182 | ) | ||||
Total
stockholders’ equity
|
12,675 | 22,279 | ||||||
Total
liabilities and stockholders’ equity
|
$ | 52,956 | $ | 78,427 |
See
accompanying notes to consolidated financial statements.
F-3
TRANSWITCH
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(in
thousands, except per share data)
Years ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Net
revenues:
|
||||||||||||
Product
revenues
|
$ | 50,709 | $ | 40,003 | $ | 29,310 | ||||||
Service
revenues
|
5,398 | 1,931 | 3,255 | |||||||||
Total
net revenues
|
56,107 | 41,934 | 32,565 | |||||||||
Cost
of revenues:
|
||||||||||||
Cost
of product revenues
|
21,393 | 16,730 | 10,514 | |||||||||
Provision
for excess and obsolete inventories
|
678 | 316 | 443 | |||||||||
Cost
of service revenues
|
2,552 | 994 | 1,437 | |||||||||
Total
cost of revenues
|
24,623 | 18,040 | 12,394 | |||||||||
Gross
profit
|
31,484 | 23,894 | 20,171 | |||||||||
Operating
expenses:
|
||||||||||||
Research
and development
|
19,132 | 24,568 | 21,703 | |||||||||
Marketing
and sales
|
10,413 | 8,816 | 10,223 | |||||||||
General
and administrative
|
8,038 | 6,678 | 5,617 | |||||||||
Restructuring
(credits) charges, net
|
(6,257 | ) | 3,804 | 1,428 | ||||||||
Impairment
of goodwill
|
10,075 | — | — | |||||||||
Reversal
of accrued royalties
|
(197 | ) | (198 | ) | — | |||||||
Total
operating expenses
|
41,204 | 43,668 | 38,971 | |||||||||
Operating
loss
|
(9,720 | ) | (19,774 | ) | (18,800 | ) | ||||||
Other
(expense) income:
|
||||||||||||
Other
(expense) income
|
(750 | ) | 81 | — | ||||||||
Impairment
of investments in non-publicly traded companies
|
(31 | ) | — | (109 | ) | |||||||
Change
in fair value of derivative liability
|
— | (347 | ) | 980 | ||||||||
Gain
(loss) on extinguishment of debt
|
— | 4,491 | (351 | ) | ||||||||
Interest:
|
||||||||||||
Interest
income
|
122 | 934 | 2,457 | |||||||||
Interest
expense
|
(787 | ) | (1,941 | ) | (3,606 | ) | ||||||
Interest
expense, net
|
(665 | ) | (1,007 | ) | (1,149 | ) | ||||||
Total
other (expense) income, net
|
(1,446 | ) | 3,218 | (629 | ) | |||||||
Loss
before income taxes
|
(11,166 | ) | (16,556 | ) | (19,429 | ) | ||||||
Income
taxes
|
365 | 490 | 283 | |||||||||
Net
loss
|
$ | (11,531 | ) | $ | (17,046 | ) | $ | (19,712 | ) | |||
Basic
and diluted loss per common share:
|
||||||||||||
Net
loss
|
$ | (0.58 | ) | $ | (0.99 | ) | $ | (1.19 | ) | |||
Basic
and diluted average common shares outstanding
|
19,938 | 17,260 | 16,566 |
See
accompanying notes to consolidated financial statements.
F-4
TRANSWITCH
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
AND
COMPREHENSIVE LOSS
(dollars
in thousands)
Common stock
|
Common
stock held in
|
Additional
paid-in
|
Accumulated
other
comprehensive
|
Accumulated
|
|
|||||||||||||||||||||||
Shares
|
Amount
|
treasury
|
capital
|
income
|
deficit
|
Total
|
||||||||||||||||||||||
Balance
at December 31, 2006
|
16,014,152 | $ | 16 | $ | — | $ | 346,058 | $ | 404 | $ | (322,424 | ) | $ | 24,054 | ||||||||||||||
Comprehensive
loss:
|
||||||||||||||||||||||||||||
Net
loss
|
(19,712 | ) | (19,712 | ) | ||||||||||||||||||||||||
Currency
translation adjustment
|
454 | — | 454 | |||||||||||||||||||||||||
Total
comprehensive loss
|
(19,258 | ) | ||||||||||||||||||||||||||
Stock
compensation
|
10,679 | — | — | 1,980 | — | — | 1,980 | |||||||||||||||||||||
Shares
of common stock issued in connection with business
acquisition
|
468,339 | 1 | — | 5,544 | — | — | 5,545 | |||||||||||||||||||||
Shares
of common stock issued under stock option and stock purchase
plans
|
144,134 | — | — | 1,347 | — | — | 1,347 | |||||||||||||||||||||
Balance
at December 31, 2007
|
16,637,304 | $ | 17 | $ | — | $ | 354,929 | $ | 858 | $ | (342,136 | ) | $ | 13,668 | ||||||||||||||
Comprehensive
loss:
|
||||||||||||||||||||||||||||
Net
loss
|
(17,046 | ) | (17,046 | ) | ||||||||||||||||||||||||
Currency
translation adjustment
|
(822 | ) | — | (822 | ) | |||||||||||||||||||||||
Total
comprehensive loss
|
(17,868 | ) | ||||||||||||||||||||||||||
Stock
compensation
|
49,136 | — | — | 1,516 | — | — | 1,516 | |||||||||||||||||||||
Shares
of common stock issued in connection with business
acquisition
|
3,125,000 | 3 | — | 24,947 | — | — | 24,950 | |||||||||||||||||||||
Shares
of common stock issued under stock option and stock purchase
plans
|
22,852 | — | — | 131 | — | — | 131 | |||||||||||||||||||||
Repurchase
of 20,794 shares of common stock
|
— | — | (118 | ) | — | — | — | (118 | ) | |||||||||||||||||||
Balance
at December 31, 2008
|
19,834,292 | $ | 20 | $ | (118 | ) | $ | 381,523 | $ | 36 | $ | (359,182 | ) | $ | 22,279 | |||||||||||||
Comprehensive
loss:
|
||||||||||||||||||||||||||||
Net
loss
|
(11,531 | ) | (11,531 | ) | ||||||||||||||||||||||||
Currency
translation adjustment
|
515 | — | 515 | |||||||||||||||||||||||||
Total
comprehensive loss
|
(11,016 | ) | ||||||||||||||||||||||||||
Stock
compensation
|
97,895 | — | — | 1,305 | — | — | 1,305 | |||||||||||||||||||||
Shares
of common stock issued under stock option and stock purchase
plans
|
39,234 | — | — | 108 | — | — | 108 | |||||||||||||||||||||
Shares
of common stock issued under restricted stock plan
|
41,352 | — | — | — | — | — | — | |||||||||||||||||||||
Payout
of fractional shares as a result of reverse stock split
|
(252 | ) | — | — | (1 | ) | — | — | (1 | ) | ||||||||||||||||||
Balance
at December 31, 2009
|
20,012,521 | $ | 20 | $ | (118 | ) | $ | 382,935 | $ | 551 | $ | (370,713 | ) | $ | 12,675 |
See
accompanying notes to consolidated financial statements.
F-5
TRANSWITCH
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(dollars
in thousands)
Years ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Operating
activities:
|
||||||||||||
Net
loss
|
$ | (11,531 | ) | $ | (17,046 | ) | $ | (19,712 | ) | |||
Adjustments
required to reconcile net loss to net cash flows used by operating
activities, net of effects of acquisitions:
|
||||||||||||
Depreciation
and amortization
|
2,669 | 4,020 | 4,527 | |||||||||
Amortization
of debt discount and deferred financing fees
|
210 | 569 | 1,536 | |||||||||
(Gain)
loss on extinguishment of debt
|
— | (4,491 | ) | 351 | ||||||||
(Benefit)
provision for doubtful accounts
|
(20 | ) | (87 | ) | 150 | |||||||
Provision
for excess and obsolete inventories
|
678 | 316 | 443 | |||||||||
Non-cash
restructuring (credits) charges, net
|
(6,257 | ) | 3,762 | 1,428 | ||||||||
Stock-based
compensation expense
|
1,305 | 1,516 | 1,970 | |||||||||
Impairment
of investments in non-publicly traded companies
|
31 | — | 109 | |||||||||
Impairment
of goodwill
|
10,075 | — | — | |||||||||
Change
in fair value of derivative liability
|
— | 179 | (980 | ) | ||||||||
Loss
on retirement of property and equipment
|
— | 74 | — | |||||||||
Reversal
of accrued royalties
|
(197 | ) | (198 | ) | — | |||||||
Other
non-cash items
|
26 | 15 | — | |||||||||
Changes
in operating assets and liabilities:
|
||||||||||||
Accounts
receivable
|
1,218 | (3,452 | ) | (1,166 | ) | |||||||
Inventories
|
(357 | ) | 437 | 146 | ||||||||
Prepaid
expenses and other assets
|
248 | 505 | (118 | ) | ||||||||
Accounts
payable
|
709 | 747 | 435 | |||||||||
Accrued
expenses and other current liabilities
|
(1,219 | ) | (2,131 | ) | (124 | ) | ||||||
Obligation
under deferred revenue
|
(28 | ) | 146 | 37 | ||||||||
Restructuring
liabilities
|
(6,682 | ) | (3,427 | ) | (1,793 | ) | ||||||
Net
cash used by operating activities
|
(9,122 | ) | (18,546 | ) | (12,761 | ) | ||||||
Investing
activities:
|
||||||||||||
Capital
expenditures
|
(348 | ) | (592 | ) | (3,884 | ) | ||||||
Investments
in non-publicly traded companies
|
(57 | ) | (65 | ) | (42 | ) | ||||||
Acquisition
of business, net of cash acquired
|
— | 7,369 | (1,650 | ) | ||||||||
Change
in restricted cash
|
2,120 | (2,286 | ) | — | ||||||||
Purchases
of short and long-term investments
|
— | (10,630 | ) | — | ||||||||
Proceeds
from sales and maturities of short and long-term
investments
|
2,970 | 8,658 | — | |||||||||
Net
cash provided (used) by investing activities
|
4,685 | 2,454 | (5,576 | ) | ||||||||
Financing
activities:
|
||||||||||||
Issuance
of common stock under employee stock plans
|
108 | 131 | 1,346 | |||||||||
Payments
to extinguish debt
|
— | (9,900 | ) | (8,908 | ) | |||||||
Principal
payments on 5.45% Convertible Notes due 2011
|
(1,251 | ) | — | — | ||||||||
Proceeds
from issuance of debt (net of fees)
|
— | — | 1,901 | |||||||||
Purchase
of 20,794 shares of common stock for treasury
|
— | (118 | ) | — | ||||||||
Net
cash used by financing activities
|
(1,143 | ) | (9,887 | ) | (5,661 | ) | ||||||
Effect
of exchange rate changes on cash and cash equivalents
|
461 | (657 | ) | 373 | ||||||||
Change
in cash and cash equivalents
|
(5,119 | ) | (26,636 | ) | (23,625 | ) | ||||||
Cash
and cash equivalents at beginning of year
|
7,462 | 34,098 | 57,723 | |||||||||
Cash
and cash equivalents at end of year
|
$ | 2,343 | $ | 7,462 | $ | 34,098 |
See
accompanying notes to consolidated financial statements.
F-6
TRANSWITCH
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Tabular
dollars in thousands, except share and per share amounts)
Note
1. Business and Summary of Significant Accounting
Policies
Description
of Business
TranSwitch
Corporation was incorporated in Delaware on April 26, 1988 and is headquartered
in Shelton, Connecticut. TranSwitch Corporation and its subsidiaries
(collectively, “TranSwitch” or the “Company”) design, develop and supply
innovative highly-integrated semiconductor solutions that provide core
functionality for voice, data and video communications network equipment.
TranSwitch customers, for these semiconductor products, are the original
equipment manufacturers (“OEMs”) who supply wire-line and wireless network
operators who provide voice, data and video services to end users such as
consumers, corporations, municipalities etc. The Company’s system-on-a-chip
products incorporate digital and mixed-signal semiconductor technology and
related embedded software. In addition to its system-on-a-chip products, the
Company has been in the business of licensing intellectual property cores to
both OEMs as well as other semiconductor companies. TranSwitch also
licenses proprietary video interconnect technology that enables the transmission
and reception of both HDMI and DisplayPort.
Principles
of Consolidation
The
consolidated financial statements include the accounts of TranSwitch Corporation
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated.
Use
of Estimates
The
preparation of financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and revenues
and expenses during the period reported. Actual results could differ from those
estimates. Estimates relate to uncollectable accounts receivable, excess or
slow-moving or obsolete inventories, impairment of assets, product warranty
allowances, depreciation and amortization, income taxes, sales returns and
allowances, stock rotation allowances and contingencies. Estimates and
assumptions are reviewed periodically, and the effects of revisions are
reflected in the consolidated financial statements in the period they are
determined to be necessary.
Liquidity
The
Company has incurred significant operating losses and used cash in its operating
activities for the past several years. Operating losses have resulted from
inadequate sales levels for the cost structure. The Company has made business
acquisitions in each of the past three years prior to 2009 to increase revenue.
In addition, in the fourth quarter of 2008 and the first quarter of 2010, the
Company executed restructurings to eliminate cost redundancies and enhance
operating effectiveness. The Company’s management believes it now has an
appropriate cost structure for its anticipated sales. Management believes that
operating expenses have been reduced to the point where the Company can break
even, excluding stock compensation costs and amortization of purchased
intangibles, at the rate of sales of $13.0 million per quarter. As such,
management believes that the Company will provide sufficient cash flows to fund
its operations in the ordinary course of business through at least the next
twelve months. There can be no assurance that the anticipated sales level will
be achieved. In addition, the Company entered into a bank financing agreement
which provides for $5,000,000 of borrowing capacity based on specified levels of
eligible accounts receivable (see Note 20).
Cash,
Cash Equivalents and Investments
All
highly liquid investments with an original maturity of three months or less when
purchased are considered cash equivalents. Cash equivalents consist of money
market funds as of December 31, 2009 and 2008. The majority of the Company’s
cash and cash equivalents balances are maintained with a limited number of major
financial institutions. Cash and cash equivalents balances at institutions may,
at times, be above the Federal Deposit Insurance Corporation insured limit of
$0.25 million per account.
Short-term
investments as of December 31, 2008 consist of government bonds which are all
due within one year. Such investments are classified as held-to-maturity.
Held-to-maturity securities are those securities which the Company has both the
ability and intent to hold to maturity. Held-to-maturity securities are stated
at amortized cost. Amortized cost and accrued interest as of December 31, 2008
approximate market value.
F-7
TRANSWITCH
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Tabular
dollars in thousands, except share and per share amounts)
Fair
Value of Financial Instruments
The
carrying amounts for cash and cash equivalents, short-term investments, accounts
receivable, and accounts payable approximate fair value. The fair value of the
outstanding 5.45% Convertible Notes due 2011 was estimated at approximately $8.8
million as of December 31, 2009 based on current market conditions and the fair
value of the outstanding 5.45% Convertible Notes due 2010 was estimated at
approximately $6.6 million as of December 31, 2008 based on market
conditions. The fair value of investments in non-publicly traded
companies is not readily determinable.
Inventories
Inventories
are carried at the lower of cost (determined on a weighted-average cost basis)
or estimated net realizable value.
Product
Licenses
All
product licenses were fully amortized as of December 31, 2008. Prior thereto
product licenses were amortized using the greater of: (1) the amount computed
using the ratio of a product’s current gross revenues to the product’s total of
current and estimated future gross revenues; or (2) the straight-line method
over the estimated useful life of the asset, generally three to five years, not
to exceed the term of the license.
Property
and Equipment
Property
and equipment are carried at cost less accumulated depreciation and
amortization. Any gain or loss resulting from sale or retirement is included in
the consolidated statement of operations. Repairs and maintenance are expensed
as incurred while renewals and betterments are capitalized.
Goodwill
Goodwill
represents the excess of the purchase price over the fair value of identifiable
net assets of the business acquired. The Company reviews goodwill for
potential impairment at least annually.
Other
Intangible Assets
Other
intangible assets consist of purchased customer relationships and developed
technology and are stated at cost, less accumulated amortization. Customer
relationships and developed technology are being amortized by the straight line
method over their estimated economic useful lives ranging from five to ten
years.
Deferred
Financing Costs
Deferred
financing costs are being amortized using the interest method over the term of
the related debt. Unamortized deferred financing fees were $0.2 million and $0.4
million as of December 31, 2009 and 2008, respectively. Amortization, included
in the consolidated statement of operations as a component of interest expense,
was $0.2 million, $0.6 million, and $0.5 million for 2009, 2008 and 2007,
respectively.
Impairment
of Intangibles and Long-Lived Assets
The
Company reviews long-lived and intangible assets (including goodwill) for
impairment at least annually, or whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable. When
factors indicate that a long-lived asset should be evaluated for possible
impairment, an estimate of the related asset’s undiscounted future cash flows
over the remaining life of the asset is made to measure whether the carrying
value is recoverable. Any impairment is measured based upon the excess of the
carrying value of the asset over its estimated fair value which is generally
based on an estimate of future discounted cash flows. A significant amount of
management judgment is used in estimating future discounted cash
flows.
The
Company’s impairment reviews of goodwill were performed using a fair-value
method and discounted cash flow models with estimated cash flows based on
internal forecasts which included terminal values based on current market
valuation metrics. The fair value represents the amount at which a
reporting unit could be bought or sold in a current transaction between willing
parties on an arms-length basis. In estimating fair value, the
Company used its common stock’s market price to determine fair value and other
valuation metrics. In addition, the Company performed discounted cash flow
analysis on the reporting units to determine fair value. During the
fourth quarter of 2009, impairment testing performed by the Company indicated
that the estimated fair values of two reporting units tested were less than
their corresponding carrying amounts. As a result of the analyses performed, the
Company recorded a goodwill impairment charge of $10.1 million. The impaired
goodwill related to business acquisitions in 2007 and 2006.
F-8
TRANSWITCH
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Tabular
dollars in thousands, except share and per share amounts)
Investments
in Non-Publicly Traded Companies
The
Company has minority investments in certain non-publicly traded companies.
Depending on the Company’s level of ownership and whether or not the Company has
the ability to exercise significant influence, these investments are accounted
for by either the cost or equity method. All such investments as of December 31,
2009 and 2008 are accounted for by the cost method. These investments
are reviewed periodically for impairment.
Revenue
Recognition
Net
revenues from product sales are recognized at the time of product shipment when
the following criteria are met: (1) persuasive evidence of an arrangement
exists; (2) ownership and risk of loss transfers to the customer; (3) the
selling price is fixed or determinable; and (4) collectability is reasonably
assured.
Agreements
with certain distributors provide price protection and return and allowance
rights. With respect to recognizing revenues from distributors: (1) the prices
are fixed at the date of shipment from the Company’s facilities; (2) payment is
not contractually or otherwise excused until the product is resold; (3) the
Company does not have any obligations for future performance relating to the
resale of the product; and (4) the amount of future returns, allowances, refunds
and costs to be incurred can be reasonably estimated and are accrued at the time
of shipment.
At the
time of shipment, the Company records a reduction to revenue (with a related
liability) to accrue for future price protection. This liability is established
based on historical experience, contractually agreed-to provisions and future
shipment forecasts. Such accruals have been insignificant for the last three
years.
The
Company also accrues, at the time of shipment, a reduction to revenue (with a
related liability) and an inventory asset against product cost of revenues in
order to establish a provision for the gross margin related to future returns
under the Company’s distributor stock rotation program. Such accruals related to
reductions of revenue were $0.6 million and less than $0.1 million at December
31, 2009 and 2008, respectively. The accruals related to inventory
assets are insignificant to the Company’s financial position and results of
operations for all periods presented. Should actual experience differ
from estimated liabilities, there could be adjustments (either favorable or
unfavorable) to the Company’s net revenues, cost of revenues and gross
profits.
Service
revenues are recognized when the following criteria are met: (1) persuasive
evidence of an arrangement exists; (2) services have been performed in
accordance with the contractual obligations; (3) the fee is fixed or
determinable; and (4) collectability is reasonably assured.
The
Company licenses HDMI and other intellectual property. Revenues from
licensing arrangements generally consist of multiple elements such as license,
implementation and maintenance services. The items (deliverables) included in
the arrangement are evaluated to determine whether they represent separate units
of accounting. The Company performs this evaluation at the inception of an
arrangement and as the Company delivers each item in the
arrangement.
Generally,
the Company accounts for a deliverable (or a group of deliverables) separately
if (1) the delivered item(s) has standalone value to the customer, (2) there is
objective and reliable evidence of the fair value of the undelivered items
included in the arrangement, and (3) if the Company has given the customer a
general right of return relative to the delivered items, delivery or performance
of the undelivered items or services are probable and substantially in the
Company’s control.
The
Company recognizes revenue from royalties upon notification of sale by its
licensees. The terms of the royalty agreements generally require licensees to
give notification to the Company and to pay royalties within 45 days of the end
of the quarter during which the sales by its licensees take place.
Allowance
for Doubtful Accounts
The
Company records allowances for doubtful accounts for estimated losses based upon
specifically identified amounts that it believes to be uncollectible along with
the Company’s assessment of the general financial condition of its customer
base. If the Company’s actual collections experience changes, revisions to its
allowances may be required. The Company has a limited number of customers with
individually large amounts due at any given balance sheet date. Any
unanticipated change in one of those customers’ creditworthiness or other
matters affecting the collectability of amounts due from such customers could
have a material effect on the Company’s results of operations in the period in
which such changes or events occur.
Concentrations
of Credit Risk
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of cash and cash equivalents, and accounts
receivable.
F-9
TRANSWITCH
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Tabular
dollars in thousands, except share and per share amounts)
Cash and
cash equivalents are held by high-quality financial institutions, thereby
reducing credit risk concentrations. In addition, the Company limits the amount
of credit exposure to any one financial institution.
At
December 31, 2009 and 2008, approximately 57% and 53% of accounts receivable
were due from five customers. The majority of the Company’s sales are to
customers in the telecommunications and data communications industries. The
Company performs ongoing credit evaluations of its customers and generally does
not require collateral.
Supplier
Concentrations
The
Company relies on a limited number of suppliers for wafer fabrication capacity.
In 2009 one outside wafer foundry supplied approximately 85% of our
semiconductor wafer requirements. Although the Company would likely be able to
find alternative manufacturing sources, the Company would experience substantial
delays or interruptions in the shipment of products if these suppliers were to
cease operations.
Product
Warranties
The
Company provides warranties on its products for up to one year from the date of
shipment. A liability is recorded for estimated costs to be incurred under
product warranties, which is based on various inputs including historical
experience. Estimated warranty expense is recorded as cost of revenues as
products are shipped. Product warranty costs are nominal for
all periods presented.
Research
and Development Costs
Research
and development costs are expensed as incurred.
Income
Taxes
Deferred
income 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 for operating
loss and tax credit carry forwards. Deferred income 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 income tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date. A valuation allowance is provided to the extent that it is more likely
than not that the Company will not be able to utilize deferred income tax assets
in the future.
Stock-Based
Compensation
The
Company recognizes share-based compensation expense for the fair value of the
awards on the date granted on a straight-line basis over their vesting
term.
Compensation
expense is recognized only for share-based payments expected to vest. The
Company estimates forfeitures at the date of grant based on the Company’s
historical experience and future expectations.
As of
December 31, 2009, the unrecognized stock-based compensation cost related to
non-vested option awards was $0.7 million and such amount will be recognized in
operations over a weighted average period of 2.06 years. As of
December 31, 2009, the unrecognized stock-based compensation cost related to
non-vested stock awards was $1.2 million and such amount will be recognized in
operations over a weighted average period of 3.17 years.
Stock
compensation charged to operations was $1.3 million in 2009, $1.5 million in
2008 and $2.0 million in 2007.
Loss
Per Common Share
The basic
and diluted loss per common share amount is based upon the weighted average
common shares outstanding during the periods. All “in-the-money” stock options
and shares issuable upon the conversion of the 5.45% Convertible Notes due 2010
and the 5.45% Convertible Notes due 2011 were anti-dilutive.
F-10
TRANSWITCH
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Tabular
dollars in thousands, except share and per share amounts)
Foreign
Currency Translation
Substantially
all foreign subsidiaries use their local currency as their functional currency.
Therefore, assets and liabilities of foreign subsidiaries are translated at
exchange rates in effect at the balance sheet date and revenue and expense
accounts are translated at average exchange rates during the year. The resulting
translation adjustments are recorded in accumulated other comprehensive income
(loss). Translation gains and losses related to monetary assets and liabilities
denominated in a currency different from a subsidiary’s functional currency are
included in the consolidated statements of operations.
Derivatives
and Hedging Activities
Fluctuating
foreign exchange rates may significantly impact the Company’s operating results
and cash flows. During 2008, the Company periodically hedged
forecasted foreign currency transactions related to certain operating
expenses. All derivatives are recorded in the balance sheet at fair
value. For a derivative designated as a fair value hedge, the
effective portion of changes in the fair value of the derivative and of the
hedged item attributable to the hedged risk are recognized in
operations. For a derivative designated as a cash flow hedge, the
effective portions of changes in the fair value of cash flow hedges are recorded
in other comprehensive income. If the derivative used in an economic
hedging activity is not designated in an accounting hedging relationship or if
it becomes ineffective, changes in the fair value of the derivative are
recognized in operations.
FASB
Establishes Accounting Standards Codification
On
September 30, 2009, the Company adopted Accounting Standards Update
No. 2009-01, “Generally Accepted Accounting Principles” (ASC Topic
105), The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles (“the Codification” or “ASC”). The Codification combines the
previous U.S. GAAP hierarchy which included four levels of authoritative
accounting literature distributed among a number of different sources. The
Codification does not by itself create new accounting standards but instead
reorganizes thousands of pages of existing U.S. GAAP accounting rules into
approximately 90 accounting topics. All existing accounting standard documents
are superseded by the Codification and all other accounting literature not
included in the Codification is now considered non-authoritative. The
Codification explicitly recognizes the rules and interpretive releases of the
Securities and Exchange Commission (“SEC”) under federal securities laws as
authoritative GAAP for SEC registrants. The Codification is now the single
source of authoritative nongovernmental accounting standards in the
U.S.
As a
result of the Codification, the references to authoritative accounting
pronouncements included herein in this Annual Report on Form 10-K now refer to
the Codification topic section rather than a specific accounting rule as was
past practice and all references to pre-codified U.S. GAAP have been removed
from this Form 10-K. The adoption of the Codification had no effect on any
reported amounts.
Recent
Accounting Pronouncements
The
Company continually assesses any new accounting pronouncements to determine
their applicability to the Company. In the case where it is
determined that a new accounting pronouncement effects the Company’s financial
reporting, the Company undertakes a study to determine the consequence of the
change to its financial reporting, and assures that there are proper controls in
place to ascertain that the Company’s financials properly reflect the change.
New pronouncements assessed by the Company are discussed below:
In
December 2007, the FASB issued new guidance related to ASC Topic 810,
“Accounting for Noncontrolling Interests” (ASC 810). ASC 810 clarifies the
classification of noncontrolling interests in consolidated balance sheets and
reporting transactions between the reporting entity and holders of
noncontrolling interests. Under this statement, noncontrolling interests are
considered equity and reported as an element of consolidated equity. Further,
net income encompasses all consolidated subsidiaries with disclosure of the
attribution of net income between controlling and noncontrolling interests. ASC
810 is effective prospectively for fiscal years beginning after December 15,
2008. Currently, there are no noncontrolling interests in any of the Company’s
subsidiaries. The Company adopted this guidance on January 1, 2009 and it had no
impact on its financial statements at the time of adoption.
In March
2008, the FASB issued new guidance related to ASC Topic 815, “Disclosures about
Derivative Instruments and Hedging Activities” (ASC 815), which requires
additional disclosures about the objectives of using derivative instruments, the
method by which the derivative instruments and related hedged items are
accounted for under and its related interpretations, and the effect of
derivative instruments and related hedged items on financial position, financial
performance, and cash flows. ASC 815 also requires disclosure of the fair values
of derivative instruments and their gains and losses in a tabular format. ASC
815 is effective for financial statements issued for fiscal years
and interim periods beginning after November 15, 2008, with early
adoption encouraged. The Company adopted this guidance on January 1, 2009 and it
had no impact on its financial statements at the time of
adoption.
F-11
TRANSWITCH
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Tabular
dollars in thousands, except share and per share amounts)
In
April 2008, the FASB issued new guidance related to ASC Topic 350,
“Intangibles – Goodwill and Other” (ASC 350), to improve the consistency between
the useful life of a recognized intangible asset and the period of expected cash
flows used to measure the fair value of the intangible asset. The new guidance
amends the factors to be considered when developing renewal or extension
assumptions that are used to estimate an intangible asset’s useful life. The
guidance in the new staff position is to be applied prospectively to intangible
assets acquired after December 31, 2008 and increases the disclosure
requirements related to renewal or extension assumptions. The Company adopted
this guidance on January 1, 2009 and it had no impact on its financial
statements at the time of adoption.
In June
2008, the FASB ratified ASC 815, “Determining Whether an Instrument (or an
Embedded Feature) Is Indexed to an Entity’s Own Stock”. ASC 815 provides that an
entity should use a two step approach to evaluate whether an equity-linked
financial instrument (or embedded feature) is indexed to its own stock,
including evaluating the instrument’s contingent exercise and settlement
provisions. It also clarifies on the impact of foreign currency denominated
strike prices and market-based employee stock option valuation instruments on
the evaluation. The Company adopted this guidance on January 1, 2009 and it had
no impact on its financial statements at the time of adoption.
In
May 2009, the FASB issued FASB ASC Topic 855, “Subsequent Events Topic”
(ASC 855). This standard is intended to establish general standards of
accounting for and the disclosures of events that occur after the balance sheet
date but before financial statements are issued or are available to be issued.
ASC Topic 855 is effective for fiscal years and interim periods ended after
June 15, 2009, to be applied prospectively. There was no financial
reporting impact due to the adoption of this standard. The Company has evaluated
subsequent events through March 16, 2010, the date of issuance of the
consolidated financial position and results of operations.
In
October 2009, the FASB issued an update related to ASC Topic 605, “Revenue Recognition —
Multiple Deliverable Revenue Arrangements” (ASC 605). This update removes
the objective-and-reliable-evidence-of-fair-value criterion from the separation
criteria used to determine whether an arrangement involving multiple
deliverables contains more than one unit of accounting, replaces references to
“fair value” with “selling price” to distinguish from the fair value
measurements required under the “Fair Value Measurements and
Disclosures” guidance, provides a hierarchy that entities must
use to estimate the selling price, eliminates the use of the residual method for
allocation, and expands the ongoing disclosure requirements. This update is
effective for fiscal years beginning on or after June 15, 2010, and can be
applied prospectively or retrospectively. The Company is currently evaluating
the effect that adoption of this update will have, if any, on its consolidated
financial statements.
Note
2. Fair Value Measurements
In
September 2006, the FASB issued ASC Topic 820 “Fair Value Measurements” (ASC
820). The Company adopted ASC 820 as of January 1, 2008 for financial
assets and liabilities only. The adoption of this
statement did not have an impact on our results of operation, financial position
or cash flow, but required additional disclosures. ASC 820 defines fair
value, establishes a framework for measuring the fair value of assets and
liabilities, and expands disclosure requirements regarding the fair value
measurement. It does not expand the use of fair value measurements, but
specifies a hierarchy of valuation techniques which requires an entity to
maximize the use of observable inputs that may be used to measure fair
value:
Level 1 –
Quoted prices in active markets are available for identical assets and
liabilities.
Level 2 –
Observable inputs other than Level 1 prices such as quoted prices for similar
assets or liabilities or other inputs that are observable or can be corroborated
by observable market data.
Level 3 –
Unobservable inputs that reflect a reporting entity’s own assumptions about the
assumptions that market participants would use in pricing an asset or
liability.
As of
December 31, 2009, the Company’s financial assets included investments in
non-publicly traded companies. The Company considers net realizable value for
its investments in non-publicly traded companies for purposes of determining
asset impairment losses. For the year ended December 31, 2009, impairment losses
on investments in non-publicly traded companies were less than $0.1
million.
Note
3. Reverse Stock Split
On
November 9, 2009, the Company announced that its Board of Directors had approved
the implementation of a one-for-eight reverse stock split of the Company's
common stock. The reverse stock split, which was authorized by the
stockholders at the Company's 2009 annual meeting of stockholders on May 21,
2009, took effect at 11:59 p.m. (Eastern time) on November 23, 2009 (the
"Effective Time"). Retroactive restatement has been given to all share numbers
in this report, and accordingly, all amounts including per share amounts are
shown on a post-split basis.
F-12
TRANSWITCH
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Tabular
dollars in thousands, except share and per share amounts)
Note
4. Acquisitions
On
October 24, 2008, the Company acquired Centillium Communications, Inc.
(“Centillium), a Delaware corporation. Centillium was a global company with
headquarters in Fremont, CA and delivered highly innovative communications
processing technology. The acquisition was financed with the issuance of
3,125,000 shares of the Company’s common stock with an approximate fair value of
$25.0 million and $15.0 million of cash. The Company incurred transaction costs
of approximately $2.6 million which resulted in a total purchase price of
approximately $42.6 million. In connection with the acquisition of Centillium,
the Company implemented a worldwide reduction in Centillium’s workforce which
was implemented and concluded during the fourth quarter of 2008 and the first
quarter of 2009. As such, the Company to incurred cash expenditures of
approximately $3.4 million primarily for employee related costs and such costs
were added to the Company’s purchase price of Centillium and allocated to the
net assets acquired. The results of operations of Centillium have been included
in the Company's consolidated financial results from October 24, 2008. All
significant inter-company balances and transactions have been eliminated. The
acquisition was accounted for by the purchase method of accounting. The Company
has allocated the cost to acquire Centillium to its identifiable tangible and
intangible assets and liabilities, with the remaining amount classified as
goodwill. None of the amount allocated to goodwill is expected to be
deductible for income tax reporting purposes.
On
January 11, 2007, the Company acquired the ASIC Design Center Division of Data –
JCE, an Israel-based publicly held electronics components distribution
company. The ASIC Design Center develops and sells customer-specific
semiconductor products. The acquisition was financed with the issuance of
468,339 shares of the Company’s common stock with an approximate fair value of
$5.5 million and $1.4 million of cash. The Company incurred transaction costs of
approximately $0.3 million which resulted in a total purchase price of
approximately $7.2 million. Under the earn-out provisions of the ASIC Design
Center acquisition agreement, the Company may have been required to pay up to an
additional $14.5 million in the form of TranSwitch common stock or cash, at its
option, if the ASIC Design Center achieved stipulated revenue and operating
profit for 2007. Such targets were not achieved. The results of
operations of the ASIC Design Center have been included in the Company's
consolidated financial results from January 11, 2007. All significant
inter-company balances and transactions have been eliminated. The acquisition
was accounted for by the purchase method of accounting. The Company has
allocated the cost to acquire the ASIC Design Center to its identifiable
tangible and intangible assets and liabilities, with the remaining amount
classified as goodwill. None of the amount allocated to goodwill is
expected to be deductible for income tax reporting purposes.
The total
purchase price of the Company’s acquisitions has been allocated in the Company's
consolidated financial statements as follows:
Centillium
2008
|
ASIC Design
Center
2007
|
|||||||
Current
assets
|
$ | 34,246 | $ | 400 | ||||
Property,
plant and equipment
|
709 | 36 | ||||||
Long-term
investments
|
992 | — | ||||||
Other
intangible assets (1)
|
10,600 | 1,756 | ||||||
Goodwill
|
15,004 | 5,183 | ||||||
Obligation
under deferred revenue
|
(23 | ) | (180 | ) | ||||
Accounts
payable & accrued expenses
|
(14,158 | ) | — | |||||
Restructuring
reserve
|
(4,798 | ) | — | |||||
Purchase
price
|
42,572 | 7,195 | ||||||
Less:
|
||||||||
Common
stock issued
|
(24,950 | ) | (5,545 | ) | ||||
Cash
and cash equivalents acquired
|
(24,991 | ) | — | |||||
Net
cash (provided by) used for acquisitions
|
$ | (7,369 | ) | $ | 1,650 |
(1)
The
valuation of Centillium’s customer relationships of $7.8 million was determined
based on their estimated fair value at the acquisition date. The excess earnings
methodology of the income approach was the technique used to value such
relationships. The value assigned to Centillium’s customer relationships is
being amortized ratably over ten years, which represents the estimated average
remaining useful life.
The
valuation of developed technology of Centillium of $2.8 million was determined
based on its estimated fair value at the acquisition date. A form of the income
approach known as the relief-from-royalty method was the technique used to value
developed technology. The developed technology is being amortized
ratably over five to seven years, which represents the estimated average
remaining useful life.
The
valuation of existing customer relationships of the ASIC Design Center of $1.8
million was determined based on their estimated fair value at the acquisition
date. The income approach, which includes an analysis of the cash
flows and risks associated with achieving such cash flows, was the primary
technique used to value such contracts. The value assigned to the
ASIC contracts is generally being amortized ratably over five years, which
represents the estimated contract average remaining useful
life.
F-13
TRANSWITCH
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Tabular
dollars in thousands, except share and per share amounts)
Unaudited
pro forma results for 2008 and 2007 assuming that Centillium was acquired as of
January 1, 2007: Net revenues of $58.3 million and $48.4 million,
respectively; net loss of $(31.3) million and $(46.5) million, respectively; and
basic and diluted loss per common share of $(1.58) and $(2.36),
respectively.
Note
5. Restricted Cash
At
December 31, 2009, the Company’s liquidity is affected by restricted cash
balances of approximately $2.7 million, which are included in current assets and
are not available for general corporate use. The Company has pledged
approximately $2.7 million of such cash as collateral for stand-by letters of
credit that guarantee certain long-term property lease obligations and to
support customer credit requirements.
At
December 31, 2008, the Company had restricted cash balances of approximately
$4.9 million. The Company pledged $3.1 million of cash as collateral for
stand-by letters of credit that guaranteed certain long-term property lease
obligations and to support customer credit requirements. The other
$1.8 million of restricted cash was being held in escrow for one year as
security for certain indemnification obligations of Centillium as a result of an
asset sale agreement which Centillium had entered into in February of
2008.
Note
6. Investments in Non-Publicly Traded Companies and
Venture Capital Funds
The
Company owns convertible preferred stock of Opulan Technologies Corp.
(“Opulan”), a 3% limited partnership interest in Neurone II, a venture capital
fund organized as a limited partnership and a 0.42% limited partnership interest
in Munich Venture Partners Fund (“MVP”). The Company accounts for
these investments at cost. The financial condition of these companies
is subject to significant changes resulting from their operating performance and
their ability to obtain financing. The Company continually evaluates
its investments in these companies for impairment. In making this judgment, the
Company considers the investee’s cash position, projected cash flows (both short
and long-term), financing needs, most recent valuation data, the current
investing environment, management/ownership changes, and competition. This
evaluation process is based on information that the Company requests from these
privately held companies. This information is not subject to the same disclosure
and audit requirements as the reports required of U.S. public companies, and as
such, the reliability and accuracy of the data may vary.
As of
December 31, 2006, the Company’s cost method investments were approximately $3.0
million, $2.7 million of which was in Opulan and $0.3 million of which was in
Neurone II.
During
2007, the Company made additional investments of less than $0.1 million and
recognized an impairment of $0.1 million on its investment in Neurone
II.
During
2008, the Company made additional investments of approximately $0.1 million in
MVP.
During
2009, the Company made additional investments of less than $0.1 million and
recognized an impairment of less than $0.1 million on its investment in Neurone
II. As of December 31, 2009, the Company’s cost method investments were
approximately $3.0 million.
Note
7. Inventories
The
components of inventories follow:
December 31,
|
||||||||
2009
|
2008
|
|||||||
Raw
material
|
$ | 199 | $ | 315 | ||||
Work-in-process
|
1,188 | 1,503 | ||||||
Finished
goods
|
2,796 | 2,686 | ||||||
Total
inventories
|
$ | 4,183 | $ | 4,504 |
F-14
TRANSWITCH
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Tabular
dollars in thousands, except share and per share amounts)
Note
8. Property and Equipment, Net
The
components of property and equipment follow:
December 31,
|
|||||||||||
Estimated
Useful Lives
|
2009
|
2008
|
|||||||||
Purchased
computer software
|
1-3 years
|
$ | 14,647 | $ | 28,200 | ||||||
Computers
and equipment
|
3-7 years
|
10,853 | 13,730 | ||||||||
Furniture
|
3-7 years
|
2,163 | 2,488 | ||||||||
Leasehold
improvements
|
Lease term*
|
924 | 938 | ||||||||
Construction-in-progress
(software and equipment)
|
25 | 25 | |||||||||
Gross
property and equipment
|
28,612 | 45,381 | |||||||||
Accumulated
depreciation and amortization
|
(27,344 | ) | (43,352 | ) | |||||||
Property
and equipment, net
|
$ | 1,268 | $ | 2,029 |
*
|
Estimated
useful life of improvement if
shorter.
|
Depreciation
expense was $1.1 million, $3.3 million, and $3.9 million, for 2009, 2008 and
2007, respectively.
Note
9. Goodwill and Other Intangible Assets
Changes in the carrying amounts of
goodwill and information about intangible assets follow:
Goodwill
|
||||
Balance
at December 31, 2007
|
$ | 10,075 | ||
Business
acquisition - Centillium
|
15,004 | |||
Balance
at December 31, 2008
|
25,079 | |||
Purchase
price allocation adjustments (1)
|
(860 | ) | ||
Impairment
of goodwill (2)
|
(10,075 | ) | ||
Balance
at December 31, 2009
|
$ | 14,144 |
|
(1)
|
Relates
to tax refunds received and accrual adjustments in connection with the
acquisition of Centillium Communications, Inc. consummated in October
2008.
|
|
(2)
|
During
the fourth quarter of 2009, impairment testing performed by the Company
indicated that the estimated fair values of two reporting units tested
were less than their corresponding carrying amounts. As a result the
Company recorded a goodwill impairment
charge.
|
Other Intangible Assets
|
||||||||||||
Developed
Technology
|
Customer
Relationships
|
Total
|
||||||||||
Balances
at December 31, 2009
|
||||||||||||
Cost
|
$ | 3,014 | $ | 9,557 | $ | 12,571 | ||||||
Accumulated
amortization
|
(752 | ) | (1,979 | ) | (2,731 | ) | ||||||
$ | 2,262 | $ | 7,578 | $ | 9,840 | |||||||
Balances
at December 31, 2008
|
||||||||||||
Cost
|
$ | 3,014 | $ | 9,557 | $ | 12,571 | ||||||
Accumulated
amortization
|
(293 | ) | (824 | ) | (1,117 | ) | ||||||
$ | 2,721 | $ | 8,733 | $ | 11,454 | |||||||
2008
|
||||||||||||
Cost
|
$ | 2,800 | $ | 7,800 | $ | 10,600 | ||||||
Weighted
average amortization period
|
6.3
years
|
10
years
|
9
years
|
F-15
TRANSWITCH
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Tabular
dollars in thousands, except share and per share amounts)
Amortization
expense related to “Other intangible assets” was $1.6 million in 2009, $0.6
million in 2008 and $0.4 million in 2007. Future estimated aggregate
amortization expense for such assets for each of the five years succeeding
December 31, 2009 follows: 2010 - $1.6 million; 2011 - $1.6 million;
2012 - $1.2 million, 2013 - $1.2 million and 2014 - $1.1 million.
Note
10. Accrued Expenses and Other Current
Liabilities
The
components of accrued and other current liabilities follow:
December 31,
|
||||||||
2009
|
2008
|
|||||||
Accrued
and other current liabilities
|
$ | 4,939 | $ | 5,578 | ||||
Accrued
royalties
|
5,578 | 6,664 | ||||||
Accrued
compensation and benefits
|
3,264 | 3,815 | ||||||
Restructuring
liabilities
|
1,775 | 5,725 | ||||||
Obligation
under deferred revenue
|
421 | 449 | ||||||
Total
accrued and other current liabilities
|
$ | 15,977 | $ | 22,231 |
The
Company periodically evaluates any contingent liabilities in connection with any
payments to be made for any potential intellectual property infringements,
asserted or unasserted. The Company’s accrued royalties as of December 31, 2009
and 2008 represents the contingent payments for asserted or unasserted claims
that are probable as of the respective balance sheet dates based on the
applicable patent law.
Note
11. Segment and Major Customer Information
The
Company has one business segment: communication semiconductor
products. Its VLSI semiconductor devices provide core functionality
of communications network equipment. The integration of various technologies and
standards in these devices result in a homogeneous product line for management
and measurement purposes.
Enterprise-wide
Information
Enterprise-wide
information provided on geographic net revenues is based on billing locations.
Long-lived asset information is based on the physical location of the assets.
The following tables present net revenues and long-lived assets information for
geographic areas:
|
Years Ended December 31,
|
|||||||||||
2009
|
2008
|
2007
|
||||||||||
Net
revenues:
|
||||||||||||
United
States
|
$ | 16,631 | $ | 6,122 | $ | 6,943 | ||||||
Japan
|
11,228 | 4,813 | 501 | |||||||||
Korea
|
7,299 | 2,467 | 1,773 | |||||||||
Israel
|
5,344 | 10,937 | 5,193 | |||||||||
China
|
5,112 | 6,943 | 7,468 | |||||||||
Hong
Kong
|
3,654 | 1,495 | 71 | |||||||||
Italy
|
2,098 | 1,324 | 224 | |||||||||
Germany
|
438 | 1,163 | 4,055 | |||||||||
Other
countries
|
4,303 | 6,670 | 6,337 | |||||||||
Total
|
$ | 56,107 | $ | 41,934 | $ | 32,565 |
F-16
TRANSWITCH
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Tabular
dollars in thousands, except share and per share amounts)
As of December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Long-lived
tangible assets:
|
||||||||||||
United
States
|
$ | 680 | $ | 1,261 | $ | 3,952 | ||||||
Other
countries
|
1,888 | 2,089 | 2,071 | |||||||||
Total
|
$ | 2,568 | $ | 3,350 | $ | 6,023 |
Information
about Major Customers
The
Company ships its products to distributors and directly to end customers. The
following table sets forth the percentage of net revenues attributable to the
Company’s significant customers:
Years ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Significant
Customers:
|
||||||||||||
Alcatel-Lucent
|
22 | % | 18 | % | 17 | % | ||||||
OKI
Electric Industry
|
18 | % | * | * | ||||||||
Inbrics
|
11 | % | * | * | ||||||||
PMC
Sierra Israel
|
* | 21 | % | * | ||||||||
Nokia
Siemens
|
* | * | 16 | % |
*
|
Revenues
were less than 10% of the Company’s net revenues in these
years.
|
Note
12. Income Taxes
The
Company adopted a new accounting standard for uncertain income tax
positions, effective
January 1, 2007. The new standard
clarifies and sets forth consistent rules for accounting for uncertain income
tax positions. There was no cumulative effect of applying the
provisions of this standard upon adoption due to the net operating loss and
valuation allowance positions of the Company. Changes in unrecognized
income tax benefits follow:
Balance
at January 1, 2008
|
$ | 6,103 | ||
Increases
related to prior year tax positions
|
141 | |||
Decreases
related to prior year tax positions
|
(351 | ) | ||
Balance
at December 31, 2008
|
$ | 5,893 | ||
Decreases
related to prior year tax positions
|
(4 | ) | ||
Balance
at December 31, 2009
|
$ | 5,889 |
F-17
TRANSWITCH
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Tabular
dollars in thousands, except share and per share amounts)
Due to
the Company’s net operating loss position in the U.S., any subsequent
recognition of these tax benefits would not likely change the Company’s
effective tax rate. The Company does not reasonably expect any
significant changes in the amount of unrecognized tax benefits to occur within
the next twelve months.
Historically
the Company has not accrued or paid significant interest and penalties for
underpayments of income taxes due to its net operating loss
position. Interest and penalties related to underpayment of income
taxes would be classified as a component of income tax expense in the
consolidated statement of operations. Approximately $132,000 of
interest has been recognized in the balance sheet of the Company through
December 31, 2009. This amount has been recorded as a part of goodwill,
therefore, no interest expense related to this uncertainty has been included in
the consolidated statement of operations.
The
Company files income tax returns in the U.S. and several foreign countries and
has not extended the statute of limitations to assess additional taxes for any
of these jurisdictions. The Company has effectively settled U.S.
Federal tax positions taken through 2002. However, the Company is
subject to adjustment in each of these periods, to the extent of its net
operating loss carry forwards. The open tax years for foreign
jurisdictions are 2002 through 2009 and 1997 through 2009 for U.S. state and
local jurisdictions.
The
components of the loss before income taxes follow:
|
Years Ended December 31,
|
|||||||||||
2009
|
2008
|
2007
|
||||||||||
U.S.
loss
|
$ | (11,996 | ) | $ | (17,405 | ) | $ | (19,874 | ) | |||
Foreign
income (loss)
|
830 | 849 | 445 | |||||||||
Loss
before income taxes
|
$ | (11,166 | ) | $ | (16,556 | ) | $ | (19,429 | ) |
The
provision for income taxes consists exclusively of current foreign income
taxes.
A
reconciliation of the U.S. federal statutory rate to the effective income tax
rate follows:
Years Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
U.S.
federal statutory tax rate
|
(35.0 | )% | (35.0 | )% | (35.0 | )% | ||||||
State
taxes
|
- | (9.5 | ) | 0.6 | ||||||||
Disallowed
interest deduction
|
- | - | 3.6 | |||||||||
Goodwill
write down
|
15.3 | - | - | |||||||||
Change
in valuation allowance
|
17.1 | 42.0 | 27.4 | |||||||||
Permanent
differences, tax credits and other adjustments
|
5.7 | 4.4 | 4.7 | |||||||||
Effective
income tax rate
|
3.1 | % | 1.9 | % | 1.3 | % |
F-18
TRANSWITCH
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Tabular
dollars in thousands, except share and per share amounts)
The tax
effects of temporary differences that give rise to deferred income taxes
follow:
2009
|
2008
|
|||||||
Deferred
income tax assets:
|
||||||||
Property
and equipment
|
$ | 843 | $ | 1,882 | ||||
Other
nondeductible accruals
|
795 | 388 | ||||||
Restructuring
accrual
|
4,607 | 10,031 | ||||||
Capitalized
research and development for tax purposes
|
11,589 | 21,296 | ||||||
Net
operating loss carry-forwards
|
162,797 | 142,678 | ||||||
Capital
losses
|
1,004 | 15,263 | ||||||
Research
and development and other credits
|
21,334 | 21,762 | ||||||
Debt
discount
|
— | 68 | ||||||
Inventories
|
14,383 | 14,735 | ||||||
Stock
compensation
|
2,230 | 2,242 | ||||||
Other
|
2,717 | 360 | ||||||
Total
gross deferred income tax assets
|
222,299 | 230,705 | ||||||
Valuation
allowance
|
(221,207 | ) | (229,586 | ) | ||||
Net
deferred income tax assets
|
1,092 | 1,119 | ||||||
Deferred
income tax liabilities:
|
||||||||
Other
|
(1,092 | ) | (1,119 | ) | ||||
Net
deferred income tax liabilities
|
(1,092 | ) | (1,119 | ) | ||||
Net
deferred income taxes
|
$ | — | $ | — |
The
Company continually evaluates its deferred income tax assets to determine
whether it is more likely than not that such assets will be realized. In
assessing the realizability, management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and tax planning
strategies. Based on this assessment, management believes that significant
uncertainty exists concerning the recoverability of the deferred income tax
assets. As such, a valuation allowance has been provided for deferred income tax
assets as of December 31, 2009 and 2008. Of the $221.2 million valuation
allowance at December 31, 2009, subsequently recognized income tax benefits, if
any, in the amount of $4.7 million will be applied directly to additional
paid-in capital and $72.1 million to goodwill.
At
December 31, 2009, the Company had available, for federal income tax purposes,
net operating loss (“NOL”) carry-forwards of approximately $439.4 million and
research and development tax credit carry-forwards of approximately $21.3
million expiring in varying amounts from 2009 through 2029. For state income tax
purposes, the Company had available NOL carry-forwards of approximately $163.5
million and state tax credit carry-forwards of $7.7 million expiring in varying
amounts from 2009 to 2029. Additionally, the Company has generated
$20.3 million of NOL’s in foreign jurisdictions which can be carried forward
indefinitely.
Certain
transactions involving the Company’s beneficial ownership have occurred in prior
years, which resulted in a stock ownership change for purposes of Section 382 of
the Internal Revenue Code of 1986, as amended. Consequently, approximately
$189.2 million of the NOL carry-forwards and $11.6 million of research and
development tax credit carry-forwards are subject to these limitations. The
Company has not yet determined if any of the NOL and credits generated through
2009 will be subject to limitation under Section 382.
Note
13. Stockholders’ Rights Plan
The
Board of Directors enacted a stockholder rights plan and declared a dividend of
one preferred share purchase right for each outstanding share of TranSwitch
common stock outstanding at the close of business on October 1, 2001 to the
stockholders of record on that date. Each stockholder of record as of October 1,
2001 received a summary of the rights and any new stock certificates issued
after the record date contain a legend describing the rights. Each preferred
share purchase right entitles the registered holder to purchase from the Company
one one hundred and twenty-fifth of a share of Series A Junior Participating
Preferred Stock, par value $0.01 per share, of the Company, at a price of
$400.00 per one one hundred and twenty-fifth of a Preferred Share, subject to
adjustment, upon the occurrence of certain triggering events, including the
purchase of 15% or more of the Company’s outstanding common stock by a third
party. Until a triggering event occurs, the common stockholders have no right to
purchase shares under the stockholder rights plan. If the right to purchase the
preferred stock is triggered, the common stockholders will have the ability to
purchase sufficient stock to significantly dilute the 15% or greater
holder.
F-19
TRANSWITCH
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Tabular
dollars in thousands, except share and per share amounts)
Note
14. Employee Benefit Plans
Employee
Stock Purchase Plans
Under the
Company’s employee stock purchase plans, eligible employees may purchase a
limited number of shares of common stock at 85% of the fair market value at
either the date of enrollment or the date of purchase, whichever is less. The
1995 Employee Stock Purchase Plan was closed effective December 31, 2004. On May
19, 2005 the Company’s shareholders approved the 2005 Employee Stock Purchase
Plan (the 2005 ESPP). Under the 2005 ESPP, the Company is authorized to issue
125,000 shares of common stock. Shares issued under the 2005 ESPP in 2009, 2008,
and 2007 were 10,172, 10,273, and 12,730 respectively.
Stock
Option and Award Plans
As of
December 31, 2009, the Company has three stock options plans: the 1995 Stock
Plan, as amended (the “1995 Plan”), 2000 Stock Option Plan as amended (the “2000
Plan”), and the 2008 Equity Incentive Plan (the ‘2008 Plan”). The 1995
Non-Employee Director Stock Option Plan, as amended (the “Director Plan”)
expired during 2005.
Under the
1995 Plan, 3,925,000 shares of the Company’s common stock are available to grant
to employees in the form of incentive stock options. Also, non-qualified stock
options and stock awards may be granted to employees, consultants and directors.
The terms of the options granted are subject to the provisions of the 1995 Plan,
as determined by the Compensation Committee of the Board of
Directors. The exercise price of options under the 1995 Plan must be
equal to the fair market value of the common stock on the date of grant. Options
granted under the 1995 Plan are generally nontransferable. The 1995 Plan, as
amended, expires March 15, 2010. In connection with the adoption of
the 2008 Plan on May 22, 2008, shares are no longer available for grant under
the 1995 Plan.
The 2000
Plan provides for the granting of non-qualified options to employees and
consultants to purchase up to an aggregate of 1,250,000 shares of common
stock. No member of the Board of Directors or executive officers
appointed by the Board of Directors is eligible for grants of options under the
2000 Plan. The terms of the options granted are subject to the provisions of the
2000 Plan, as determined by the Compensation Committee of the Board of
Directors. Each non-qualified stock option shall either be fully exercisable on
the date of grant or shall become exercisable thereafter in such installments as
the Board of Directors may specify. The 2000 Plan will terminate in 2010. No
option granted under the 2000 Plan may be exercised after the expiration of
seven years from the date of grant. The exercise price of options under the 2000
Plan must be equal to the fair market value of the common stock on the date of
grant. Options granted under the 2000 Plan are generally nontransferable. In
connection with the adoption of the 2008 Plan on May 22, 2008, shares are no
longer available for grant under the 2000 Plan.
The
2008 Plan was approved by shareholders at the shareholder meeting held on May
22, 2008. The purpose of this plan is to provide stock options, stock
issuances, and other equity interests in the Company to employees, officers,
directors, consultants, and advisors to the Company and its subsidiaries or any
future parent corporation. The 2008 Plan is to be administered by the Board of
Directors of the Company who will have sole discretion and authority to
interpret and correct the provisions of the Plan and any Award. The Board will
also have sole authority to determine the terms and provisions of the respective
Stock Option Agreements and Awards, which need not be identical. The
aggregate number of shares of Common Stock of the Company that may be issued
pursuant to the 2008 Plan is 3,196,250. As of December 31, 2009, there were
1,128,418 shares available for grant under the 2008 Plan.
Information
regarding stock options follows:
Number
of options
outstanding |
Weighted average
exercise price per share
|
|||||||
Outstanding
at December 31, 2006
|
3,030,895 | $ | 61.49 | |||||
Granted
and assumed
|
244,151 | 11.93 | ||||||
Exercised
|
(131,357 | ) | 9.33 | |||||
Canceled,
forfeited or expired
|
(707,821 | ) | 139.36 | |||||
Outstanding
at December 31, 2007
|
2,435,868 | 37.71 | ||||||
Granted
and assumed
|
1,406,963 | 9.66 | ||||||
Exercised
|
(12,576 | ) | 5.54 | |||||
Canceled,
forfeited or expired
|
(962,137 | ) | 61.28 | |||||
Outstanding
at December 31, 2008
|
2,868,118 | 15.33 | ||||||
Granted
|
461,650 | 2.97 | ||||||
Exercised
|
(29,064 | ) | 2.93 | |||||
Canceled,
forfeited or expired
|
(815,570 | ) | 24.97 | |||||
Outstanding
at December 31, 2009
|
2,485,134 | $ | 10.02 |
F-20
TRANSWITCH
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Tabular
dollars in thousands, except share and per share amounts)
Information
regarding restricted stock awards follows:
Outstanding
at December 31, 2007
|
- | $ | 0.00 | |||||
Granted
|
- | 0.00 | ||||||
Assumed
|
181,968 | 0.00 | ||||||
Released
|
(2,133 | ) | 0.00 | |||||
Canceled,
forfeited or expired
|
(42,725 | ) | 0.00 | |||||
Outstanding
at December 31, 2008
|
137,110 | 0.00 | ||||||
Granted
|
495,502 | 0.00 | ||||||
Released
|
(39,225 | ) | 0.00 | |||||
Canceled,
forfeited or expired
|
(22,205 | ) | 0.00 | |||||
Outstanding
at December 31, 2009
|
571,182 | $ | 0.00 |
The
Company has, in connection with the acquisitions of various companies, assumed
the stock option plans of each acquired company. The related options
are included in the preceding table.
Options
outstanding and exercisable at December 31, 2009 follow:
Options Outstanding
|
Options Exercisable
|
||||||||||||||||||||
Range of
Exercise prices
|
Number
Outstanding
|
Weighted
Average
Remaining
Contractual
Life
|
Weighted
average
exercise
price
|
Number
Exercisable
|
Weighted
average
exercise
price
|
||||||||||||||||
$
|
2.00
to 2.32
|
224,506 | 5.84 | $ | 2.27 | 80,118 | $ | 2.30 | |||||||||||||
2.43
to 2.43
|
267,540 | 6.89 | 2.43 | 2,119 | 2.43 | ||||||||||||||||
2.48
to 5.12
|
253,536 | 5.61 | 4.10 | 151,275 | 4.44 | ||||||||||||||||
5.52
to 7.36
|
271,067 | 4.46 | 6.22 | 170,272 | 6.57 | ||||||||||||||||
7.37
to 11.04
|
260,441 | 4.69 | 9.51 | 227,263 | 9.45 | ||||||||||||||||
11.12
to 12.40
|
305,613 | 2.37 | 12.00 | 302,780 | 12.00 | ||||||||||||||||
12.41
to 13.28
|
345,934 | 3.84 | 13.15 | 343,553 | 13.15 | ||||||||||||||||
13.44
to 16.88
|
298,935 | 3.59 | 14.77 | 297,442 | 14.77 | ||||||||||||||||
17.04
to 27.12
|
252,131 | 2.92 | 22.54 | 251,756 | 22.55 | ||||||||||||||||
30.04
to 410.00
|
5,431 | 1.58 | 39.97 | 5,431 | 39.97 | ||||||||||||||||
$
|
2.00
to 410.00
|
2,485,134 | 4.38 | $ | 10.02 | 1,831,989 | $ | 12.32 |
Stock
options generally expire five, seven or ten years from the date of grant and
generally vest ratably over periods ranging from immediately to four
years.
As of
December 31, 2009 both the fair value of options outstanding and the fair value
of options exercisable were less than the exercise price.
Stock
compensation charged to operations was $1.3 million in 2009, $1.5 million in
2008, and $2.0 million in 2007. Further, no compensation cost was capitalized as
part of inventory, and no income tax benefit was recognized in those years.
Lastly, no equity awards were settled in cash.
Stock-Based Compensation Fair Value
Disclosures
The fair
value of each option granted is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
2009
|
2008
|
2007
|
||||||||||
Risk-free
interest rate
|
2.43 | % | 1.82 | % | 4.62 | % | ||||||
Expected
life in years
|
4.03 | 2.95 | 3.38 | |||||||||
Expected
volatility
|
89.26 | % | 68.21 | % | 91.98 | % | ||||||
Expected
dividend yield
|
— | — | — |
F-21
TRANSWITCH
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Tabular
dollars in thousands, except share and per share amounts)
The
weighted average fair value of stock options granted, calculated using the
Black-Scholes option-pricing model, is $1.89, $0.87 and $7.45 for 2009, 2008 and
2007, respectively. The weighted average fair value of restricted stock units
granted, calculated using the Black-Scholes option-pricing model, is $3.01 for
2009. No restricted stock units were granted during 2008 or 2007. The
total intrinsic value of the options exercised was $0.06 million, $0.02 million
and $0.5 million for 2009, 2008 and 2007, respectively. In 2009 and 2008,
restricted stock units released had an intrinsic value of $0.1 million and
approximately five thousand dollars, respectively. No restricted stock units
were released in 2007.
The
Company recognized compensation expense related to stock options granted to
non-employees of $0.01 million in 2009, $0.03 million in 2008 and $0.1 million
in 2007.
Employee 401(k)
Plan
The
TranSwitch Corporation 401(k) Retirement Plan (the “Plan”) provides tax-deferred
salary deductions for eligible employees. Employees may contribute an annual
maximum amount as set periodically by the Internal Revenue Service. The Company
provides matching contributions equal to 50% of the employees’ contributions, up
to a maximum of 6% of the employee’s annual compensation. On July 1, 2009, the
Company indefinitely suspended its matching contributions. Company contributions
begin vesting after two years and are fully vested after three years.
Contribution expense related to the Plan was $0.1 million, $0.2 million and $0.2
million for 2009, 2008 and 2007, respectively.
Note
15. Convertible Notes
On July
6, 2007, the Company exchanged approximately $21.2 million aggregate principal
amount of its then outstanding 5.45% Convertible Plus Cash Notes due
September 30, 2007 (the “Plus Cash Notes”) for an equivalent principal amount of
a new series of 5.45% Convertible Notes due September 30, 2010 (the “2010
Notes”). The remaining $8.9 million balance of the 2007 Plus Cash
Notes were redeemed at par value for cash at the end of September, 2007. In
connection with the exchange the Company recorded an extinguishment loss of
approximately $0.4 million, including a non-cash write-off of unamortized debt
discount and deferred debt issuance costs.
Also on
July 6, 2007, the Company issued for an equal amount of cash an additional $3.8
million aggregate principal amount of 2010 Notes. At December 31, 2007, the
Company had $25.0 million of the 2010 Notes outstanding.
On
December 24, 2008, the Company entered into an agreement with certain holders of
its 2010 Notes to purchase $15.0 million aggregate principal amount of the 2010
Notes for $9.9 million in cash, plus accrued and unpaid interest. As a result of
this transaction, the Company recorded an extinguishment gain of $4.5 million,
net of a non-cash write-off of unamortized deferred debt issuance costs. As of
December 31, 2008, $10.0 million of the 2010 Notes remained
outstanding.
On
October 26, 2009, the Company exchanged approximately $10.0 million aggregate
principal amount of its unsecured 2010 Notes for an equal principal amount of
new unsecured 5.45% Convertible Notes due September 30, 2011 (the “2011
Notes”).
The
2011 Notes are convertible at the option of the holder, at any time on or prior
to maturity at an initial conversion ratio of 138.8888 per $1,000 principal
amount.
If
a holder of the 2011 Notes converts such notes in connection with a corporate
transaction that constitutes a change in control, as defined, at any time prior
to July 6, 2011, then in addition to the conversion shares, as defined, such
holder is also entitled to receive upon such conversion, a make-whole payment
premium in cash.
Commencing
on October 30, 2009, the 2011 Notes are payable in monthly principal payments of
$417,000 plus interest. The Company’s future principal payments are expected to
be $5.0 million in 2010 and $3.8 million in 2011. The interest payments on the
2011 Notes are expected to be $0.3 million in 2010 and $0.1 million in
2011.
The
principal payments for the 2011 Notes may be paid for in shares of the Company’s
common stock, solely at the Company’s option and upon the satisfaction or waiver
of certain conditions by the note holder. If the Company elects to
make any payment of or provision for principal in shares of its common stock,
the shares to be delivered will be valued at the lower of $0.90 (subject to
adjustment) or 90% of the arithmetic average of the daily volume-weighted
average price of the common stock for the ten (10) consecutive trading days
ending on or including the second trading day immediately preceding the
applicable interest payment date but; not be less than $0.45.
F-22
TRANSWITCH
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Tabular
dollars in thousands, except share and per share amounts)
The
holders of the 2011 Notes may require the Company to repurchase the 2011 Notes
upon a change in control for cash at 100% of the principal amount, plus accrued
and unpaid interest.
The
terms underlying the 2011 Notes contain certain customary covenants that limit,
among other things, the Company’s ability to incur additional debt. The failure
to comply with such covenants could cause the 2011 Notes to become due and
payable immediately.
As of
December 31, 2009, $8.8 million of the 2011 Notes remained
outstanding. Approximately $5.0 million of the 2011 Notes has been
classified as short-term as of December 31, 2009.
Note
16. Restructuring and Asset Impairment
Charges
During
2009, the Company recorded a net restructuring benefit of approximately $6.3
million, primarily resulting from a new sublease. On March 3, 2009 the Company
entered into a sublease with a major corporation to sublease 92,880 square feet
of office space located in Shelton, Connecticut to the year 2014. As
a result of this sublease, the Company reversed approximately $6.7 million of
accrued restructuring expense that it initially recorded in 2001. The Company
also reversed approximately $0.9 million of accrued restructuring expense as a
result of certain other sub-lease agreements relating to the Company’s excess
facilities in Shelton, Connecticut. These benefits were partially
offset by approximately $1.3 million of charges for workforce reductions and
other restructuring adjustments.
During
2008 the Company implemented restructuring plans that resulted in total
restructuring costs of approximately $7.2 million, of which approximately $3.8
million was recorded as restructuring charges in its Consolidated Statements of
Operations and $3.4 was recorded as a liability assumed in the acquisition of
Centillium. These restructuring plans included the elimination of
approximately 76 positions, primarily in the Company’s Shelton, Connecticut,
Bedford, Massachusetts, Fremont, California, Eclubens, Switzerland, New Delhi,
India and Bangalore, India locations. As a result, the Company
recorded restructuring charges in its Consolidated Statements of Operations of
approximately $1.7 million related to employee termination benefits, $0.8
million related to asset impairments, $0.7 million related to excess facility
costs net of anticipated sublease income and $0.8 million in other restructuring
charges. These 2008 charges were partially offset by approximately
$0.2 million of benefits related to adjustments to certain sublease agreements
relating to the Company’s excess facilities in Shelton, Connecticut
In
connection with the restructuring events of 2008, approximately $6.3 million of
the $7.2 million in restructuring costs required cash expenditures. As of
December 31, 2009, all but $0.2 million of the cash expenditures had been paid.
The remaining $0.2 million will be paid in 2010.
During
2007 the Company recorded restructuring charges of approximately $1.5 million
related to workforce reductions.
A summary
of the restructuring liabilities and activity follows:
2009
Activity
|
||||||||||||||||||||||||
Restructuring
Liabilities December 31, 2008 |
Restructuring
Charges |
Cash Payments
|
Non-cash
asset write- offs |
Adjustments
and Changes to Estimates |
Restructuring
Liabilities December 31, 2009 |
|||||||||||||||||||
Employee
Termination Benefits
|
$ | 1,930 | $ | 523 | $ | (2,437 | ) | $ | — | $ | 227 | $ | 243 | |||||||||||
Facility
lease costs
|
22,534 | — | (3,444 | ) | — | (6,965 | ) | 12,125 | ||||||||||||||||
Asset
impairments
|
— | — | — | (82 | ) | 82 | — | |||||||||||||||||
Other
|
925 | 48 | (801 | ) | — | (172 | ) | — | ||||||||||||||||
Totals
|
$ | 25,389 | $ | 571 | $ | (6,682 | ) | $ | (82 | ) | $ | (6,828 | ) | $ | 12,368 |
F-23
TRANSWITCH
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Tabular
dollars in thousands, except share and per share amounts)
2008 Activity
|
||||||||||||||||||||||||||||
Restructuring
Liabilities December 31, 2007 |
Liabilities
assumed in acquisition of business |
Restructuring
Charges |
Cash Payments
|
Non-cash
asset write-offs |
Adjustments
and Changes to Estimates |
Restructuring
Liabilities December 31, 2008 |
||||||||||||||||||||||
Employee
Termination Benefits
|
$ | 235 | $ | 3,071 | $ | 1,740 | $ | (3,080 | ) | $ | — | $ | (36 | ) | $ | 1,930 | ||||||||||||
Facility
lease costs
|
20,731 | 1,686 | 728 | (346 | ) | — | (265 | ) | 22,534 | |||||||||||||||||||
Asset
impairments
|
— | 42 | 835 | — | (877 | ) | — | — | ||||||||||||||||||||
Other
|
124 | — | 783 | (1 | ) | — | 19 | 925 | ||||||||||||||||||||
Totals
|
$ | 21,090 | $ | 4,799 | $ | 4,086 | $ | (3,427 | ) | $ | (877 | ) | $ | (282 | ) | $ | 25,389 |
Note
17. Commitments and Contingencies
Lease
Agreements
The
Company leases buildings and equipment at its headquarters in Shelton,
Connecticut as well as at its subsidiaries’ locations
worldwide. Rental expense under all operating lease agreements was
$1.5 million in 2009, $2.0 million in 2008 and $1.7 million in 2007.
The
following table summarizes as of December 31, 2009 future minimum operating
lease commitments, including contractually obligated building operating
commitments that have remaining, non-cancelable lease terms in excess of one
year and future anticipated sublease income:
Operating
Commitments |
Less:
Sublease
Agreements |
Net
Commitments
|
|||||||||||
2010
|
$ | 5,506 | $ | 3,331 | $ | 2,175 | |||||||
2011
|
4,299 | 2,732 | 1,567 | ||||||||||
2012
|
4,238 | 2,581 | 1,657 | ||||||||||
2013
|
3,380 | 2,180 | 1,200 | ||||||||||
2014
|
3,220 | 1,181 | 2,039 | ||||||||||
Thereafter
|
7,393 | - | 7,393 | ||||||||||
$ | 28,036 | $ | 12,005 | $ | 16,031 |
F-24
TRANSWITCH
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Tabular
dollars in thousands, except share and per share amounts)
Patent
Indemnity
Under the
terms of substantially all of its sales agreements, the Company has agreed to
indemnify its customers for costs and damages arising from claims against such
customer based on, among other things, allegations that the Company’s products
infringed upon the intellectual property rights of a third party. In the event
of an infringement claim, the Company retains the right to (i) procure for the
customer the right to continue using the product; (ii) replace the product with
a non-infringing item which shall give equally good service; (iii) modify the
product so that it becomes non-infringing; or (iv) remove the product and, on
return of the product to the Company, the Company shall refund the buyers
purchase price. Due to the nature of these indemnification agreements, the
maximum potential future payments the Company could be required to make under
these guarantees, when and if such claims may arise, cannot be reliably
determined. No amounts have been accrued for any estimated losses with respect
to these guarantees for customer indemnifications since it is not probable that
a loss will be incurred. No claims have been made under these indemnity
provisions.
1 Purchase
Commitments
In the
normal course of business, the Company makes various commitments to purchase
goods or services from specific suppliers, including those related to capital
expenditures. As of December 31, 2009, the Company had purchase commitments
totaling $5.7 million
Note
18. Supplemental Cash Flow Information
Supplemental
cash flow information follows:
Years
Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Cash
paid for interest
|
$ | 712 | $ | 1,554 | $ | 1,705 | ||||||
Cash
paid for income taxes
|
$ | 194 | $ | 340 | $ | 373 |
During
2008, in connection with the Centillium acquisition, the Company issued
3,125,000 shares of its common stock with an approximate fair value of $25.0
million.
In
connection with the ASIC Design Center acquisition in 2007 the Company issued
468,339 shares of its common stock with an approximate fair value of $5.5
million.
Note
19. Stock Repurchase Program
On February 13, 2008 the Company
announced that its Board of Directors authorized a stock repurchase program
under which the Company may repurchase up to $10 million of its outstanding
common stock. The share repurchase program authorizes the Company to
repurchase shares through February 2010, from time to time, through transactions
in the open market or in privately negotiated transactions. The
number of shares to be purchased and the timing of the purchases will be based
on market conditions and other factors. The stock repurchase program
does not require the Company to repurchase any specific dollar value or number
of shares, and the Company may terminate the repurchase program at any
time.
During
2008, the Company purchased 20,794 shares of its outstanding common stock at an
average price of $5.44 per share or approximately $0.1 million, excluding
commissions. There were no such repurchases in 2009.
F-25
TRANSWITCH
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Tabular
dollars in thousands, except share and per share amounts)
Note
20. Subsequent Events
On
December 31, 2009, the Company, entered into a Common Stock Purchase Agreement
(the "Common Stock Purchase Agreement") with Seaside 88, LP, a Florida limited
partnership ("Seaside"), relating to the offering and sale (the "Offering") of
up to 1,950,000 shares (the "Shares") of the Company's common stock. The Common
Stock Purchase Agreement requires the Company to issue and sell, and Seaside to
purchase, up to 75,000 shares of Common Stock once every two (2) weeks, subject
to the satisfaction of customary closing conditions, beginning on January 4,
2010 and ending on or about the date that is fifty (50) weeks subsequent
to closing. The offering price of the Company’s common stock at each
closing is an amount equal to the lower of (i) the daily volume weighted average
of actual trading prices of the common stock on the trading market (the "VWAP")
for the ten consecutive trading days immediately prior to a closing date
multiplied by 0.875 and (ii) the VWAP for the trading day immediately prior to a
closing date multiplied by 0.90. In the event that the 3-Day VWAP, as
defined in the Common Stock Purchase Agreement, does not equal or exceed $1.00
(the "Floor"), as calculated with respect to any subsequent closing date, then
such subsequent closing will not occur, and there will be one fewer subsequent
closing and the aggregate number of Shares to be purchased under the Common
Stock Purchase Agreement will be reduced by 75,000 shares for each subsequent
closing that does not occur because the Floor has not been reached. The Common
Stock Purchase Agreement provides that the Company may, upon ten days' prior
written notice to Seaside, terminate the Common Stock Purchase Agreement after
the fifth subsequent closing (i.e., after six closings) but prior to the sixth
subsequent closing. The Common Stock Purchase Agreement contains representations
and warranties and covenants for each party, which must be true and have been
performed at each closing.
As
of March 15, 2010, the Company has had 6 closings with Seaside and has sold
450,000 shares of stock to Seaside for an aggregate price of approximately $0.8
million.
On
February 1, 2010, the Company announced that it recently effected a
restructuring to be implemented and concluded during the first quarter of 2010.
The Company expects that such restructuring and other cost reduction initiatives
will result in annual savings of approximately $4.0 million, and that these
savings will begin to be recognized in the first quarter of 2010. Of
this amount, the Company expects annual savings of approximately $2.4 million in
reduced employee related costs, including base salary reductions, and $1.6
million from other cost savings initiatives. In connection with the
restructuring, the Company expects to incur pre-tax restructuring charges of
approximately $1.4 million which will be cash expenditures primarily for
employee related costs. These charges are expected to be recorded in the first
quarter of 2010.
On
March 12, 2010 the Company entered into a new credit facility agreement with
Bridge Bank N.A., a subsidiary of Bridge Capital Holdings. The facility is for
up to $5.0 million with availability determined by the Company’s outstanding
accounts receivable.
Note
21. Quarterly Information (Unaudited)
The table
below shows selected unaudited quarterly information of operating results. The
Company believes that this information reflects all normal recurring adjustments
necessary for a fair presentation of the information for the periods presented.
Interim operating results are not necessarily indicative of future period
results.
|
First
Quarter |
Second
Quarter |
Third
Quarter |
Fourth
Quarter |
Full
Year |
|||||||||||||||
Year
ended December 31, 2009
|
||||||||||||||||||||
Net
revenues
|
$ | 14,247 | $ | 14,535 | $ | 15,181 | $ | 12,144 | $ | 56,107 | ||||||||||
Cost
of revenues
|
5,937 | 5,983 | 7,050 | 5,653 | 24,623 | |||||||||||||||
Gross
profit
|
8,310 | 8,552 | 8,131 | 6,491 | 31,484 | |||||||||||||||
Net
income (loss) (2)
|
4,016 | (1,320 | ) | (1,497 | ) | (12,730 | ) | (11,531 | ) | |||||||||||
Net
income (loss) per common share (1):
|
||||||||||||||||||||
Basic
|
$ | 0.20 | $ | (0.07 | ) | $ | (0.08 | ) | $ | (0.64 | ) | $ | (0.58 | ) | ||||||
Diluted
|
$ | 0.19 | $ | (0.07 | ) | $ | (0.08 | ) | $ | (0.64 | ) | $ | (0.58 | ) | ||||||
Year ended December 31,
2008
|
||||||||||||||||||||
Net
revenues
|
$ | 7,520 | $ | 8,891 | $ | 10,498 | $ | 15,025 | $ | 41,934 | ||||||||||
Cost
of revenues
|
2,935 | 3,549 | 4,517 | 7,039 | 18,040 | |||||||||||||||
Gross
profit
|
4,585 | 5,342 | 5,981 | 7,986 | 23,894 | |||||||||||||||
Net
loss (2)
|
(5,494 | ) | (4,320 | ) | (2,956 | ) | (4,276 | ) | (17,046 | ) | ||||||||||
Net
loss per common share (1):
|
||||||||||||||||||||
Basic
|
$ | (0.33 | ) | $ | (0.26 | ) | $ | (0.18 | ) | $ | (0.22 | ) | $ | (0.98 | ) | |||||
Diluted
|
$ | (0.33 | ) | $ | (0.26 | ) | $ | (0.18 | ) | $ | (0.22 | ) | $ | (0.98 | ) |
(1)
|
The
sum of quarterly per share amounts may not equal per share amounts
reported for year-to-date periods due to changes in the number of weighted
average shares outstanding and the effects of
rounding.
|
(2)
|
The
reported net loss for 2009 and 2008 reflects stock-based compensation
expense of $1.3 million (Q1 of $0.3 million, Q2 of $0.3 million, Q3 of
$0.3 million and Q4 of $0.4 million) and $1.5 million (Q1 of $0.4 million,
Q2 of $0.3 million, Q3 of $0.3 million and Q4 of $0.5 million),
respectively.
|
F-26
SCHEDULE
II
TRANSWITCH
CORPORATION
VALUATION
AND QUALIFYING ACCOUNTS
(in
thousands)
Additions
|
||||||||||||||||||||
Description
|
Balance
at Beginning of Year |
Charges to
Costs
and Expenses
|
Charges
to Other
Accounts
|
Deductions
|
Balance
at End
of Year
|
|||||||||||||||
Year
ended December 31, 2009:
|
||||||||||||||||||||
Allowance
for losses on:
|
||||||||||||||||||||
Accounts
receivable
|
$ | 536 | $ | 94 | $ | — | $ | (114 | ) | $ | 516 | |||||||||
Sales
returns and allowances
|
151 | (2 | ) | — | — | 149 | ||||||||||||||
Stock
rotation
|
44 | 704 | — | (137 | ) | 611 | ||||||||||||||
Deferred
income tax assets valuation allowance
|
229,586 | (8,379 | ) | — | — | 221,207 | ||||||||||||||
$ | 230,317 | $ | (7,583 | ) | $ | — | $ | (251 | ) | $ | 222,483 | |||||||||
Year
ended December 31, 2008:
|
||||||||||||||||||||
Allowance
for losses on:
|
||||||||||||||||||||
Accounts
receivable
|
$ | 623 | $ | (3 | ) | $ | 17 | $ | (101 | ) | $ | 536 | ||||||||
Sales
returns and allowances
|
99 | 261 | 151 | (360 | ) | 151 | ||||||||||||||
Stock
rotation
|
60 | 27 | — | (43 | ) | 44 | ||||||||||||||
Deferred
income tax assets valuation allowance
|
148,250 | 9,263 | 72,073 | — | 229,586 | |||||||||||||||
$ | 149,032 | $ | 9,548 | $ | 72,241 | $ | (504 | ) | $ | 230,317 | ||||||||||
Year
ended December 31, 2007:
|
||||||||||||||||||||
Allowance
for losses on:
|
||||||||||||||||||||
Accounts
receivable
|
$ | 473 | $ | 118 | $ | 32 | $ | — | $ | 623 | ||||||||||
Sales
returns and allowances
|
37 | 322 | — | (260 | ) | 99 | ||||||||||||||
Stock
rotation
|
75 | 34 | — | (49 | ) | 60 | ||||||||||||||
Deferred
income tax assets valuation allowance
|
142,791 | 5,459 | — | — | 148,250 | |||||||||||||||
$ | 143,376 | $ | 5,933 | $ | 32 | $ | (309 | ) | $ | 149,032 |
F-27
Subscription
Rights to Purchase an Aggregate of up to
[ ]
Shares
of Common Stock
TranSwitch
Corporation
PRELIMINARY
PROSPECTUS
[—],
2010
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and
Distribution.
SEC
registration fee
|
$ | 713 | ||
Accounting
fees and expenses*
|
$ | 25,000 | ||
Legal
fees and expenses*
|
$ | 80,000 | ||
Printing
and engraving expenses*
|
$ | 50,000 | ||
Subscription
agent and registrar fees and expenses*
|
$ | 25,000 | ||
Miscellaneous*
|
$ | 4,287 | ||
Total*
|
$ | 185,000 |
* Estimated
pursuant to Item 511 of Regulation S-K
Item 14. Indemnification of Directors and
Officers.
Section 145
of the Delaware General Corporation Law permits TranSwitch to indemnify its
directors, officers, employees and agents against actual and reasonable expenses
(including attorneys’ fees) incurred by them in connection with any action, suit
or proceeding brought against them by reason of their status or service as a
director, officer, employee or agent by or on behalf of TranSwitch and against
expenses (including attorneys’ fees), judgments, fines and settlements actually
and reasonably incurred by him or her in connection with any such action, suit
or proceeding, if:
·
|
he
or she acted in good faith and in a manner he or she reasonably believed
to be in or not opposed to the best interests of TranSwitch;
and
|
·
|
in
the case of a criminal proceeding, he or she had no reasonable cause to
believe his or her conduct was
unlawful.
|
Except as
ordered by a court, no indemnification shall be made in connection with any
proceeding brought by or in the right of TranSwitch where the person involved is
adjudged to be liable to TranSwitch.
Article
Ten of TranSwitch’s amended and restated certificate of incorporation, as
amended, contains provisions that eliminate a director’s personal liability for
monetary damages resulting from a breach of fiduciary duty, except in certain
circumstances involving certain wrongful acts, such as the breach of a
director’s duty of loyalty or acts or omissions which involve intentional
misconduct or a knowing violation of law. These provisions do not limit or
eliminate TranSwitch’s rights or those of any stockholder to seek non-monetary
relief, such as an injunction or rescission, in the event of a breach of a
director’s fiduciary duty. These provisions will not alter a director’s
liability under federal securities laws. TranSwitch’s certificate of
incorporation also contains provisions indemnifying its directors and officers
to the fullest extent permitted by Delaware law. TranSwitch maintains directors
and officers’ liability insurance for the benefit of its directors and certain
of its officers.
On April
3, 2009, TranSwitch entered into indemnification agreements with each of its
directors. The indemnification agreements supplement existing
indemnification provisions of TranSwitch’s amended and restated certificate of
incorporation, as amended, and, in general, provide for indemnification to the
maximum extent permitted by Delaware law, subject to the exceptions, terms and
conditions provided in the indemnification agreements. The indemnification
agreements also provide that TranSwitch will advance to the indemnified person,
if requested by an indemnified person, expenses incurred in connection with any
proceeding arising out of such indemnified person’s service to TranSwitch,
subject to reimbursement by the indemnified person should a final judicial
determination be made that indemnification is not available under applicable
law, and that TranSwitch may purchase and maintain insurance against any
liability asserted against, and incurred by, the indemnified person arising out
of their service to TranSwitch, if such insurance is available on commercially
reasonable terms.
66
Item 15. Recent Sales of Unregistered
Securities.
On
January 11, 2007, TranSwitch completed its acquisition of substantially all
of the assets of the ASIC Design Center division of Data-JCE, Ltd., a
publicly-held Israeli electronics components distribution company
(“Data-JCE”). In connection with the Corporation’s acquisition of
substantially all the assets of Data-JCE, TranSwitch issued an
aggregate of 468,339 shares of its common stock (as adjusted to reflect the
November 23, 2009 1-for-8 reverse stock split) to Data-JCE, in a
transaction exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
A discussion of the issuance of the Corporation’s securities in
connection with the acquisition of Data-JCE is included in the Corporation’s
Current Report on Form 8-K filed on January 12, 2007.
On
July 6, 2007, TranSwitch, pursuant to separate exchange and purchase
agreements, each dated June 29, 2007 with certain holders of the
Corporation’s 5.45% Convertible Plus Cash NotesSM due 2007
(“2007 Notes”), completed its exchange of $21,246,000 aggregate principal amount
of its 2007 Notes for an equal principal amount of new 5.45% Convertible Notes
due September 30, 2010 (the “2010 Notes”) and issuance of an additional
$3,767,000 aggregate principal amount of 2010 Notes for an equal amount of cash
in a private offering pursuant to Rule 144A under the Securities Act of 1933, as
amended (the “Securities Act”).
The 2010
Notes were issued under an indenture dated July 6, 2007 by and among the
Corporation and U.S. Bank National Association, as trustee. The New Notes will
mature on September 30, 2010 and are convertible into shares of the
Corporation’s common stock. The issuance of the New Notes and the underlying
shares of common stock have not been registered under the Securities Act in
reliance on an exemption under Rule 506 of Regulation D.
A
discussion of the issuance of the 2010 Notes and the Corporation’s underlying
common stock is included in the Corporation’s Current Report on Form 8-K filed
on July 6, 2007.
On
February 13, 2008 the Corporation announced that its Board of Directors
authorized a stock repurchase program under which the Corporation may repurchase
up to $10 million of its outstanding common stock. The share repurchase program
authorizes the repurchase of shares through February 2010, from time to time,
through transactions in the open market or in privately negotiated transactions.
The number of shares to be purchased and the timing of the purchases are based
on market conditions and other factors. The stock repurchase program does not
require the Corporation to repurchase any specific dollar value or number of
shares, and may be terminated by the Corporation at any time.
The
Corporation repurchased a total of 166,350 shares at an average price of $0.68
per share for approximately $0.1 million. A discussion of the
repurchase program and such repurchases can be found in the Corporation’s
Quarterly Report for the quarter ended March 31, 2008 filed on May 9,
2008.
On
October 26, 2009, TranSwitch, pursuant to separate exchange agreements, each
dated October 20, 2009 with each of the holders of all of the Corporation’s 2010
Notes, completed the exchange of $10,013,000 aggregate principal amount of its
2010 Notes for an equal principal amount of new 5.45% Convertible Notes due
September 30, 2011 (the “2011 Notes”) in a private offering pursuant to Section
3(a)(9) of the Securities Act of 1933, as amended (the “Securities
Act”).
The 2011
Notes were issued under an indenture dated October 26, 2009 by and among the
Corporation and U.S. Bank National Association, as trustee. The 2011 Notes will
mature on September 30, 2011 and are convertible into shares of the
Corporation’s common stock. The issuance of the 2011 Notes and the
underlying shares of common stock were not been registered under the Securities
Act in reliance on Section 3(a)(9) of the Securities Act.
A
discussion of the issuance of the 2011 Notes and the Corporation’s underlying
common stock is included in the Corporation’s Current Report on Form 8-K filed
on October 26, 2009.
67
Item 16. Exhibits and Financial Statement
Schedules.
Exhibit
Number
|
Description
|
|
3.1
|
Amended
and Restated Certificate of Incorporation, as amended to date (previously
filed as Exhibit 3.1 to TranSwitch Corporation’s Quarterly Report on Form
10-Q for the quarter ended March 31, 2005 and incorporated herein by
reference).
|
|
3.2
|
Second
Amended and Restated By-Laws, (previously filed as Exhibit 3.1 to
TranSwitch Corporation’s Current Report on Form 8-K as filed with the SEC
on October 17, 2007 and incorporated herein by
reference).
|
|
3.3
|
Certificate
of Amendment of Amended and Restated Certificate of Incorporation
(previously filed as Exhibit 3.1 to TranSwitch Corporation’s Current
Report on Form 8-K as filed with the SEC on November 23, 2009 and
incorporated herein by reference).
|
|
3.4
|
Amended
Certificate of Designation of Series A Junior Participating Preferred
Stock of TranSwitch Corporation (previously filed as Exhibit 3.2 to
TranSwitch Corporation’s Current Report on Form 8-K as filed with the SEC
on November 23, 2009 and incorporated herein by
reference).
|
|
4.1
|
Specimen
certificate representing the common stock of TranSwitch Corporation
(previously filed as Exhibit 4.1 to TranSwitch Corporation’s Quarterly
Report on Form 10-Q for the quarter ended September 30, 2001 and
incorporated herein by reference).
|
|
4.2
|
Rights
Agreement, dated as of October 1, 2001, between TranSwitch Corporation and
EquiServe Trust Company, N.A., which includes the form of Rights
Certificate and the Summary of Rights to Purchase Preferred Shares
(previously filed as Exhibit 1 to TranSwitch Corporation’s Registration
Statement No. 0-25996 on Form 8-A filed on October 2, 2001 and
incorporated by reference herein).
|
|
4.3
|
Amendment
No. 1 to the Rights Agreement, between TranSwitch Corporation and
Computershare Trust Company, N.A. (formerly known as Equiserve Trust
Company, N.A) as Rights Agent, dated as of February 24,
2006 (previously filed as Exhibit 4.1 to TranSwitch
Corporation’s Current Report on Form 8-K as filed on February 28, 2006 and
incorporated herein by reference).
|
|
4.4
|
2005
Employee Stock Purchase Plan, as amended (previously filed as
Exhibit 99.1 to TranSwitch Corporation’s Current Report on Form 8-K as
filed with the Securities and Exchange Commission on August 12, 2009 and
incorporated herein by reference).
|
|
4.5
|
Form
of Employee Stock Purchase Plan Enrollment Authorization Form (previously
filed as Exhibit 4.3 to the Company’s Registration Statement on Form S-8
(File No. 333-126129) and incorporated herein by
reference).
|
|
4.6
|
Form
of Employee Stock Purchase Plan Change / Withdrawal Authorization Form
(previously filed as Exhibit 4.4 to the Company’s Registration Statement
on Form S-8 (File No. 333-126129) and incorporated herein by
reference).
|
|
4.7
|
2008
Equity Incentive Plan, as amended (previously filed as Exhibit 4.1 to
TranSwitch Corporation’s Quarterly Report on Form 10-Q for the quarter
ended June 30, 2009 and incorporated herein by
reference).
|
|
4.8
|
Form
of 2008 Equity Incentive Plan Stock Option Award Agreement (previously
filed as Exhibit 4.3 to TranSwitch Corporation’s Registration Statement on
Form S-8 (File No. 333-151113) and incorporated herein by
reference).
|
|
4.9
|
Form
of 2008 Equity Incentive Plan 102 Stock Option Award Agreement (previously
filed as Exhibit 4.4 to TranSwitch Corporation’s Registration Statement on
Form S-8 (File No. 333-151113) and incorporated herein by
reference).
|
|
4.10
|
Form
of Restricted Stock Award Agreement under the 2008 Equity Incentive Plan
(previously filed as Exhibit 4.5 to TranSwitch Corporation’s Registration
Statement on Form S-8 (File No. 333-151113) and incorporated herein by
reference).
|
|
4.11
|
Form
of Restricted Stock 102 Award Agreement under the 2008 Equity Incentive
Plan (previously filed as Exhibit 4.6 to TranSwitch Corporation’s
Registration Statement on Form S-8 (File No. 333-151113) and incorporated
herein by reference).
|
|
4.12
|
Form
of Non-Qualified Stock Option Award to Director Agreement under the 2008
Equity Incentive Plan (previously filed as Exhibit 4.7 to TranSwitch
Corporation’s Registration Statement on Form S-8 (File No. 333-151113) and
incorporated herein by reference).
|
|
4.13
|
Form
of 2008 Equity Incentive Plan 102 Stock Award Agreement (previously filed
as Exhibit 4.8 to TranSwitch Corporation’s Registration Statement on Form
S-8 (File No. 333-151113) and incorporated herein by
reference).
|
|
4.14
|
Indenture
between TranSwitch Corporation and U.S. Bank National Trust (previously
filed as Exhibit 4.1 to TranSwitch Corporation’s Current Report on Form
8-K as filed with the Securities and Exchange Commission on October 26,
2009 and incorporated herein by reference).
|
|
4.15**
|
Form
of Subscription Rights Certificate.
|
|
5.1**
|
Form
of Opinion of Brown Rudnick LLP regarding legality of securities
registered.
|
|
10.1
|
Third
Amended and Restated 1995 Stock Option Plan, as amended (previously filed
as an exhibit to TranSwitch Corporation’s Current Report on Form 8-K as
filed on May 23, 2005 and incorporated herein by
reference).
|
68
10.2
|
1995
Non-Employee Director Stock Option Plan, as amended (previously filed as
Exhibit 4.4 to the TranSwitch Corporation’s Registration Statement on Form
S-8 (File No. 333-89798) and incorporated herein by
reference).
|
|
10.3
|
Form
of Incentive Stock Option Agreement under the 1995 Stock Plan (previously
filed as an exhibit to the TranSwitch Corporation’s Registration Statement
on Form S-8 (File No. 333-94234) and incorporated herein by
reference).
|
|
10.4
|
Form
of Non-Qualified Stock Option Agreement under the 1995 Stock Plan
(previously filed as an exhibit to the TranSwitch Corporation’s
Registration Statement on Form S-8 (File No. 333-94234) and incorporated
herein by reference).
|
|
10.5
|
Form
of Non-Qualified Stock Option Agreement under the 1995 Non-Employee
Director Stock Option Plan (previously filed as an exhibit to the
TranSwitch Corporation’s Registration Statement on Form S-8 (File No.
333-94234) and incorporated herein by reference).
|
|
10.6
|
Lease
Agreement, as amended, with Robert D. Scinto (previously filed as Exhibit
10.14 to the TranSwitch Corporation’s Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 and incorporated herein by
reference).
|
|
10.7
|
2000
Stock Option Plan (previously filed as Exhibit 4.2 to TranSwitch
Corporation’s Registration Statement on Form S-8 (File No. 333-75800) and
incorporated by reference herein).
|
|
10.8
|
Form
of Non-Qualified Stock Option Agreement under the 2000 Stock Option Plan
(previously filed as Exhibit 4.3 to TranSwitch Corporation’s Registration
Statement on Form S-8 (File No. 333-75800) and incorporated by reference
herein).
|
|
10.9
|
1999
Stock Incentive Plan of Onex Communications Corporation (previously filed
as Exhibit 4.2 to TranSwitch Corporation’s Registration Statement on Form
S-8 (File No. 333-70344) and incorporated by reference
herein).
|
|
10.10
|
Form
of Incentive Stock Option Agreement under the 1999 Stock Incentive Plan of
Onex Communications Corporation (previously filed as Exhibit 4.3 to
TranSwitch Corporation’s Registration Statement on Form S-8 (File No.
333-70344) and incorporated by reference herein).
|
|
10.11
|
Form
of Director Non-Qualified Stock Option Agreement under the Third Amended
and Restated 1995 Stock Option Plan, as amended (previously filed as
Exhibit 10.1 to TranSwitch Corporation’s Current Report on Form 8-K as
filed with the SEC on May 25, 2007 and incorporated herein by
reference).
|
|
10.12
|
Agreement
and Plan of Merger by and among TranSwitch Corporation, Centillium
Communications, Inc., Sonnet Acquisition Corporation and Haiku Acquisition
Corporation, dated as of July 9, 2008 (previously filed as Exhibit 10.1 to
TranSwitch Corporation’s Current Report on Form 8-K as filed with the
Securities and Exchange Commission on July 11, 2008 and incorporated
herein by reference).
|
|
10.13
|
Exchange
Agreement by and among TranSwitch Corporation, QVT Fund LP and
Quintessence Fund LP (previously filed as Exhibit 10.1 to TranSwitch
Corporation’s Current Report on Form 8-K as filed with the Securities and
Exchange Commission on October 26, 2009 and incorporated herein by
reference).
|
|
10.14
|
Exchange
Agreement by and among TranSwitch Corporation, JGB Capital LP, JGB Capital
Offshore Ltd. and SAMC LLC (previously filed as Exhibit 10.2 to TranSwitch
Corporation’s Current Report on Form 8-K as filed with the Securities and
Exchange Commission on October 26, 2009 and incorporated herein by
reference).
|
|
10.15
|
Employment
Agreement dated November 5, 2009 between Dr. M. Ali Khatibzadeh and
TranSwitch Corporation (previously filed as Exhibit 10.1 to TranSwitch
Corporation’s Current Report on Form 8-K as filed with the Securities and
Exchange Commission on November 12, 2009 and incorporated herein by
reference).
|
|
10.16
|
Common
Stock Purchase Agreement dated December 31, 2009 by and between TranSwitch
Corporation and Seaside 88, LP (previously filed as Exhibit 10.1 to
TranSwitch Corporation’s Current Report on Form 8-K as filed with the
Securities and Exchange Commission on January 4, 2010 and incorporated
herein by reference).
|
|
10.17
|
Form
of Director Indemnification Agreement as executed with each director of
TranSwitch Corporation (previously filed as Exhibit 10.1 to TranSwitch
Current Report on Form 8-K as filed with the Securities and Exchange
Commission on April 9, 2009 and incorporated herein by
reference).
|
|
10.18
|
Form
of Director Restricted Stock Unit Award Agreement under the 2008 Equity
Incentive Plan (previously filed as Exhibit 10.1 to TranSwitch
Corporation’s Current Report on Form 8-K as filed on May 27, 2009 and
incorporated herein by reference).
|
|
10.19
|
Letter Agreement
by and between TranSwitch Corporation and Robert Bosi, dated as of
February 13, 2009 (previously filed as Exhibit 10.1 to TranSwitch
Corporation’s Quarterly Report on Form 10-Q for the quarter ended March
31, 2009 and incorporated herein by reference).
|
|
10.20
|
Sublease
Agreement by and between TranSwitch Corporation and Sikorsky Aircraft
Corporation, dated as of March 3, 2009 (previously filed as Exhibit 10.2
to TranSwitch Corporation’s Quarterly Report on Form 10-Q for the quarter
ended March 31, 2009 and incorporated herein by
reference).
|
|
10.21
|
Separation
Agreement by and between TranSwitch Corporation and Dr. Santanu Das, dated
as of November 6, 2009 (previously filed as Exhibit 21.1 to TranSwitch
Corporation’s Annual Report on Form 10-K for the year ended December 31,
2009 and incorporated herein by reference).
|
|
10.22
|
Consulting
Agreement by and between TranSwitch Corporation and Dr. Santanu Das, dated
as of November 6, 2009 (previously filed as Exhibit 21.1 to TranSwitch
Corporation’s Annual Report on Form 10-K for the year ended December 31,
2009 and incorporated herein by
reference).
|
69
10.23
|
Business
Financing Agreement by and between TranSwitch Corporation and Bridge Bank,
National Association, dated as of March 12, 2010 (previously filed as
Exhibit 21.1 to TranSwitch Corporation’s Annual Report on Form 10-K for
the year ended December 31, 2009 and incorporated herein by
reference).
|
|
21.1
|
Subsidiaries
of the Registrant (previously filed as Exhibit 21.1 to TranSwitch
Corporation’s Annual Report on Form 10-K for the year ended December 31,
2009 and incorporated herein by reference).
|
|
23.1*
|
Consent
of Independent Registered Public Accounting Firm (filed
herewith).
|
|
24.1
|
Power
of Attorney (set forth on signature page).
|
|
99.1**
|
Form
of Instructions as to Use of TranSwitch Corporation Subscription Rights
Certificates.
|
|
99.2**
|
Form
of Letter to Clients.
|
|
99.3**
|
Form
of Letter to Security Dealers, Commercial Banks, Trust Companies and Other
Nominees.
|
|
99.4**
|
Form
of Nominee Holder Certification.
|
|
99.5**
|
Beneficial
Owner Election Form.
|
|
99.6**
|
Form
of Letter to Shareholders.
|
*
|
Filed
herewith.
|
**
|
To
be filed by amendment.
|
Item 17. Undertakings.
The
undersigned Registrant hereby undertakes:
(1) To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i)
|
To
include any prospectus required by Section 10(a)(3) of the Securities
Act of 1933;
|
(ii)
|
To
reflect in the prospectus any facts or events arising after the effective
date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration
statement (notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any deviation from
the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than 20% change in the maximum aggregate offering price
set forth in the “Calculation of Registration Fee” table in the effective
registration statement); and
|
(iii)
|
To
include any material information with respect to the plan of distribution
no previously disclosed in the registration statement or any material
change to such information in the registration
statement.
|
(2) That,
for the purpose of determining liability under the Securities Act of 1933, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
(4) That,
for purposes of determining any liability under the Securities Act of 1933, each
filing of the registrant’s annual report pursuant to section 13(a) or section
15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing
of an employee benefit plan’s annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(5) To
supplement the prospectus, after the expiration of the subscription period, to
set forth the results of the subscription offer and the terms of any subsequent
reoffering thereof.
(6) To
deliver or cause to be delivered with the prospectus, to each person to whom the
prospectus is sent or given, the latest annual report to security holders that
is incorporated by reference in the prospectus and furnished pursuant to and
meeting the requirements of Rule 14a-3 or Rule 14c-3 under the Securities
Exchange Act of 1934; and, where interim financial information required to be
presented by Article 3 of Regulation S-X are not set forth in the prospectus, to
deliver, or cause to be delivered to each person to whom the prospectus is sent
or given, the latest quarterly report that is specifically incorporated by
reference in the prospectus to provide such interim financial
information.
70
(7)
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(8) For
the purpose of determining any liability under the Securities Act of 1933, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to rule 424(b)(1), or (4), or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
71
Pursuant
to the requirements of the Securities Act of 1933, as amended, has duly caused
this registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Shelton, in the State of Connecticut,
on April 13, 2010.
TRANSWITCH
CORPORATION
|
|||
By:
|
/s/
Dr.
M. Ali Khatibzadeh
|
||
Dr.
M. Ali Khatibzadeh
President
and Chief Executive
Officer
|
April
13, 2010
POWER
OF ATTORNEY AND SIGNATURES
We, the
undersigned named executive officers and directors of TranSwitch Corporation,
hereby severally constitute and appoint Dr. M. Ali Khatibzadeh and Mr. Robert A.
Bosi, 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 Registrant and in the
capacities and on the dates indicated.
Name
and Signature
|
|
Title(s)
|
Date
|
|
/s/
Dr. M. Ali Khatibzadeh
|
||||
Dr.
M. Ali Khatibzadeh
|
|
President
and Chief Executive Officer (principal
executive
officer) |
April
13, 2010
|
|
/s/
Mr. Robert A. Bosi
|
||||
Mr.
Robert A. Bosi
|
|
Vice
President and Chief Financial Officer (principal financial
and accounting officer) |
April
13, 2010
|
|
/s/
Mr. Gerald F. Montry
|
||||
|
|
Director
and Chairman of the Board
|
April
13, 2010
|
|
Mr.
Gerald F. Montry
|
||||
/s/
Mr. Faraj Aalaei
|
||||
Mr.
Faraj Aalaei
|
|
Director
|
April
13, 2010
|
|
/s/
Mr. Thomas Baer
|
||||
|
|
Director
|
April
13, 2010
|
|
Mr.
Thomas Baer
|
||||
/s/
Mr. Herbert Chen
|
||||
Mr.
Herbert Chen
|
|
Director
|
April
13, 2010
|
|
/s/
Mr. Michael Crawford
|
||||
Mr.
Michael Crawford
|
|
Director
|
April
13, 2010
|
|
/s/
Dr. Santanu Das
|
||||
Dr.
Santanu Das
|
|
Director
|
April
13, 2010
|
|
/s/
Mr. James M. Pagos
|
||||
Mr.
James M. Pagos
|
|
Director
|
April
13, 2010
|
|
/s/
Mr. Sam Srinivasan
|
||||
Mr.
Sam Srinivasan
|
|
Director
|
April
13,
2010
|
72
Exhibits
|
||
Exhibit
Number
|
Description
|
|
3.1
|
Amended
and Restated Certificate of Incorporation, as amended to date (previously
filed as Exhibit 3.1 to TranSwitch Corporation’s Quarterly Report on Form
10-Q for the quarter ended March 31, 2005 and incorporated herein by
reference).
|
|
3.2
|
Second
Amended and Restated By-Laws, (previously filed as Exhibit 3.1 to
TranSwitch Corporation’s Current Report on Form 8-K as filed with the SEC
on October 17, 2007 and incorporated herein by
reference).
|
|
3.3
|
Certificate
of Amendment of Amended and Restated Certificate of Incorporation
(previously filed as Exhibit 3.1 to TranSwitch Corporation’s Current
Report on Form 8-K as filed with the SEC on November 23, 2009 and
incorporated herein by reference).
|
|
3.4
|
Amended
Certificate of Designation of Series A Junior Participating Preferred
Stock of TranSwitch Corporation (previously filed as Exhibit 3.2 to
TranSwitch Corporation’s Current Report on Form 8-K as filed with the SEC
on November 23, 2009 and incorporated herein by
reference).
|
|
4.1
|
Specimen
certificate representing the common stock of TranSwitch Corporation
(previously filed as Exhibit 4.1 to TranSwitch Corporation’s Quarterly
Report on Form 10-Q for the quarter ended September 30, 2001 and
incorporated herein by reference).
|
|
4.2
|
Rights
Agreement, dated as of October 1, 2001, between TranSwitch Corporation and
EquiServe Trust Company, N.A., which includes the form of Rights
Certificate and the Summary of Rights to Purchase Preferred Shares
(previously filed as Exhibit 1 to TranSwitch Corporation’s Registration
Statement No. 0-25996 on Form 8-A filed on October 2, 2001 and
incorporated by reference herein).
|
|
4.3
|
Amendment
No. 1 to the Rights Agreement, between TranSwitch Corporation and
Computershare Trust Company, N.A. (formerly known as Equiserve Trust
Company, N.A) as Rights Agent, dated as of February 24,
2006 (previously filed as Exhibit 4.1 to TranSwitch
Corporation’s Current Report on Form 8-K as filed on February 28, 2006 and
incorporated herein by reference).
|
|
4.4
|
2005
Employee Stock Purchase Plan, as amended (previously filed as
Exhibit 99.1 to TranSwitch Corporation’s Current Report on Form 8-K as
filed with the Securities and Exchange Commission on August 12, 2009 and
incorporated herein by reference).
|
|
4.5
|
Form
of Employee Stock Purchase Plan Enrollment Authorization Form (previously
filed as Exhibit 4.3 to the Company’s Registration Statement on Form S-8
(File No. 333-126129) and incorporated herein by
reference).
|
|
4.6
|
Form
of Employee Stock Purchase Plan Change / Withdrawal Authorization Form
(previously filed as Exhibit 4.4 to the Company’s Registration Statement
on Form S-8 (File No. 333-126129) and incorporated herein by
reference).
|
|
4.7
|
2008
Equity Incentive Plan, as amended (previously filed as Exhibit 4.1 to
TranSwitch Corporation’s Quarterly Report on Form 10-Q for the quarter
ended June 30, 2009 and incorporated herein by
reference).
|
|
4.8
|
Form
of 2008 Equity Incentive Plan Stock Option Award Agreement (previously
filed as Exhibit 4.3 to TranSwitch Corporation’s Registration Statement on
Form S-8 (File No. 333-151113) and incorporated herein by
reference).
|
|
4.9
|
Form
of 2008 Equity Incentive Plan 102 Stock Option Award Agreement (previously
filed as Exhibit 4.4 to TranSwitch Corporation’s Registration Statement on
Form S-8 (File No. 333-151113) and incorporated herein by
reference).
|
|
4.10
|
Form
of Restricted Stock Award Agreement under the 2008 Equity Incentive Plan
(previously filed as Exhibit 4.5 to TranSwitch Corporation’s Registration
Statement on Form S-8 (File No. 333-151113) and incorporated herein by
reference).
|
|
4.11
|
Form
of Restricted Stock 102 Award Agreement under the 2008 Equity Incentive
Plan (previously filed as Exhibit 4.6 to TranSwitch Corporation’s
Registration Statement on Form S-8 (File No. 333-151113) and incorporated
herein by reference).
|
|
4.12
|
Form
of Non-Qualified Stock Option Award to Director Agreement under the 2008
Equity Incentive Plan (previously filed as Exhibit 4.7 to TranSwitch
Corporation’s Registration Statement on Form S-8 (File No. 333-151113) and
incorporated herein by reference).
|
|
4.13
|
Form
of 2008 Equity Incentive Plan 102 Stock Award Agreement (previously filed
as Exhibit 4.8 to TranSwitch Corporation’s Registration Statement on Form
S-8 (File No. 333-151113) and incorporated herein by
reference).
|
|
4.14
|
Indenture
between TranSwitch Corporation and U.S. Bank National Trust (previously
filed as Exhibit 4.1 to TranSwitch Corporation’s Current Report on Form
8-K as filed with the Securities and Exchange Commission on October 26,
2009 and incorporated herein by reference).
|
|
4.15**
|
Form
of Subscription Rights Certificate.
|
|
5.1**
|
Form
of Opinion of Brown Rudnick LLP regarding legality of securities
registered.
|
|
10.1
|
Third
Amended and Restated 1995 Stock Option Plan, as amended (previously filed
as an exhibit to TranSwitch Corporation’s Current Report on Form 8-K as
filed on May 23, 2005 and incorporated herein by
reference).
|
73
10.2
|
1995
Non-Employee Director Stock Option Plan, as amended (previously filed as
Exhibit 4.4 to the TranSwitch Corporation’s Registration Statement on Form
S-8 (File No. 333-89798) and incorporated herein by
reference).
|
|
10.3
|
Form
of Incentive Stock Option Agreement under the 1995 Stock Plan (previously
filed as an exhibit to the TranSwitch Corporation’s Registration Statement
on Form S-8 (File No. 333-94234) and incorporated herein by
reference).
|
|
10.4
|
Form
of Non-Qualified Stock Option Agreement under the 1995 Stock Plan
(previously filed as an exhibit to the TranSwitch Corporation’s
Registration Statement on Form S-8 (File No. 333-94234) and incorporated
herein by reference).
|
|
10.5
|
Form
of Non-Qualified Stock Option Agreement under the 1995 Non-Employee
Director Stock Option Plan (previously filed as an exhibit to the
TranSwitch Corporation’s Registration Statement on Form S-8 (File No.
333-94234) and incorporated herein by reference).
|
|
10.6
|
Lease
Agreement, as amended, with Robert D. Scinto (previously filed as Exhibit
10.14 to the TranSwitch Corporation’s Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 and incorporated herein by
reference).
|
|
10.7
|
2000
Stock Option Plan (previously filed as Exhibit 4.2 to TranSwitch
Corporation’s Registration Statement on Form S-8 (File No. 333-75800) and
incorporated by reference herein).
|
|
10.8
|
Form
of Non-Qualified Stock Option Agreement under the 2000 Stock Option Plan
(previously filed as Exhibit 4.3 to TranSwitch Corporation’s Registration
Statement on Form S-8 (File No. 333-75800) and incorporated by reference
herein).
|
|
10.9
|
1999
Stock Incentive Plan of Onex Communications Corporation (previously filed
as Exhibit 4.2 to TranSwitch Corporation’s Registration Statement on Form
S-8 (File No. 333-70344) and incorporated by reference
herein).
|
|
10.10
|
Form
of Incentive Stock Option Agreement under the 1999 Stock Incentive Plan of
Onex Communications Corporation (previously filed as Exhibit 4.3 to
TranSwitch Corporation’s Registration Statement on Form S-8 (File No.
333-70344) and incorporated by reference herein).
|
|
10.11
|
Form
of Director Non-Qualified Stock Option Agreement under the Third Amended
and Restated 1995 Stock Option Plan, as amended (previously filed as
Exhibit 10.1 to TranSwitch Corporation’s Current Report on Form 8-K as
filed with the SEC on May 25, 2007 and incorporated herein by
reference).
|
|
10.12
|
Agreement
and Plan of Merger by and among TranSwitch Corporation, Centillium
Communications, Inc., Sonnet Acquisition Corporation and Haiku Acquisition
Corporation, dated as of July 9, 2008 (previously filed as Exhibit 10.1 to
TranSwitch Corporation’s Current Report on Form 8-K as filed with the
Securities and Exchange Commission on July 11, 2008 and incorporated
herein by reference).
|
|
10.13
|
Exchange
Agreement by and among TranSwitch Corporation, QVT Fund LP and
Quintessence Fund LP (previously filed as Exhibit 10.1 to TranSwitch
Corporation’s Current Report on Form 8-K as filed with the Securities and
Exchange Commission on October 26, 2009 and incorporated herein by
reference).
|
|
10.14
|
Exchange
Agreement by and among TranSwitch Corporation, JGB Capital LP, JGB Capital
Offshore Ltd. and SAMC LLC (previously filed as Exhibit 10.2 to TranSwitch
Corporation’s Current Report on Form 8-K as filed with the Securities and
Exchange Commission on October 26, 2009 and incorporated herein by
reference).
|
|
10.15
|
Employment
Agreement dated November 5, 2009 between Dr. M. Ali Khatibzadeh and
TranSwitch Corporation (previously filed as Exhibit 10.1 to TranSwitch
Corporation’s Current Report on Form 8-K as filed with the Securities and
Exchange Commission on November 12, 2009 and incorporated herein by
reference).
|
|
10.16
|
Common
Stock Purchase Agreement dated December 31, 2009 by and between TranSwitch
Corporation and Seaside 88, LP (previously filed as Exhibit 10.1 to
TranSwitch Corporation’s Current Report on Form 8-K as filed with the
Securities and Exchange Commission on January 4, 2010 and incorporated
herein by reference).
|
|
10.17
|
Form
of Director Indemnification Agreement as executed with each director of
TranSwitch Corporation (previously filed as Exhibit 10.1 to TranSwitch
Current Report on Form 8-K as filed with the Securities and Exchange
Commission on April 9, 2009 and incorporated herein by
reference).
|
|
10.18
|
Form
of Director Restricted Stock Unit Award Agreement under the 2008 Equity
Incentive Plan (previously filed as Exhibit 10.1 to TranSwitch
Corporation’s Current Report on Form 8-K as filed on May 27, 2009 and
incorporated herein by reference).
|
|
10.19
|
Letter Agreement
by and between TranSwitch Corporation and Robert Bosi, dated as of
February 13, 2009 (previously filed as Exhibit 10.1 to TranSwitch
Corporation’s Quarterly Report on Form 10-Q for the quarter ended March
31, 2009 and incorporated herein by reference).
|
|
10.20
|
Sublease
Agreement by and between TranSwitch Corporation and Sikorsky Aircraft
Corporation, dated as of March 3, 2009 (previously filed as Exhibit 10.2
to TranSwitch Corporation’s Quarterly Report on Form 10-Q for the quarter
ended March 31, 2009 and incorporated herein by
reference).
|
|
10.21
|
Separation
Agreement by and between TranSwitch Corporation and Dr. Santanu Das, dated
as of November 6, 2009 (previously filed as Exhibit 21.1 to TranSwitch
Corporation’s Annual Report on Form 10-K for the year ended December 31,
2009 and incorporated herein by reference).
|
|
10.22
|
Consulting
Agreement by and between TranSwitch Corporation and Dr. Santanu Das, dated
as of November 6, 2009 (previously filed as Exhibit 21.1 to TranSwitch
Corporation’s Annual Report on Form 10-K for the year ended December 31,
2009 and incorporated herein by
reference).
|
74
10.23
|
Business
Financing Agreement by and between TranSwitch Corporation and Bridge Bank,
National Association, dated as of March 12, 2010 (previously filed as
Exhibit 21.1 to TranSwitch Corporation’s Annual Report on Form 10-K for
the year ended December 31, 2009 and incorporated herein by
reference).
|
|
21.1
|
Subsidiaries
of the Registrant (previously filed as Exhibit 21.1 to TranSwitch
Corporation’s Annual Report on Form 10-K for the year ended December 31,
2009 and incorporated herein by reference).
|
|
23.1*
|
Consent
of Independent Registered Public Accounting Firm (filed
herewith).
|
|
24.1
|
Power
of Attorney (set forth on signature page).
|
|
99.1**
|
Form
of Instructions as to Use of TranSwitch Corporation Subscription Rights
Certificates.
|
|
99.2**
|
Form
of Letter to Clients.
|
|
99.3**
|
Form
of Letter to Security Dealers, Commercial Banks, Trust Companies and Other
Nominees.
|
|
99.4**
|
Form
of Nominee Holder Certification.
|
|
99.5**
|
Beneficial
Owner Election Form.
|
|
99.6**
|
Form
of Letter to
Shareholders.
|
*
Filed herewith.
**
To be filed by amendment.
75