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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- - ACT OF 1934
For the fiscal year ended December 31, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- - EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission file number 000-26401
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GLOBESPAN, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2658218
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
100 Schulz Drive, Red Bank, New Jersey 07701
(Address of principal executive offices) (Zip Code)
(732) 345-7500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. X Yes No - -
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X -
The aggregate market value of voting stock held by non-affiliates of the
registrant as of February 28, 2001 (based on the closing price for the common
stock on the Nasdaq National Market on such date) was approximately
$1,109,688,000. As of February 28, 2001, 73,276,184 shares of common stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the Proxy Statement to be filed in connection with the
2001 Annual Meeting of Stockholders are incorporated by reference into Part III
of this Form 10-K report where indicated.
GLOBESPAN, INC.
FORM 10-K
DECEMBER 31, 2000
TABLE OF CONTENTS
Item Page No.
- ---- --------
PART I
1. Business............................................................... 1
2. Properties............................................................. 26
3. Legal Proceedings...................................................... 26
4. Submission of Matters to a Vote of Security Holders.................... 26
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters.. 27
6. Selected Financial Data................................................ 27
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 29
7A. Quantitative and Qualitative Disclosures About Market Risk............. 35
8. Financial Statements and Supplementary Data............................ 35
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................... 35
PART III
10. Directors and Executive Officers of the Registrant..................... 35
11. Executive Compensation................................................. 35
12. Security Ownership of Certain Beneficial Owners and Management......... 35
13. Certain Relationships and Related Transactions......................... 35
PART IV
14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K........ 36
Signatures............................................................. 58
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PART I
ITEM 1. BUSINESS
GENERAL
GlobeSpan, Inc. is a leading provider of advanced integrated circuits that
enable broadband digital communications to homes and business enterprises. We
design, develop and supply these integrated semiconductor chips, or chip sets,
for use in digital subscriber line, or DSL networks, which utilize the existing
network of copper telephone wires known as the local loop for the high-speed
transmission of data.
Our products target the rapidly growing market for high-speed data
transmission applications such as Internet access, telecommuting and networking
among branch offices. These transmission applications are expanding to include
voice and video transmissions over the same copper wire. We sell our integrated
circuits to equipment manufacturers for incorporation into products that are
sold to telecommunications service providers and end-users worldwide.
In an effort to provide system-level products to our customers, we have
developed chip set solutions that integrate the functionality of multiple
discrete components, memory, microprocessors and software onto a single chip
known as "System-On-Chip" solutions. These system-level products allow our
customers to reduce the time it takes for their products to reach the market and
to focus their resources on adding features and functions to differentiate their
product offerings from those of their competitors. Our recent acquisitions
provide us with additional design and product development resources and
expertise. We are utilizing these skills and resources to add greater networking
functionality to our chip sets and to capture more of the system functions used
in DSL system solutions in our products.
We have shipped our chip set solutions to a broad base of leading
communications equipment manufacturers, including Alcatel, Cisco Systems, Intel
Corporation, Lucent Technologies, NEC Corporation, Nokia Corporation and Nortel
Networks, among others.
INDUSTRY OVERVIEW
THE LAST MILE IS THE BOTTLENECK TO HIGH-SPEED NETWORK ACCESS
In recent years, consumers and businesses have become increasingly
dependent on instantaneous communications to others and access to multimedia
information worldwide. This trend has resulted in a 447% increase in the
installed base of DSL subscribers worldwide between 1999 and 2000 according to
estimates from International Data Corporation. The demand is driven by both the
increasing amounts of desirable information and entertainment content easily
accessed through the Internet and expanded service offerings such as Internet
Web sites, business-to-business electronic commerce, high quality video
communication and lower cost telephone services. Consumers are increasingly
demanding broadband service in their homes in order to quickly transmit large
amounts of data such as highly graphical Web-sites and audio and video content.
Small-businesses, self-employed individuals and corporate telecommuters are also
demanding the same access speeds from their home offices as they would
experience at corporate offices.
Continual improvement in the performance and affordability of products used
to connect to these networks such as set-top boxes, personal computers and
Integrated Access Devices, or IADs, has placed severe bandwidth stress on the
networks. Network wide area service providers that provide the main transmission
channels, or backbone, connecting network nodes (telephone company central
offices) have continually upgraded the transmission capacity of their network
infrastructure to meet the demand for high-speed data transmission. While the
network backbone is now capable of delivering data at very high speeds, an
access bottleneck continues to exist in the network connection between the
service providers' central offices and the end-users' homes and businesses,
commonly referred to as the "last mile". Copper wire telephone lines comprising
the "local loop" and cable TV systems, which have been used to make this last
mile connection, have not been able to provide the data transmission capacity to
keep pace with the growing bandwidth demand. This communications bottleneck has
created difficult challenges for network service providers and equipment
manufacturers to deliver new solutions that overcome the last mile bandwidth
limitations.
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COMPETITION TO DELIVER HIGH-SPEED NETWORK ACCESS
The evolving development of the Internet and virtual private networks,
which use the Internet backbone, allow unprecedented communication capabilities
to nearly any location in the world. However, to realize the full potential of
the Internet broadband backbone, service providers and equipment manufacturers
must offer practical solutions to overcome the bandwidth bottleneck of the last
mile connection. Legacy network access services offered by telephone companies,
such as T1 or E1 lines, provide broadband access speeds but are too costly for
the average consumer. Legacy dial-up modems are very affordable for the consumer
or telecommuter, but the maximum data rate of 56 kilobits per second, or Kbps,
can frustrate users and impede productivity.
Until recently, traditional regional telephone companies were the exclusive
operators of the local loop. These companies are now being forced by governments
and enforcement agencies to open portions of their network to competing
providers. These deregulation initiatives have created opportunities for
competing service providers and equipment manufacturers to develop and deploy
competitive solutions to overcome the bandwidth limitations in the last mile
connection. In addition, other service providers, including cable, wireless and
direct broadcast satellite companies, are providing high-speed data transmission
services in the last mile outside of the existing telephone network. Cable
services are deployed over the cable television infrastructure at transmission
rates of up to 40 megabits per second, or Mbps. Cable competes effectively with
other high-speed data transmission technologies, particularly in the residential
market, because it enables fast data transmission speeds at comparatively low
cost and uses the existing infrastructure of coaxial cable. Wireless and direct
broadcast satellite systems transmit digital data without terrestrial lines at
speeds of more than 10 Mbps. Many of these services are at an early stage of
development, but they are expected to provide cost-effective high-speed data
transmission. In addition, some telecommunications service providers are
delivering high-speed data transmission services to large businesses in major
metropolitan areas over locally installed fiber networks. These systems use
fiber optic cable and very high frequency laser light transmission technology to
provide the last mile connection. Fiber optic systems offer highly reliable
transmission data rates that exceed 1 gigabit per second. Although local fiber
networks have not generally been cost effective to deploy for small business and
home users, fiber networks will compete effectively in the market for high-speed
data transmission services, particularly for large businesses. As the volume of
data traffic increases, high-speed data transmission services have become a key
competitive service offering for these providers.
Equipment manufacturers have made great strides to develop interoperable
DSL modems that meet American National Standards Institute, or ANSI, and
International Telecommunications Union, or ITU, standards for high-speed digital
transmission over copper wire telephone lines. Deregulation of communication
networks has allowed competitive local exchange carriers, or CLECs, to gain
access to the telephone companies' local loop lines, which they are currently
using to provide high-speed data, voice and video services. The telephone
companies recognize that the satellite, wireless, fiber, cable and CLEC service
providers are serious threats to win consumer and business customers that have
traditionally been served by them. To protect the business relationship with
their existing customers and preserve the opportunity to increase revenue from
additional services (such as Internet access and additional voice services),
telephone companies are committing significant capital and resources to rapidly
deploy DSL equipment.
DSL TECHNOLOGY ENABLES HIGH-SPEED DATA TRANSMISSION OVER COPPER TELEPHONE WIRE
DSL technology has several important advantages over other high-speed
technologies, including:
DEDICATED BANDWIDTH. DSL is a point-to-point technology that connects
the end user to the service provider's central office over a copper
telephone wire. Because DSL connections are dedicated to one user, DSL does
not suffer from service degradation as other users are added in the
neighborhood, and allows a higher level of security. Some alternative
high-speed data transmission solutions, such as cable and wireless, are
shared systems, which may suffer performance degradation and increase the
risk of security breaches as additional users are added.
LOW COST INFRASTRUCTURE. Because DSL uses the existing local loop
copper telephone line that is used for standard telephone voice service,
DSL can be significantly less expensive to deploy to businesses and homes
than other high-speed data transmission technologies that require new or
upgraded infrastructure.
USER INSTALLED. DSL equipment can readily be installed by the end user
without requiring on-site support from the service provider, a critical
cost saving factor for the customer and the service provider over other
last mile technology solutions.
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BROAD COVERAGE. Since virtually all businesses and homes worldwide
have installed copper telephone wire connections for standard telephone
service, DSL access services can be made immediately available using the
same copper wire for a large percentage of potential end users.
DSL technology uses sophisticated digital signal processing techniques to
achieve high-speed data transmission over copper telephone wires. DSL technology
addresses different high-speed data transmission service requirements resulting
in several configuration options. Transmission rates of DSL modems range from
256 Kbps up to 50 Mbps, depending upon the length and transmission
characteristics of the copper wire as well as the capabilities of the DSL
equipment. For each of these configuration options, a DSL chip set is needed on
each end of the copper telephone wire for every end-user. Symmetric transmission
technologies, such as high bit-rate DSL, or HDSL, and symmetric high bit-rate
DSL, or SHDSL, provide equal data transmission rates in both directions between
the service provider's central office and the end-user. These configurations are
therefore most ideally suited for business applications and networking between
branch offices. Symmetric technologies transmit signal power in the frequency
band from 0 hertz to 80 kilohertz or higher. Since standard analog voice
telephone service signals use the frequency range from 0 hertz to 4 kilohertz,
the DSL and voice signals would interfere with each other, making it impractical
to provide both analog telephone service and symmetric DSL service over the same
copper telephone wire. Asymmetric transmission technologies, such as asymmetric
DSL, or ADSL, provide greater downstream transmission rates from a central
office to the end user than upstream transmission from the end user.
Applications most efficiently served by asymmetric technologies include Internet
access and telecommuting where data traffic flows primarily downstream. Since
ADSL transmits its signal power in a higher frequency band on the copper wire
than the 4 kilohertz frequency band used for standard analog voice service, ADSL
access and voice service can be used simultaneously without interference between
the two on the same copper telephone wire. The option to offer multiple services
to the customer on an existing local loop connection provides a competitive
advantage for the service provider.
In a typical deployment of DSL service, DSL equipment is connected to a
personal computer in a residence or to a router in a business where multiple
personal computers may be connected. The end user is connected to the service
providers' central office over a copper telephone wire that is terminated at the
central office by a digital subscriber line access multiplexer, or DSLAM, unit
that provides the DSL connections for hundreds of users. Copper telephone wire
is broadly deployed to most home and business locations worldwide, with over 800
million lines installed worldwide according to the estimates by the
International Telecommunications Union. This minimizes the requirement for
additional capital investment to install transmission infrastructure in
comparison to other broadband deployment alternative and has positioned the
copper telephone wire network as an economic and immediately available means for
mass deployment of broadband data, voice and video services.
CHALLENGES TO DSL SERVICE PROVIDERS
DSL services are in the initial ramp-up phases of worldwide deployment. To
continue to be a compelling alternative to other data transmission services, DSL
services must:
o Meet data transmission rate requirements to satisfy end user
bandwidth needs;
o Meet central office DSLAM equipment constraints for size, power,
performance and reliability;
o Meet customer premises equipment constraints for feature sets and
ease of installation and use;
o Possess value-added functionality for the high-speed transmission of
data, voice and video;
o Reach a large potential end user base;
o Provide low equipment, installation and maintenance costs; and
o Be tested and proven through field deployment.
CHALLENGES TO DSL EQUIPMENT MANUFACTURERS
International Data Corporation estimates that the worldwide number of DSL
subscribers will expand rapidly from approximately 4.5 million in 2000 to 66.4
million in 2004. The projected growth of these services will require innovative
broadband products and services to be introduced into the market at attractive
prices. To take advantage of this opportunity, DSL equipment manufacturers must
design next generation products that overcome the challenges presented by the
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stringent and varying feature, function, performance and cost demands of the
service providers. Equipment manufactures must meet challenges in each of the
following areas:
o STANDARDS COMPLIANCE AND INTEROPERABILITY. Equipment manufacturers
must ensure that their products are compatible with industry standards
and interoperate with DSLAM and customer premises equipment made by
other manufacturers;
o PROGRAMMABILITY AND UPGRADABILITY. Evolving industry standards and
continuous improvements in DSL performance and function have
challenged equipment manufacturers to develop flexible solutions that
can be enhanced or reconfigured without replacement of the equipment;
o POWER CONSTRAINTS. Low power consumption is critical for the
addition of equipment within existing communication facilities.
Equipment manufactures must design DSLAMs that use minimum power
dissipation to operate within the service provider's specification;
o SIZE CONSTRAINTS. DSL systems must physically fit within the local
telephone company's existing infrastructure. This has challenged
equipment manufactures to develop DSLAMs that support hundreds of DSL
local loop lines in the smallest amount of physical space;
o INTEGRATION. Equipment manufacturers must integrate the maximum
possible system functions into a product to minimize both system
management costs and the number of different components required to
implement the system solution;
o PRODUCT CAPABILITIES. Equipment manufacturers must design products
that provide both symmetric and asymmetric DSL solutions to
efficiently offer a broad range of services to business and consumer
customers;
o PRODUCT COSTS AND USE. Equipment manufacturers must provide
cost-effective products for homes and businesses that can be easily
installed and operated by non-technical users; and
o PRODUCT PERFORMANCE. Equipment manufacturers must create solutions
that overcome the real-world impairments of the local loop, such as
line noise, to reach as many customers as possible at the greatest
speeds.
THE OPPORTUNITY FOR DEVELOPERS OF INTEGRATED CIRCUITS
In order to minimize time-to-market, development and product costs required
by service providers, DSL equipment manufacturers are designing system product
solutions around increasingly complex integrated circuits that account for a
large portion of the value-added proprietary content of these systems. While
equipment manufacturers have in-depth system knowledge, they often lack the core
technology expertise in signal processing, signal conversion, communications
algorithms and communication protocols that are required to develop these
integrated circuits. In addition, these solutions must overcome real-world
impairments of the local loop, such as line noise, which could otherwise degrade
transmission performance. As a result of these factors, DSL equipment
manufacturers are turning to integrated circuit developers to bring
high-performance, cost-effective solutions to market that include multiple
system functions. Successful solutions must offer field-proven technology,
high-performance, high levels of system integration, low power consumption,
flexibility to enhance features and performance, rapid time-to-market and
competitive total system cost.
We believe that equipment manufacturers can best meet these performance,
size and cost demands by designing their system-level products with
System-On-Chip integrated circuit solutions that incorporate multiple system
functions into a single integrated circuit package. By using highly integrated
System-On-Chip solutions, equipment manufacturers can utilize their engineering
resources to design additional features and functions into their products and
minimize their time to market.
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THE GLOBESPAN SOLUTION
We are a leading worldwide provider of DSL highly integrated circuits,
software and system designs that enable high-speed data transmission over the
local loop. We sell our integrated circuits to equipment manufacturers for
incorporation into products that are sold to telecommunications service
providers and end-users. We believe that we provide our customers with
significant value created by our leading System-On-Chip integrated circuits, our
heritage in the DSL market, our understanding of equipment manufacturers,
service provider and end-user needs, and our strong sales and support
organizations. Our programmable products are designed to comply with industry
standards, achieve interoperability with products made by other integrated
circuit providers, maximize the speed and reach of DSL systems, and provide
cost-effective solutions that are easily installed and operated by non-technical
users. Key elements of our solution include:
BREADTH OF CAPABILITIES. Between December 31, 1997 and December 31,
2000, we increased our employee base from 93 to 776, of which approximately
617 are involved in product development and customer support. With this
increase, we have broadened our core competencies and resources with the
capability to introduce new chip set products targeted to capture more of
the system functions used in DSL system solutions.
LONG HISTORY OF DSL EXPERIENCE. We have built on seven years of field
experience in implementing DSL technology to successfully bring proven DSL
chip set solutions to market. Our core engineering team includes several
individuals who were early developers of DSL technology at AT&T Bell Labs.
BROAD SUITE OF DSL SYSTEM SOLUTION CHIP SETS. We offer a broad suite
of DSL system solution chip sets, including ADSL, HDSL, HDSL2, SDSL, and
SHDSL chip sets, as well as multi-mode asymmetric and symmetric operation
and chip sets in other technologies complimentary to our DSL chip sets
including voice compression, echo cancellation, video compression and
application specific network processing chips.
ADVANCED SYSTEM-LEVEL EXPERTISE. Our system-level expertise enables us
to offer multiple system functions that can be most cost-effectively
incorporated into complete System-On-Chip solutions that contribute to
optimizing the performance, cost, and time to market of system products
used to deliver DSL network services. We provide comprehensive step-by-step
reference design guides that enable our customers to rapidly bring
innovative DSL system products to market.
COMPLETE SYSTEM-ON-CHIP. Our System-On-Chip solutions integrate the
functionality of multiple discrete components, memory and microprocessors
that provide DSL transmission, framing, communication protocol handling,
voice processing and multiple data interfaces onto a single chip. Our
System-On-Chip solutions for DSLAM products offer asymmetric or symmetric
DSL functions to support multiple local loop lines in a single chip, which
enables our DSLAM equipment manufacturers to design products to meet the
size and power constraints requirements of the service providers. Our
System-On-Chip solutions for home and business DSL products offer
asymmetric or symmetric DSL functions with universal serial bus, or USB,
peripheral component interconnect, or PCI, or Ethernet data interfaces on a
single chip with application software, which enables our customers to
design products to meet the easy to install and use requirements of the end
user.
HIGH-PERFORMANCE. Our chip sets are capable of performing billions of
operations per second. We believe the high-performance capability of our
chip sets enables us to deliver one of the industry's longest loop reach
per data transmission rates which allows telecommunications service
providers to offer services to a larger customer base.
SOFTWARE FLEXIBILITY. Our chip sets are highly programmable. Our
customers are able to enhance or reconfigure their products through
downloads of our software rather than through costly replacement or
modification of their installed DSL system products. This flexibility
enables telecommunications service providers to optimize performance and
keep pace with changing industry requirements, including features and
standards compliance. It also allows us to deliver a common chip set
platform that operates in many different modes through software control.
COMPETITIVE TOTAL SYSTEM COST. The high levels of integration in our
System-On-Chip solutions lead to low power consumption and density
advantages, thereby maximizing the number of local loop lines that can be
incorporated into a single broadband DSLAM system product. Higher system
density enables service providers to connect a larger number of end users
with their central office DSLAM equipment thereby reducing total cost per
end user. The high level of integration in our System-On-Chip solutions
used in home and business products offer multiple system functions in a
single chip, thereby minimizing equipment manufacturers' materials cost and
the manufacturing time required to produce the product.
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STRONG TECHNICAL SUPPORT. We provide superior technical support
throughout the design and test process to minimize our customers' costs and
time to get their product to market. We also provide comprehensive support
after our customers' products are installed in networks to ensure that our
customers' products perform optimally in real world environments.
STANDARDS COMPLIANCE AND INTEROPERABILITY. We actively participate in
the formulation of industry standards, which enables us to monitor industry
trends and refine our product development efforts to bring
standards-compliant solutions to market. We also actively participate in
interoperability testing to make sure that our products are compatible with
products being offered by other companies.
We believe these attributes make us a preferred design partner and supplier
of integrated circuits for DSL network system products.
STRATEGY
Our objective is to be the leading provider of integrated circuits,
software and system designs for the DSL market and other complementary
high-growth broadband communications markets. To achieve this objective, we are
pursuing the following strategies:
EXPAND OUR RESOURCES AND CAPABILITIES. Our strategy is to significantly
grow our position as one of the largest organizations dedicated to DSL system
solutions and to build on and expand our core competencies and capabilities to
support our growing customer base and the accelerating pace of DSL deployment.
We view strategic acquisitions as an important element in the expansion of our
resources and capabilities for DSL and complementary communication technologies.
MAXIMIZE DESIGN WIN MARKET SHARE. Our strategy is to maximize the number of
design wins with both new and existing customers. A design win represents a
customer's initial commitment to develop a product incorporating our chip sets.
We believe design wins are strategically important because once a customer has
designed our chip sets into its product, that customer is more likely to
continue to choose our solutions for additional products. Furthermore, achieving
the broadest number of design wins creates an opportunity to capitalize on the
success of any one of our customers' products. We maximize our ability to
compete for design wins by using our extensive sales representative organization
to access the greatest number of customers and further penetrate our existing
customer base.
TARGET ALL APPLICATIONS WITHIN THE DSL MARKET. Our strategy is to provide
the necessary technologies to enable all applications within the DSL market. We
are currently shipping chip sets based upon ADSL, HDSL, HDSL2, SDSL and SHDSL
technologies. Our chip sets are used in both central office and home and
business locations to enable high-speed data, voice and video applications such
as Internet access, voice and video over DSL, telecommuting and networking among
branch offices. We have introduced multi-mode asymmetric and symmetric chip sets
that interoperate with all applicable coding techniques, or line codes, and we
will continue to monitor industry trends and refine our product development
efforts to target emerging DSL data, voice and video applications.
STRENGTHEN AND BROADEN TECHNOLOGY LEADERSHIP. Our strategy is to continue
to build upon our strong technology core competencies to maintain our position
as a technology leader in the DSL market and utilize our core competencies to
expand our integrated circuit solutions for products complimentary to our DSL
technology. We are currently investing substantial development resources in
system-level knowledge, communications algorithms, signal processing and signal
conversion, voice compression, echo cancellation, video compression algorithms,
application specific network processing, and communication protocols. We are
devoting resources to enhance our high-performance algorithms and to increase
system integration by embedding more system functions on a single integrated
circuit. We invest significant resources in research and development and product
support and will continue to work closely with our customers to develop new and
enhanced solutions that address next-generation DSL network market
opportunities.
LEVERAGE ADVANCED SYSTEM-LEVEL EXPERTISE. Our strategy is to leverage our
advanced system-level expertise to develop and market chip sets that can be
cost-effectively and rapidly incorporated into complete DSL network system
solutions designed and manufactured by our customers. This strategy is intended
to enable our customers to optimize time-to-market, performance and system cost.
By working closely with our customers throughout the design and deployment
process, we gain valuable insights and are often able to anticipate their needs
and incorporate value-added functionality onto our chip sets. We gain additional
insights by continually testing our solutions against real-world models of DSL
networks to verify their performance in harsh and unpredictable deployment
environments. We have also used our system-level expertise to create
state-of-the-art system test facilities to verify the performance and operation
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of new chip sets. We have invested significant resources in automating our test
facility to maximize the efficiency and reliability of our tests. We will
continue to make our test facility readily available to our customers to verify
the performance of their DSL network system products. Furthermore, we will
continue to provide comprehensive reference design guides that enable our
customers to apply our system-level expertise to their products.
DRIVE INDUSTRY STANDARDS. We actively participate in the formulation of
industry standards for high-speed data transmission markets. We believe such
participation accelerates and expands the development of markets for our
products and provides valuable insights and relationships, which assist us in
directing our product development efforts to target emerging market
opportunities.
TECHNOLOGY CORE COMPETENCY
We believe that our technology expertise encompassing the entire DSL
network system solution design process, from the development of custom
integrated circuits and software to their integration into a system solution, is
our key competitive advantage. To address the technology challenges of DSL
transmission, voice and video compression, voice and video transmission and
network processing, we have developed and will continue to build upon our
primary technology core competencies, including system-level knowledge,
communications algorithms, voice processing and echo cancellation algorithms,
video processing algorithms, digital signal processing, signal conversion,
Asynchronous Transfer Mode protocol, or ATM, and Internet Protocol, or IP.
SYSTEM-LEVEL KNOWLEDGE. Our DSL network system-level knowledge has been
developed through years of field installation experience and working
relationships with over 150 equipment manufacturer customers and through the
acquisition of technology companies with system-level knowledge in voice
processing, video processing, application specific network processing, and
communication protocols. As a result, we understand the requirements for DSL
system solutions that include ATM and IP protocols, packet and cell aggregation,
switching and traffic management, voice and video transmission, voice gateways,
and recognize the harsh and varying conditions of the local loop that impact
reliable data transmission. The local loop environment is characterized by
various impairments that impact DSL operations and make reliable high-speed
data, voice and video transmission difficult to achieve. These factors include
bridge taps, cross-talk from adjacent wires in the same wire bundle, signal
attenuation and impulse noise spikes, among others. To minimize the effects of
these impairments, we will continue to incorporate our understanding of these
factors into our DSL chip set designs.
COMMUNICATIONS ALGORITHMS. A key component of our continued success is the
expertise that we have developed in the areas of communications theory and
algorithms. Communications algorithms are the processes and techniques used to
transform a digital data stream into a specially-conditioned analog signal
suitable for transmission across copper telephone wires. At the receiving end of
the copper telephone wire, our algorithms process the analog signal and
transform this data into a digital form without introducing data errors. We
invest significant resources to maintain our technology leadership in the
development of communications system algorithms in the areas of start-up
training, coding for forward error correction, line codes, echo cancellation,
adaptive equalizers, digital filter design and transmission line analysis. Our
broad theoretical knowledge base, coupled with our extensive DSL field
experience, has enabled our technology team to generate comprehensive DSL system
models utilizing computer-aided design tools. These models are used to design
our complex algorithms and to determine performance and architectural
requirements for our digital communications processor and analog front-end
chips. The knowledge gained from these simulations, combined with the advantages
of our programmable platform, enables us to optimize algorithm designs for
specific DSL applications across a broad range of local loop conditions. In
addition, we develop communications algorithms used specifically for data
compression coding and decoding critical to the transmission of digital voice
and video over copper wire telephone lines.
DIGITAL SIGNAL PROCESSING. Digital signal processing, as it relates to DSL
applications, is a means of encoding digital data for transmission over
bandwidth-limited media, such as copper telephone wires, and recovering the
encoded data at the receiving end. This process requires very high-speed,
high-precision silicon engines to meet the performance specifications of
telecommunications service providers. Digital signal processors are also used as
a means to implement voice, echo, and video processing algorithms. We are a
leader in the design of high-performance, low-power, silicon-efficient, digital
communications processors that optimize digital signal processing for DSL,
voice, echo cancellation and video applications. Our digital communications
processors are based on a proprietary architecture that incorporates concurrent
multi-tasking, multi-processor digital signal processing engines. Our digital
communications processor architecture provides system design flexibility without
the inherent power and costs normally associated with conventional, general
purpose digital signal processors. The performance and flexibility of our
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digital communications processor enables our customers to implement multiple DSL
configurations using different line codes and multiple voice and video
compression levels through a simple software download.
SIGNAL CONVERSION. Signal conversion is a component of our solution that
transforms digital signals into analog signals that are suitable for
transmission over copper telephone wires. Our analog front end includes a custom
integrated circuit that performs the signal conversion function, as well as a
combination of discrete components such as resistors, capacitors, linear
amplifiers and transformers. Our analog front end provides several programmable
analog functions critical to achieving high-speed and long-reach performance and
is capable of operating over a wide array of signal amplitudes and frequency
ranges associated with different line codes.
ATM AND IP PROTOCOL. ATM and IP protocol are being used to build the next
generation of communication infrastructure, including Voice over Packet. Our
network processing platforms and software solutions are used to build a
packet-based converged switching and routing network with guaranteed quality of
service for voice, data and multimedia applications. These technologies
represent critical components of broadband access systems and application
specific network devices.
APPLICATION SPECIFIC NETWORK PROCESSING. Network processing in DSL network
systems solutions provides a means for managing data traffic flow between
network core switching equipment, DSLAMs, and DSL products in homes and
businesses. The network processor platforms manage the data traffic flow to each
local loop and aggregates this traffic into a single high-speed data stream to
core switching equipment. Our expertise and experience in developing proprietary
reduced instruction set computers, or RISC, and the lower layers of the open
systems interconnection, or OSI, protocol stack enable us to integrate network
processing functions into our System-On-Chip integrated circuits used in DSL
network system solutions. Our hardware and software architecture enables us to
implement a cost-effective, programmable and scalable design to meet performance
demands for a broad range of bandwidth requirements and to add product features
and functions over time.
VOICE PROCESSING ALGORITHMS. Voice processing algorithms are the processes
and techniques used to convert analog voice signals into digital data that can
then be compressed and formatted into data packets for transmission over digital
networks. The algorithm also performs the reverse function to convert the
received digital data packets to analog form, reproducing the original speech
sounds and idle speech periods. Voice processing algorithms must have the
capability to accurately accommodate a wide variety of speech inflections of
worldwide languages and the broad frequency ranges of the male and female voice.
Speech sound quality resulting from the compression and decompression process is
highly dependent upon the implementation of the voice processing algorithm and
the speech to digital format compression ratio. We use these algorithms with our
proprietary digital signal processing technology to design voice transmission
features into our chip sets for use in voice gateway and integrated access
device products.
ECHO CANCELLATION ALGORITHMS. As a result of transmission signal delays
through a wide area network system, echo signals of speech are sometimes
reflected back to the speaker, making it difficult to conduct a conversation.
Echo cancellation algorithms are techniques and processes used to detect the
signal power and time period of the echo signal, and then perform an operation
to attenuate the echo so that it is not heard by the original speaker. Echo
compression algorithms are complex functions that are most efficiently
implemented with digital signal processing techniques. We incorporate these
algorithms with our proprietary digital signal processing technology into our
integrated circuit chip sets for use in network echo cancellor products.
VIDEO PROCESSING ALGORITHMS. Video signals used to create pictures on TV
sets are in analog signal formats that include both video and audio content.
Video processing algorithms are the processes and techniques used to transform
the analog video signal to digital data format. The algorithm performs highly
complex video compression schemes that minimize the amount of digital data
required to capture the video and sound content of the subject for transmission
over broadband networks or for storage on CD-ROMs or hard disk drives. The
algorithm also performs the reverse function to transform the compressed video
and audio data back into its analog form for presentation on TV sets or personal
video players. The video processing algorithm requires the use of very
high-speed digital processing techniques and complex algorithms to reproduce
high quality pictures and audio sounds. Our video digital signal processor is
based on proprietary architecture designed to optimize video processing
functions. Our video compression algorithms are designed to meet the Moving
Pictures Experts Group, or MPEG, international compression standard.
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PRODUCTS
We offer a broad suite of chip set solutions for DSL, voice and video
processing, and network protocol processing. Our product offerings include
various combinations of digital signal processor and an analog front end chip
sets, a reference design guide and software.
Our chip sets are software programmable, enabling a broad range of data
transmission rates, performance enhancements, feature upgrades and compliance
with industry standards. Through our use of outside integrated circuit
manufacturers, we have been producing high volumes of our current chip sets for
over three years and have shipped more than 12 million chip sets. Our
comprehensive, step-by-step reference design guides include schematics, bills of
materials, circuit board layouts, application interface programs, debug guides
and software. Our reference design guides enable equipment manufacturers to
bring innovative products to market quickly and cost-effectively.
DSL PRODUCTS
Our chip sets and reference design guides are optimized for specific
DSL applications, resulting in a variety of configuration options. Our chip
sets offer alternative packaging and bus interface options, and
standards-based line codes. We have designed a family of single
System-On-Chip integrated circuits for use in home and business DSL
products that incorporate a combination of multiple system functions. These
solutions can optionally include a DSL asymmetric or symmetric modem, an
application specific network processor, and Ethernet, PCI or USB data
interfaces.
HDSL. High bit rate digital subscriber line, or HDSL, is a
cost-effective alternative to traditional repeated T1 and E1 data services
for business applications. HDSL provides symmetric transmission over two
pairs of copper telephone wires at data transmission rates of T1 (1.544
Mbps)/ E1 (2.048 Mbps). Our HDSL chip sets use carrier amplitude phase
modulation, or CAP, and two bits per quadrant, or 2B1Q, line code which
incorporate a single or dual channel digital communications processor and
an analog front end. Our HDSL product meets the ANSI Technical Report TR28
draft 2 and the ITU standard G.991.
HDSL2. HDSL2 is a next generation HDSL configuration that provides
symmetric transmission over one pair of copper telephone wires rather than
two pairs, resulting in a more network-efficient and cost-effective
solution. We currently offer HDSL2 chip sets that use pulse amplitude
modulation, or PAM, line code and incorporate a single channel digital
communications processor and an analog front end. Our HDSL2 chip set is
designed to meet the HDSL2 standard T1.418-2000 defined in the United
States by the ANSI.
SDSL. Symmetric digital subscriber line, or SDSL, is a cost-effective
chip set primarily used for business applications. SDSL provides symmetric
transmission over one pair of copper telephone wires and provides data
rates ranging from 128 Kbps up to E1. We currently offer SDSL chip sets
that use CAP and 2B1Q line code which incorporate a single or dual channel
digital communications processor and an analog front end.
SHDSL. Symmetric high bit rate digital subscriber line, or SHDSL, is
an improved performance version of SDSL used to provide cost-effective
multi-rate symmetric transmission over one pair of copper telephone wires
at data transmission rates ranging from 144 Kbps to 2.3 Mbps. We currently
offer SHDSL chip sets that use the PAM line codes which incorporate a
single or dual channel digital communications processor and an analog front
end. Our SHDSL chip set is designed to meet the ITU standard G.991.2
ADSL. Asymmetric digital subscriber line, or ADSL, is used to provide
cost-effective, high-speed local loop access for Internet and other
applications where data flows downstream to the end user faster than it
does upstream from the end user. ADSL provides asymmetric transmission over
one pair of copper telephone wires with downstream data transmission rates
ranging from 90 Kbps to 12.0 Mbps and upstream data transmission rates
ranging from 45 Kbps to 1.1 Mbps. ADSL allows the telephone line to be used
simultaneously for voice and data transmission. We currently offer ADSL
chip sets which incorporate single and multiple channel analog front end
and single and multiple channel digital communications processor chip that
use CAP or discrete multi-tone modulation, or DMT, line code. Our ADSL chip
sets are designed to meet the ANSI standard specification T1.413 for DMT
line code configuration, the ITU standard G.992.1 for 8 Mbps DMT line code
configuration (commonly called G.dmt) and G.992.2 for the 1.5 Mbps DMT line
code configuration (commonly called G.lite), and the ANSI technical
specification TR-59 for the CAP line code.
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VOICE AND VIDEO PROCESSING PRODUCTS
VOICE COMPRESSION AND ECHO CANCELLATION. To utilize the efficiency and
reliability of digital transmission, standard telephone voice signals must
be converted from an analog form to a digital form and placed into packets
of digital data. This allows both voice information packets and data
information packets to be efficiently transmitted over a common
transmission path. When the digital voice packet reaches its destination,
the reverse process of converting from digital form to analog form must
take place for the listener to understand the speech. Voice compression is
a technique used to reduce the number of packets required for a given
amount of speech, therefore increasing the transmission efficiency of voice
packets. It is also important that voice echoes created by the network from
the far end destination are blocked from reaching the speaker. A technique
called echo cancellation is used to detect and cancel voice echo signal
reflected back to the speaker. We currently sample a voice compression and
echo cancellation chip for use in voice gateways and echo cancellors that
can support multiple user connections. Our voice compression feature meets
the ITU standard G.711.
VIDEO COMPRESSION AND AUDIO COMPRESSION. Until recently, video images
and the accompanying audio tracks were stored and transmitted in analog
format. In the 1990s, the transformation of video from analog to digital
formats began. Digital video and audio provide several fundamental benefits
over their analog counterparts. Unlike analog, digital content can be
compressed, providing significant storage and transmission efficiencies.
These compression techniques for example, allow an hour long video program,
which normally would require more than 50 CD-ROMs for storage of
uncompressed format, to be stored on a single CD-ROM. The advantages of the
compression technology have enabled the deployment of a number of new
applications in the consumer electronics, communications and computer
markets, including digital video disk players, or DVDs, personal video
recorders, or PVRs, and video conferencing equipment. We currently offer
highly integrated digital video and audio encoder chips that are based on
the MPEG international compression standard. These chips enable
high-quality audio and video content to be provided cost-effectively by a
range of end-user applications including DVDs, PVRs, desktop based video or
audio editing and authoring solutions.
NETWORK PROTOCOL PROCESSING PRODUCT
APPLICATION SPECIFIC NETWORK PROCESSOR. Our application specific
network processor is a programmable communication controller that combines
both hardware and software technologies to provide dedicated processing of
the lower layers of the OSI reference model. The application specific
network processor has applications in edge routers, multi-service wide area
network, or WAN, switches, broadband aggregation concentrators, DSLAMs,
add/drop multiplexers and voice gateways. This product can process an array
of high-level data link control layer channels on multiple T1 and T3 lines.
Downloadable software modules that come bundled with the application
specific processor solution can be linked together to provide a scalable
offering as the designed system evolves and as new local services are
adopted. We currently offer the application specific processor in a single
very large scale integrated, or VLSI, chip with the capability to support
672 full-duplex 64 Kbps channels on one T3 line, or 28 multiplexed T1
links. The processor includes network software features designed to meet
bit synchronous link control as required by ISO 3309 and OSI Layer 2
protocol functions.
SALES, MARKETING AND TECHNICAL SUPPORT
Our sales and marketing strategy is to expand the breadth of our customer
base by using our extensive worldwide sales representative organization, which
includes relationships with approximately 34 firms with over 150 professionals.
In addition, we employ 99 sales, marketing and technical support professionals.
Our strategy has enabled us to spread our sales efforts across a much larger
base of customers than would otherwise be possible using only a direct sales
model. Furthermore, it has been our experience that once we successfully
penetrate a new account, we become better positioned to secure additional design
wins.
Providing comprehensive DSL reference design guides to our customers is
integral to our sales strategy. Our design materials are intended to enable our
customers to effectively incorporate our chip sets into their DSL systems and to
achieve a faster time-to-market. This reduces the necessary level of customer
support and allows for a greater allocation of our sales effort to target future
design wins.
We provide advanced technical support throughout the design and test
process to accelerate our customers' time-to-market. We also provide
comprehensive field support to ensure that our customers' products perform
optimally in real world deployment environments.
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CUSTOMERS
We sell our products worldwide to over 150 companies that manufacture data
communications products. Customers from which we recognized at least $20,000,000
in revenues in 2000 include Cisco Systems, Lucent Technologies, Nokia and Nortel
Networks. Our chip sets are incorporated by our customers into the following
products:
o Digital subscriber line access multiplexers, or DSLAMs, which are
used to terminate up to hundreds of lines in a central office and
aggregate them onto high-speed lines for transmission to the
communications backbone;
o DSL network interface units, which are customer premises products
that enable high-speed data transmission over the local loop;
o DSL-compatible routers, which are used to connect one or more
personal computers to the local loop; and
o USB (standalone) and PCI (internal) network interface cards, which
are used to connect a personal computer to the local loop.
Our customers market their products to public and private
telecommunications service providers. These service providers include
traditional telephone companies, CLECs, Internet service providers, businesses
and government entities.
We depend on a relatively small number of customers for a large percentage
of our revenues. In the years ended December 31, 2000, 1999 and 1998, our
customers who individually represented at least ten percent of our net revenues
accounted for 62.6%, 41.2% and 60.9%, respectively, of our total net revenues.
In 2000, our top three customers were Cisco Systems, Lucent Technologies and
Nortel Networks, which accounted for 27.8%, 23.6% and 11.2% of our net revenues.
In 1999, our top three customers were Cisco Systems, Lucent Technologies and
Ascom Hasler AG, which accounted for 41.6%, 7.1% and 6.2% of our net revenues,
respectively. In 1998, our top three customers were Cisco Systems, NEC
Corporation and Ascom Hasler AG, which accounted for 48.3%, 12.6% and 9.2% of
our net revenues, respectively. We do not have long-term purchase contracts with
any of our customers that obligate them to continue to purchase our products and
these customers could cease purchasing our products at any time. Many of our
customers purchase our products indirectly through contract manufacturers. These
third party manufacturers are typically responsible for ordering and paying for
our products.
PRODUCT DEVELOPMENT AND SUPPORT
Our core engineering team, including several individuals who were early
developers of DSL technology at AT&T Bell Labs, has substantial expertise in DSL
technology. Since our founding in August 1996, we have invested significant
resources to expand our product development and support group. During 2000 we
added approximately 420 product development and support employees, a majority of
whom were added through our acquisitions. As of December 31, 2000, approximately
617 employees are engaged in product development and support. These engineers
are involved in advancing our technology core competencies and our product
development activities. Recently, we have been devoting a significant portion of
our research and development expenditures to products incorporating new features
and line codes, such as 2B1Q, DMT and PAM.
We believe that we must continually enhance the performance and flexibility
of our current products, and successfully introduce new products to maintain our
leadership position. Our research and development expenditures in the years
ended December 31, 2000, 1999 and 1998 were $115.4 million (including $16.8
million of non-cash compensation), $26.5 million, and $18.7 million,
respectively. In 2001, we expect that our research and development expenditures
will increase due to planned increases in personnel, material costs and
depreciation resulting from capital expenditures. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
MANUFACTURING
Our manufacturing objective is to produce reliable, high-quality integrated
circuits at competitive prices and to achieve on-time delivery of our products
to our customers. We outsource the manufacturing of our integrated circuits
which enables us to concentrate our resources on the design, development and
marketing of our products where we believe we have greater competitive
advantages, and to eliminate the high-cost of owning and operating a
semiconductor wafer fabrication facility.
11
Our long-term strategy is to qualify new foundries to provide additional
manufacturing capacity and to access diverse manufacturing technologies. We have
secured and intend to continue to secure multiple sources of wafer fabrication,
assembly and test to reduce our dependence on any single source. There can be no
assurance that we will be able to successfully qualify and implement any
additional arrangements.
We do not own or operate a semiconductor fabrication facility. Currently,
we depend primarily on Lucent Microelectronics to timely deliver to us
sufficient quantities of fully-assembled and tested chip sets on a turnkey
basis. We have had a series of manufacturing arrangements with Lucent
Microelectronics, the latest of which became effective in March 1999. Under this
agreement, Lucent Microelectronics will fill our orders for our current chip
sets in accordance with agreed-upon quantity, price, lead-time and other terms.
The agreement also contains procedures for establishing Lucent Microelectronics
as a manufacturer of future chip sets for us. This agreement, however, does not
guarantee that Lucent Microelectronics will adequately fill our orders for
current chip sets (either in quantity or timing), or that we will be able to
negotiate mutually satisfactory terms for manufacturing our future chip sets.
Further, Lucent Microelectronics has the right to discontinue the supply of any
chip set upon 12 months' notice (as long as Lucent Microelectronics fills our
orders for commercially reasonable quantities of that chip set during the notice
period). In addition, Lucent Microelectronics' ability to manufacture our chip
sets is limited by its available capacity, and under some circumstances Lucent
Microelectronics may allocate its available capacity to its other customers. Any
disruption in availability of our products would have a serious adverse impact
on our business. If we are required for any reason to seek a new manufacturer of
the chip sets presently manufactured by Lucent Microelectronics, such a new
manufacturer may not be available and in any event switching to a new
manufacturer would require six months or more and would involve significant
expense and disruption to our business. We have been notified that our agreement
with Lucent Microelectronics has been assigned to Agere Systems, Inc. effective
as of February 1, 2001, in connection with Lucent's previously announced
spin-off of its Microelectronics Group.
In order to enhance our ability to obtain sufficient quantities of chip
sets to meet our growing product needs, we have been engaged in the process of
negotiating and/or exploring prospective supply agreements with other leading
chip suppliers. In this regard, we entered into an agreement with United
Microelectronics Corporation, or UMC, to supply some of our chip sets. The UMC
agreement, which became effective in December 1999, provides us with the ability
to obtain delivery of specified chip sets, in accordance with the agreement's
terms, upon our providing of binding forecasts to UMC. Although the UMC
agreement provides for a term of five years, with subsequent one year renewals,
the supplier may cancel the agreement upon 12 months' advance notice to us.
While, in such an event, UMC would still be required to fill our orders for
commercially reasonable quantities of product during the twelve month notice
period, the termination of this agreement by UMC could cause a disruption to our
business. In October 1999, we entered into an agreement with Taiwan
Semiconductor Manufacturing Co., or TSMC, which also provides for a five-year
term and is terminable by the supplier upon 12 months' advance notice to us.
TSMC will still fill our orders for commercially reasonable quantities of
product during the 12-month notice period. Finally, we have recently begun using
ZiLOG, Inc. as a chip supplier. To further supply us with greater chip supply
capacity, we will continue to seek agreements with other chip manufactures.
COMPETITION
Although we design and develop system-level products, we primarily compete
with providers of integrated circuits for the DSL market. The DSL chip set
market is intensely competitive. We expect competition to intensify further as
current competitors expand their product offerings and new competitors enter the
market. We believe that we must compete on the basis of a variety of factors,
including time to market, functionality, conformity to industry standards,
performance, price, breadth of product lines, product migration plans and
technical support.
We believe our principal competitors include:
o for asymmetric DSL products, Alcatel Microelectronics, Analog
Devices, Broadcom Corporation, Centillium Communications, Integrated
Telecom Express, Intel Corporation, Texas Instruments and Virata
Corporation, among others;
o for symmetric DSL products, Conexant Systems, Infineon Technologies,
Intel Corporation, MetaLink and Virata Corporation, among others.
In addition to these competitors, there have been announcements by other
integrated circuit companies that they intend to enter the DSL chip set market.
Many of our competitors have greater name recognition, their own
manufacturing capabilities, significantly greater financial and technical
resources, and the sales, marketing and distribution strengths that are normally
associated with
12
large multinational companies. These competitors may also have pre-existing
relationships with our customers or potential customers. These competitors may
compete effectively with us because in addition to the above-listed factors,
they more quickly introduce new technologies, more rapidly or effectively
address customer requirements or devote greater resources to the promotion and
sale of their products than we do. Further, in the event of a manufacturing
capacity shortage, these competitors may be able to manufacture products when we
are unable to do so.
The DSL market has become increasingly subject to price competition driven
by the lowest cost providers of chip sets. We anticipate that average per unit
selling prices of DSL chip sets will continue to decline as product technologies
mature. If we are unable to reduce our costs sufficiently to offset declines in
the average per unit selling prices or are unable to introduce new higher
performance products with higher average per unit selling prices, our operating
results will be seriously harmed. Since we do not manufacture our own products,
we may be unable to negotiate volume discounts with our foundries in order to
reduce the costs of manufacturing our chip sets in response to declining average
per unit selling prices. Many of our competitors are larger with greater
resources and therefore may be able to achieve greater economies of scale and
would be less vulnerable to price competition. Our inability to achieve
manufacturing efficiencies would have an adverse impact on our operating
results.
INTELLECTUAL PROPERTY
Our success depends to a significant degree upon our ability to protect our
intellectual property. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our products or obtain and
use information that we regard as proprietary. In the past, competitors have
recruited our employees who have had access to our proprietary technologies,
processes and operations. Our competitors' recruiting efforts, which we expect
will continue, expose us to the risk that such employees will misappropriate our
intellectual property. In June 1998, we filed suit against three former
employees who had commenced employment with one of our competitors. Our lawsuit
alleged misappropriation of trade secrets. The court issued a final judgment
against the defendants. In addition, the court ordered injunctive and other
relief against the defendants.
We rely in part on patents to protect our intellectual property. As of
December 31, 2000, we had 46 patents in the United States and 26 patents in
other countries. These patents principally cover various aspects of systems and
features relating to telecommunications technologies and telecommunications
products, including aspects specifically pertaining to particular DSL algorithms
and DSL communications systems. These patents have expiration dates ranging from
2009 to 2017. In addition, as of December 31, 2000, we had 97 utility patent
applications and 32 provisional applications pending in the United States Patent
and Trademark Office. We also had 31 patent applications pending in various
countries other than the United States. These patents may never be issued. Even
if these patents are issued, taken together with our existing patents, they may
not provide sufficiently broad protection to protect our proprietary rights, or
they may prove to be unenforceable. To protect our proprietary rights, we also
rely on a combination of copyrights, trademarks, trade secret laws, contractual
provisions, licenses and maskwork protection under the Federal Semiconductor
Chip Protection Act of 1984. We also typically enter into confidentiality
agreements with our employees, consultants and customers and seek to control
access to, and distribution of, our other proprietary information.
The laws of some foreign countries do not protect our proprietary rights to
as great an extent as do the laws of the United States, and many U.S. companies
have encountered substantial infringement problems in such countries, some of
which are countries in which we have sold and continue to sell products. There
is also a risk that our means of protecting our proprietary rights may not be
adequate. For example, our competitors may independently develop similar
technology, duplicate our products or design around our patents or our other
intellectual property rights. If we fail to adequately protect our intellectual
property, it would be easier for our competitors to sell competing products.
Another company, Singapore Telecommunications Limited, or Singapore
Telecom, also has prior rights to the GlobeSpan mark in one or more countries
outside the United States, in connection with services involving the
transmission and broadcast of satellite communications. Singapore Telecom's
rights in the GlobeSpan mark may limit our ability to use or market under the
GlobeSpan name in some territorial regions outside the United States.
EMPLOYEES
As of December 31, 2000, we had 776 full-time employees, including 617
employees engaged in product development and support, 67 engaged in sales and
marketing and 92 engaged in general and administrative activities. Our employees
are not represented by any collective bargaining agreements, and we have never
experienced a work stoppage. We believe our employee relations are good.
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STOCK SPLIT
On January 21, 2000, our board of directors approved a 3-for-1 stock split
applicable to all issued and outstanding shares of our common stock par value
$0.001. This 3-for-1 stock split was effected in the form of a stock dividend
and became effective on February 25, 2000, when stockholders of record received
two additional shares of common stock for each outstanding share of common stock
held as of the record date.
ACQUISITIONS
During 2000, we completed five acquisitions to accelerate development
efforts and enhance our technology. In January 2000, we acquired Ficon
Technology, Inc., orFicon, a provider of solutions in the areas of IP, ATM and
Voice over Packet, which enable service providers to build next generation
communications infrastructure. In February 2000, we acquired certain technology
and employees of the Microelectronics Group of PairGain Technologies, Inc., or
PairGain, designers of integrated circuits and software for DSL applications. In
April 2000, we completed the acquisition of T.sqware, Inc., or T.sqware, a
provider of fully programmable scalable network processors supporting high-speed
data communications. In June 2000, we acquired iCompression, Inc., or
iCompression, a supplier of advanced signal processing technology for delivering
voice, video and data for the broadband infrastructure in applications such as
broadband video conferencing. In September 2000, we completed the acquisition of
ATecoM Inc., or ATecoM, a provider of technology which allows for the
transmission of video over ATM networks. See "Financial Statements - Note 3."
CERTAIN BUSINESS RISKS
Our business, financial condition and operating results can be impacted by
a number of factors including, but not limited to, those risks set forth below.
You should carefully consider and evaluate all of the information in this
report, including the risk factors listed below. Any of these risks could
materially and adversely affect our business, financial condition and results of
operations, which in turn could materially and adversely affect the price of our
common stock or other securities.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE BECAUSE OF MANY FACTORS, WHICH
WOULD CAUSE OUR STOCK PRICE TO FLUCTUATE
Our net revenues and operating results have varied in the past and may vary
significantly in the future from quarter-to-quarter. As a result, we believe
that period-to-period comparisons of our operating results are not necessarily
meaningful. Investors should not rely on the results of any one quarter or
series of quarters as an indication of our future performance.
It is likely that in some future quarter or quarters our operating results
will be below the expectations of public market analysts or investors. In such
event, the market price of our common stock may decline significantly. Due to
our recent acquisitions accounted for as purchases, we will incur substantial
non-cash compensation and amortization expenses associated with those and,
potentially, future transactions.
These variations in our operating results may be caused by factors related
to the operation of our business, including:
o variations in the timing and size of chip set orders from, and
shipments to, our existing and new customers;
o loss of a significant customer, or a significant decrease or
deferral in purchases by significant customers, such as Cisco Systems,
Lucent Technologies or Nortel Networks;
o the mix of chip sets shipped with different gross margins, including
the impact of volume purchases from our large customers at discounted
average selling prices;
o the availability of foundry capacity and the expense of having our
chip sets manufactured by Agere Systems, or other foundries in the
future;
o the timing and size of expenses, including operating expenses and
expenses of developing new products and product enhancements; and
14
o our ability to attract and retain key personnel.
These variations will also be caused by factors related to the development
of the DSL market and the competition we face from other DSL chip set suppliers,
including:
o the timing and rate of deployment of DSL services by
telecommunications service providers;
o the timing and rate of deployment of alternative high-speed data
transmission technologies, such as cable modems, high-speed wireless
data transmission and fiber optic networks;
o anticipated decreases in per unit prices as competition among DSL
chip set suppliers increases; and
o the level of market penetration of our chips sets relative to those
of our competitors.
These variations will also be caused by other factors affecting our
business, many of which are substantially outside of the control of our
management, including:
o costs associated with future litigation, including litigation
relating to the use or ownership of intellectual property;
o acquisition costs or other non-recurring charges in connection with
the acquisition of companies, products or technologies;
o foreign currency and exchange rate fluctuations which may make our
dollar-denominated products more expensive in foreign markets or could
expose us to currency rate fluctuation risks if our sales become
denominated in foreign currencies; and
o general global economic conditions, which could adversely affect
sales to our customers.
A GENERAL ECONOMIC SLOWDOWN, AND A SLOWDOWN IN SPENDING IN THE
TELECOMMUNICATIONS INDUSTRY SPECIFICALLY, MAY ADVERSELY AFFECT OUR BUSINESS AND
OPERATING RESULTS
There have been announcements throughout the worldwide telecommunications
industry of current and planned reductions in component inventory levels and
equipment production volumes, and of delays in the build-out of new
infrastructure. The slowdown has resulted in a decrease in spending on DSL
equipment by service providers and lower-than-expected sales volume for DSL
equipment manufacturers. Any of these trends, if continued, could result in
lower than expected demand for our products, which are components of DSL
equipment. Any continued or further slowdown could have a material adverse
effect on our revenues and results of operations generally, and cause the market
price of our common stock to decline.
WE EXPECT THAT PRICE COMPETITION AMONG DSL CHIP SET SUPPLIERS AND VOLUME
PURCHASES BY LARGE CUSTOMERS WILL REDUCE OUR GROSS MARGINS IN THE FUTURE
We expect that price competition among DSL chip set suppliers and volume
purchases of our chip sets at discounted prices will reduce our gross margins in
the future. We anticipate that average per unit selling prices of DSL chip sets
will continue to decline as product technologies mature. Since we do not
manufacture our own products, we may be unable to reduce our manufactured costs
in response to declining average per unit selling prices. Many of our
competitors are larger with greater resources and therefore may be able to
achieve greater economies of scale and would be less vulnerable to price
competition.
Further, we expect that average per unit selling prices of our chip sets
will decrease in the future due to volume discounts to our large customers.
These declines in average per unit selling prices will generally lead to
declines in gross margins for these products.
WE HAVE A HISTORY OF LOSSES, AND WE WILL INCUR SUBSTANTIAL LOSSES IN THE FUTURE
We incurred a net loss attributable to common stockholders of $153.2
million, $9.1 million and $7.8 million in the years December 31, 2000, 1999 and
1998,
15
respectively. We will incur substantial net losses for the foreseeable future.
Because of substantial operating expenses, we will need to generate significant
quarterly revenues to achieve profitability. Our failure to significantly
increase our net revenues would result in continuing losses. Even if we do
achieve profitability, we may not be able to sustain or increase profitability
or cash flow on a quarterly or annual basis.
THE LOSS OF ONE OR MORE OF OUR KEY CUSTOMERS WOULD RESULT IN A LOSS OF A
SIGNIFICANT AMOUNT OF OUR NET REVENUES
A relatively small number of customers account for a large percentage of
our net revenues. Our business will be seriously harmed if we do not generate as
much revenue as we expect from these customers, or experience a loss of any of
our significant customers, particularly Cisco Systems, Lucent Technologies and
Nortel Networks, or suffer a substantial reduction in orders from such
customers. In the three years ended December 31, 2000, 1999 and 1998, our
customers who individually represented at least ten percent of our net revenues
accounted for 62.6%, 41.2% and 60.9%, respectively, of our net revenues. In year
ended December 31, 2000, our top three customers were Cisco Systems, Lucent
Technologies and Nortel Networks, which accounted for 27.8%, 23.6% and 11.2% of
our net revenues, respectively. In 1999, our top three customers were Cisco
Systems, Lucent Technologies and Ascom Hasler AG, which accounted for 41.6%,
7.1% and 6.2% of our net revenues, respectively. In 1998, our top three
customers were Cisco Systems, NEC Corporation and Ascom Hasler AG, which
accounted for 48.3%, 12.6% and 9.2% of our net revenues, respectively. We do not
have long-term purchase contracts with any of our customers that obligate them
to continue to purchase our products and these customers could cease purchasing
our products at any time. Furthermore, it is possible that DSL equipment
manufacturers, such as Cisco Systems, Lucent Technologies and Nortel Networks,
may design and develop internally, or acquire, their own chip set technology,
rather than continue to purchase chip sets from third parties such as us. We
expect that sales of our products to relatively few customers will continue to
account for a significant portion of our net revenues for the foreseeable
future.
BECAUSE OF OUR LONG PRODUCT DEVELOPMENT PROCESS AND SALES CYCLE, WE MAY INCUR
SUBSTANTIAL EXPENSES BEFORE WE EARN ASSOCIATED NET REVENUES AND MAY NOT
ULTIMATELY SELL A LARGE VOLUME OF OUR PRODUCTS
We develop products based on forecasts of demand and incur substantial
product development expenditures prior to generating associated net revenues. We
sell our products based on individual purchase orders. Our customers are not
obligated by long-term contracts to purchase our chip sets. In addition, we do
not have a substantial non-cancelable backlog of orders and our customers can
generally cancel or reschedule orders upon short notice. The cancellation or
deferral of product orders or overproduction due to the failure of anticipated
orders to materialize could result in our holding excess or obsolete inventory,
which could result in write-downs of inventory that would have a material
adverse effect on our operating results. We also do not receive orders for our
chip sets during the period that potential customers test and evaluate our chip
sets. This test and evaluation period typically lasts from three to six months
or longer, and volume production of the equipment manufacturer's product that
incorporates our chip sets typically does not begin until this test and
evaluation period has been completed. As a result, a significant period of time
may lapse between our product development and sales efforts and our realization
of revenues from volume ordering of our products by our customers, or we may
never realize revenues from our efforts. Furthermore, achieving a design win
with a customer does not necessarily mean that this customer will order large
volumes of our products. A design win is not a binding commitment by a customer
to purchase our products. Rather, it is a decision by a customer to use our
products in the design process of that customer's products. A customer can
choose at any time to discontinue using our products in that customer's designs
or product development efforts. If our products are chosen to be incorporated
into a customer's products, we may still not realize significant net revenues
from that customer if that customer's products are not commercially successful.
WE HAVE ONLY BEEN OPERATING AS AN INDEPENDENT COMPANY SINCE AUGUST 1996, AND
THIS LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE OUR PROSPECTS
We have only been operating as an independent company since August 1996,
and we only began shipping chip sets in volume in January 1997. We have not had
a long history of generating significant net revenues. As a result of our
limited operating history, we have limited historical financial data that can be
used in evaluating our business and its prospects and in projecting future
operating results. You must consider our prospects in light of the risks,
expenses and difficulties we might encounter because we are in a rapidly
evolving market.
16
OUR ACQUISITIONS MAY BE DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS, DILUTE
STOCKHOLDER VALUE OR DIVERT MANAGEMENT ATTENTION
We may seek to acquire or invest in additional businesses, products,
technologies or engineers. Our acquisition strategy does not require that our
acquisitions immediately increase our net revenues; rather, our objective is to
seek acquisitions that we believe could complement or expand our business,
augment our market coverage, enhance our technical capabilities or that may
otherwise offer growth opportunities. During the year ended December 31, 2000,
we acquired Ficon, the technology and the right to hire employees of the
Microelectronics Group of PairGain, T.sqware, iCompression and additional
smaller companies. We plan to pursue further acquisition opportunities in the
future and we are currently engaged in various stages of negotiations with
certain parties with respect to possible acquisitions. While there are currently
no unannounced purchase agreements for the acquisitions of any material business
or assets, such transactions can be effected quickly, may occur at any time and
may be significant in size relative to our existing assets or operations.
Mergers and acquisitions of high-technology companies are inherently risky,
and no assurance can be given that our previous or future acquisitions will be
successful and will not materially adversely affect our business, operating
results or financial condition. Our past and future acquisitions may involve
many risks, including:
o difficulties in managing our growth following acquisitions;
o difficulties in the integration of the acquired personnel,
operations, technologies, products and systems of the acquired
companies;
o uncertainties concerning the intellectual property rights we purport
to acquire;
o unanticipated costs associated with the acquisitions;
o diversion of management's attention from other business concerns;
o adverse effects on our existing business relationships with our or
our acquired companies' customers;
o potential difficulties in completing projects associated with
purchased in process research and development;
o risks of entering markets in which we have no or limited direct
prior experience and where competitors in such markets have stronger
market positions; and
o inability to retain employees of acquired companies.
Additionally, future acquisitions may require us to use substantial
portions of our available cash as all or a portion of the purchase price.
Acquisitions may also materially and adversely affect our results of operations
because they may require large one-time write-offs, increased debt or contingent
liabilities, substantial depreciation or deferred compensation charges or the
amortization of expenses related to tangible and intangible assets. For example,
in the year ended December 31, 2000, we incurred a one-time charge of $44.9
million related to in process research and development in connection with prior
acquisitions and began to amortize charges from tangible and intangible assets
acquired.
Furthermore, if we issue equity or convertible debt securities in
connection with an acquisition, as in the case of our recent acquisitions, the
issuance may be dilutive to our existing shareholders. The equity or debt
securities that we may issue could have rights, preference or privileges senior
to those of holders of our common stock.
Any of the events described in the foregoing paragraphs could cause the
price of our common stock to decline.
17
IF LEADING EQUIPMENT MANUFACTURERS DO NOT INCORPORATE OUR CHIP SETS IN
SUCCESSFUL PRODUCTS, SALES OF OUR PRODUCTS WILL SIGNIFICANTLY DECLINE
We rely upon broadband equipment manufacturers, such as Cisco Systems,
Lucent Technologies and Nortel Networks, to design our chip sets into their
products for the DSL market. We rely on these products to be successful, and if
they are not, we will not sell our chip sets in volume quantities. Accordingly,
we must correctly anticipate the price, performance and functionality
requirements of these equipment manufacturers. We must also successfully develop
products that meet these requirements and make such products available on a
timely basis and in sufficient quantities. Further, if there is consolidation in
the equipment manufacturing industry, or if a small number of equipment
manufacturers otherwise dominate the market for DSL equipment, then our success
will depend upon our ability to establish and maintain relationships with these
market leaders. If we do not anticipate trends in the market for products
enabling the digital transmission of data, voice and video to homes and business
enterprises over existing copper wire telephone lines and meet the requirements
of equipment manufacturers, or if we do not successfully establish and maintain
relationships with leading equipment manufacturers, then our business, financial
condition and results of operations will be seriously harmed.
IF OUR CUSTOMERS EXPERIENCE COMPONENT SUPPLY SHORTAGES, OUR NET REVENUES AND
OPERATING RESULTS MAY DECLINE
The semiconductor industry from time to time is affected by limited
supplies of certain key components and materials. We rely on our customers,
broadband equipment manufacturers, to produce reliable, successful DSL systems
by incorporating our chip sets and additional components into their products. In
the past there have been industry wide shortages of electronic components, such
as capacitors. In some cases, supply shortages of particular components or
materials will substantially curtail production of products using these
components. We cannot guarantee that we would not lose potential sales from our
customers if key components or materials are unavailable to them, and as a
result, we are unable to maintain or increase our production levels.
RAPID CHANGES IN THE MARKET FOR DSL PRODUCTS MAY RENDER OUR SOLUTIONS OBSOLETE
OR UNMARKETABLE
The market for chip sets for DSL products is characterized by:
o intense competition;
o rapid technological change;
o frequent new product introductions by our competitors;
o changes in customer demands; and
o evolving industry standards.
Additionally, the life cycles of some of our products depend heavily upon
the life cycles of the end products into which our products are designed.
Products with short life cycles require us to manage closely production and
inventory levels. We cannot assure you that obsolete or excess inventories,
which may result from unanticipated changes in the estimated total demand for
our products and/or the estimated life cycles of the end products into which our
products are designed, will not materially and adversely affect us.
Any of these factors could make our existing or proposed products obsolete
or unmarketable. If we fail to successfully introduce new products on a timely
and cost-effective basis that meet customer requirements and are compatible with
evolving industry standards, then our business, financial condition and results
of operations will be seriously harmed.
WE DEPEND ON A LIMITED NUMBER OF SUPPLIERS TO MANUFACTURE OUR CHIP SETS, AND ANY
DISRUPTION IN ANY OF THESE RELATIONSHIPS COULD PREVENT US FROM SELLING OUR
PRODUCTS
We do not own or operate a semiconductor fabrication facility.
Historically, Lucent Microelectronics has manufactured substantially all of our
chip sets. We depend on Agere Systems, Inc. (formerly the Microelectronics Group
of Lucent Technologies), to timely deliver to us sufficient quantities of
fully-assembled and tested chip sets on a turnkey basis. We have had a series of
manufacturing arrangements with Agere Systems and its predecessors, the latest
of which became
18
effective in March 1999. This agreement, however, does not guarantee that Agere
Systems will adequately fill our orders for current chip sets (either in
quantity or timing), or that we will be able to negotiate mutually satisfactory
terms for manufacturing our future chip sets. Any disruption in availability of
our products would have a serious adverse impact on our business.
We have been engaged in the process of negotiating and/or exploring
prospective supply agreements with other leading chip suppliers. We entered into
an agreement with United Microelectronics Corporation, or UMC, to supply some of
our chip sets. Our agreement with UMC became effective in December 1999 and
provides us with the ability to obtain delivery of specific chip sets in
accordance with the terms of that agreement, upon our providing binding
forecasts to UMC. Although this agreement provides for a term of five years,
with subsequent one-year renewals, UMC may cancel the agreement upon 12 months'
advance notice to us. While, in such an event, UMC would still be required to
fill our orders for commercially reasonable quantities of product during the
12-month notice period, the termination of this agreement by UMC could cause a
disruption to our business. In addition, in October 1999 we entered into an
agreement with Taiwan Semiconductor Manufacturing Co., or TSMC, which also
provides for a five-year term, is terminable by the supplier upon 12 months'
advance notice to us, and requires TSMC to fill our orders for commercially
reasonable quantities of product during the 12-month notice period. We also use
ZiLOG, Inc., an affiliate of Texas Pacific Group, our controlling shareholder,
to manufacture chip sets for us on a purchase order basis. We do not have a
supply agreement with ZiLOG. We will continue to seek agreements with other chip
manufacturers. None of these other prospective agreements, however, would
provide us with a guarantee that our orders for chip sets will be adequately
filled.
If we are required for any reason to seek a new manufacturer of our chip
sets, a new manufacturer of our chip sets may not be available and in any event,
switching to a new manufacturer would require six months or more and would
involve significant expense and disruption to our business. From time to time
there are shortages in worldwide foundry capacity. Such shortages, if they
occur, could make it more difficult for us to find a new manufacturer of our
chip sets if our relationship with any of our suppliers is terminated for any
reason.
IF WE ARE REQUIRED TO SEEK NEW MANUFACTURERS OF OUR INTEGRATED CIRCUITS, WE WILL
BE REQUIRED TO MODIFY OUR PRODUCTS WHICH WILL BE COSTLY
Our integrated circuits are manufactured by independent providers of
semiconductor manufacturing services, known as foundries. These foundries
manufacture our integrated circuits using their individual manufacturing process
technology. In addition, the foundry may license to us standard circuit modules,
known as intellectual property cores, or IP cores. Our DSL chip designs are
customized by the foundry for their specific manufacturing processes and IP
cores. In order to second source or switch foundry providers, our chip sets
would need to be re-designed for the process technology and IP cores of the
respective foundry. The re-design of the integrated circuits is costly and time
consuming and the requalification of the manufacturing process can take up to
six months. Establishing additional sources for manufacturing our products would
be expensive and disruptive to our business.
WE MAY BE REQUIRED TO OBTAIN LICENSES ON ADVERSE TERMS TO SELL INDUSTRY STANDARD
COMPLIANT CHIP SETS
We have received correspondence, including a proposed licensing agreement,
from Amati Corporation (which was acquired by Texas Instruments) stating that
they believe that they own a number of patents that are required to be compliant
with the ANSI standard specification T1.413. This industry standard is based on
the DMT line code. We have introduced products that we believe are compliant
with this industry standard, and we may be required to obtain a license to these
Amati patents. We are currently evaluating Amati's patents and proposed
licensing terms. If these patents are valid and essential to the implementation
of products that are compliant with this industry standard, then Amati may be
required to offer us a license to use these patents on commercially reasonable,
non-discriminatory terms. If these patents are valid, but not essential to the
implementation of products that are compliant with this industry standard, and
they apply to our products and we do not modify our products so they become
non-infringing, then Amati would not be obligated to offer us a license on
reasonable terms or at all. If we are not able to agree on license terms and as
a result fail to obtain a required license, we could be sued and potentially be
liable for substantial monetary damages or have the sale of our products stopped
by an injunction. We could also be subject to similar claims like the Amati
claim by third parties in the future.
THIRD-PARTY CLAIMS REGARDING INTELLECTUAL PROPERTY MATTERS COULD CAUSE US OR OUR
CUSTOMERS TO STOP SELLING PRODUCTS OR PAY MONETARY DAMAGES
There is a significant risk that third parties, including current and
potential competitors, will claim that our products, or our customers' products,
19
infringe on their intellectual property rights. The owners of such intellectual
property rights may bring infringement claims against us. Any such litigation,
whether or not determined in our favor or settled by us, would be costly and
divert the attention of our management and technical personnel.
Any inquiries with respect to coverage of our intellectual property could
develop into litigation. In the event of an adverse ruling for an intellectual
property infringement claim, we could be required to obtain a license or pay
substantial damages or have the sale of our products stopped by an injunction.
In addition, if a customer of our chip sets cannot acquire a required license on
commercially reasonable terms, that customer may choose not to use our chip
sets. From time to time our customers or we receive letters from third parties
claiming that our or our customers' products infringe those third parties'
intellectual property rights.
We have obligations to indemnify our customers under some circumstances for
infringement of third-party intellectual property rights. From time to time we
receive letters from customers inquiring as to the scope of these indemnity
rights. For example, on April 25, 2000 we received a letter from counsel to
Cisco Systems informing us that Alcatel Alsthom S.A. had recently asserted that
certain products made and sold by Cisco Systems, which incorporate digital
signal processors made by us, infringed patents held by Alcatel. We evaluate all
letters of this nature to determine whether we have an indemnity obligation and
take appropriate steps. If any claims from third-parties required us to
indemnify customers under our agreements, the costs could be substantial and our
business could be harmed.
DESPITE OUR EFFORTS TO PROTECT OUR INTELLECTUAL PROPERTY, THIRD PARTIES MAY GAIN
ACCESS TO OUR PROPRIETARY TECHNOLOGY AND USE IT TO COMPETE WITH US
We rely primarily on a combination of patents, copyrights, trademarks,
trade secret laws, contractual provisions, licenses and mask work protection
under the Federal Semiconductor Chip Protection Act of 1984 to protect our
intellectual property. In particular, we rely on these measures to protect our
intellectual property because, as a fabless semiconductor company, we have third
parties, including potential competitors such as Agere Systems, manufacture our
chip sets. Employees, consultants and customers have access to our proprietary
and confidential information. Any misuse or misappropriation of this
intellectual property could have an adverse impact on our business. We take
steps to control access to, and the distribution of, our proprietary
information. We cannot guarantee, however, that such safeguards will protect our
intellectual property and other valuable competitive information.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or obtain and use information that
we regard as proprietary. For example, in June 1998, we filed suit against three
former employees who had recently commenced employment with one of our
competitors. The court issued a final judgment in our favor and against the
defendants. In addition, the court ordered injunctive and other relief against
the defendants. The defendants appealed the judgment and their appeal was
dismissed as moot in June 2000.
In connection with our private placement of Series A preferred stock, which
was subsequently converted into common stock, we agreed not to sue Intel
Corporation for any violation by it of our patent rights. This agreement
terminates if Intel Corporation sues us for any infringement by us of its patent
rights or Intel's ownership in us is less than 1% of our outstanding capital
stock. This agreement not to sue could enable Intel Corporation to compete more
effectively against us.
OUR EFFORTS TO PROTECT OUR INTELLECTUAL PROPERTY MAY BE LESS EFFECTIVE IN SOME
FOREIGN COUNTRIES WHERE INTELLECTUAL PROPERTY RIGHTS ARE NOT WELL PROTECTED BY
LAW OR ENFORCEMENT
The laws of some foreign countries do not protect our proprietary rights to
the same extent as do the laws of the United States, and many U.S. companies
have encountered substantial infringement problems in these countries, some of
which are countries in which we have sold and continue to sell products. There
is a risk that our efforts to protect our proprietary rights may not be
adequate. For example, our competitors may independently develop similar
technology, duplicate our products or design around our patents or our other
intellectual property rights. If we fail to adequately protect our intellectual
property or if the laws of a foreign jurisdiction do not effectively permit such
protection, it would be easier for our competitors to sell competing products.
OUR INDUSTRY IS HIGHLY COMPETITIVE, AND WE CANNOT ASSURE YOU THAT WE WILL BE
ABLE TO EFFECTIVELY COMPETE
Although we design and develop system-level products, we primarily compete
with providers of integrated circuits for the DSL market. The DSL chip set
market is intensely competitive. We expect competition to intensify further as
current competitors expand their product offerings and new competitors enter the
20
market. We believe that we must compete on the basis of a variety of factors,
including:
o time to market;
o functionality;
o conformity to industry standards;
o performance;
o price;
o breadth of product lines;
o product migration plans; and
o technical support.
We believe our principal competitors include Alcatel Microelectronics,
Analog Devices, Broadcom, Centillium Communications, Conexant Systems, Infineon
Technologies, Integrated Telecom Express, Intel Corporation, MetaLink, Texas
Instruments and Virata Corporation. In addition to these competitors, there have
been announcements by other integrated circuit companies that they intend to
enter the DSL chip set market.
Many of our competitors have greater name recognition, their own
manufacturing capabilities, significantly greater financial and technical
resources, and the sales, marketing and distribution strengths that are normally
associated with large multinational companies. These competitors may also have
pre-existing relationships with our customers or potential customers. These
competitors may compete effectively with us because of the above-listed factors
and because they more quickly introduce new technologies, more rapidly or
effectively address customer requirements or devote greater resources to the
promotion and sale of their products than we do. Further, in the event of a
manufacturing capacity shortage, these competitors may be able to manufacture
products when we are unable to do so.
OTHER TECHNOLOGIES FOR THE HIGH-SPEED DATA TRANSMISSION MARKET WILL COMPETE
EFFECTIVELY WITH DSL SERVICES
DSL services are competing with a variety of different high-speed data
transmission technologies, including cable modems, satellite and other wireless
technologies. Many of these technologies will compete effectively with DSL
services. All of our chip sets are deployed in networks that use standard copper
telephone wires. Copper telephone wires have physical properties that limit the
speed and distance over which data can be transmitted. In general, data
transmission rates over copper telephone wires are slower over longer distances
and faster over shorter distances. If any technology that is competing with DSL
technology is more reliable, faster, less expensive, reaches more customers or
has other advantages over DSL technology, then the demand for our chip sets and
our revenues and gross margins may decrease.
CHANGES IN CURRENT OR FUTURE LAWS OR REGULATIONS OR THE IMPOSITION OF NEW LAWS
OR REGULATIONS BY THE FCC, OTHER FEDERAL OR STATE AGENCIES OR FOREIGN
GOVERNMENTS COULD IMPEDE THE SALE OF OUR PRODUCTS OR OTHERWISE HARM OUR BUSINESS
The Federal Communications Commission has broad jurisdiction over our
target market. Although current FCC regulations and the laws and regulations of
other federal or state agencies are not directly applicable to our products,
they do apply too much of the equipment into which our products are
incorporated. As a result, the effects of regulation on our customers or the
industries in which they operate may, in turn, materially and adversely impact
our business, financial condition and results of operations. FCC regulatory
policies that affect the ability of cable operators or telephone companies to
offer certain services or other aspects of their business may impede the sale of
our products. We may also be subject to regulation by countries other than the
United States. Foreign governments may impose tariffs, duties and other import
restrictions on components that we obtain from non-domestic supplies and may
impose export restrictions on products that we sell internationally. These
tariffs, duties or restrictions could materially and adversely affect our
business, financial condition and results of operations. Changes in current laws
or regulations or the imposition of new laws and regulations in the United
States or elsewhere could also materially and adversely affect our business.
21
OUR FUTURE SUCCESS DEPENDS IN PART ON THE CONTINUED SERVICE OF OUR KEY DESIGN,
ENGINEERING, SALES, MARKETING AND EXECUTIVE PERSONNEL AND OUR ABILITY TO
IDENTIFY, HIRE AND RETAIN ADDITIONAL PERSONNEL
We depend upon the continuing contributions of our key management, sales,
customer support and product development personnel. The loss of any of such
personnel could seriously harm us. Armando Geday, our President and Chief
Executive Officer, is our only executive officer subject to an employment
agreement; however, we cannot be sure that we can continue to retain Mr. Geday's
services. In addition, we have not obtained key-man life insurance on any of our
executive officers or key employees. Because DSL technology is specialized and
complex, we need to recruit and train qualified technical personnel. However,
there are many employers competing to hire qualified technical personnel and we
have had difficulty attracting and retaining such personnel. We expect to
continue to have difficulty hiring and retaining qualified personnel. We may
have particular difficulty attracting and retaining key personnel during periods
of poor stock price performance, given the significant use of equity-based
compensation in our industry. Further, our competitors have recruited our
employees and may do so in the future. Loss of the services of, or failure to
recruit, key design engineers or other technical and management personnel could
be significantly detrimental to our product development programs.
SALES OF OUR PRODUCTS ARE DEPENDENT ON THE WIDESPREAD ADOPTION OF DSL SERVICE.
IF THE DEMAND FOR DSL SERVICE DOES NOT INCREASE, WE MAY NOT BE ABLE TO GENERATE
SUBSTANTIAL SALES.
Sales of our products depend on the increased use and widespread adoption
of DSL services, and the ability of telecommunications service providers to
market and sell DSL services. Our business would be harmed, and our results of
operations and financial condition would be adversely affected, if the use of
DSL services does not increase as anticipated. Certain critical factors will
likely continue to affect the development of the DSL service market. These
factors include:
o inconsistent quality and reliability of service;
o inadequate deployment by service providers;
o lack of interoperability among multiple vendors' network equipment;
o congestion in service providers' networks; and
o inadequate security.
SUBSTANTIAL SALES OF OUR CHIP SETS WILL NOT OCCUR UNLESS TELECOMMUNICATIONS
SERVICE PROVIDERS INITIATE SUBSTANTIAL DEPLOYMENT OF DSL SERVICES
The success of our products is dependent upon the decision by
telecommunications service providers to deploy DSL technologies and the timing
of the deployment. Factors that will affect such deployment include:
o a prolonged approval process for equipment, including laboratory
tests, technical trials, marketing trials and initial commercial
deployment;
o the implementation of a viable business model for DSL services,
including the capability to market, sell, install and maintain DSL
services;
o the availability and commitment of resources by telecommunication
service providers to provide adequate installation and support
services
o cost constraints, such as installation costs and space and power
requirements at the telecommunications service provider's central
office;
o varying and uncertain conditions of the local loop, including the
size and length of the copper wire, electrical interference and
interference with existing voice and data telecommunications services;
o challenges of interoperability among DSL equipment manufacturers'
products;
22
o evolving industry standards for DSL technologies; and
o government regulation.
Although a number of telecommunications service providers have commenced
commercial deployment of DSL services using DSL products that incorporate our
chip sets, if these telecommunications service providers do not expand their
deployment of DSL services, or if additional telecommunications service
providers do not offer DSL services on a timely basis, then our business,
financial condition and results of operations will be seriously harmed.
THE RECENT RAPID EXPANSION OF OUR OPERATIONS HAS PLACED A STRAIN ON OUR
MANAGEMENT AND PERSONNEL AND OTHER RESOURCES
From December 31, 1997 to December 31, 2000, we increased from 93 to 776
total employees. This growth and rapid expansion in our operations has placed
and will continue to place a significant strain upon our management, operating
and financial systems and other resources. To accommodate this expansion of
operations, we must continue to implement and improve information systems,
procedures and controls and expand, train, motivate and manage our work force.
If we do not successfully manage our growth, our business, financial condition
and results of operations will be seriously harmed.
SALES TO CUSTOMERS BASED OUTSIDE OF THE UNITED STATES HAVE ACCOUNTED FOR A
SIGNIFICANT PORTION OF OUR NET REVENUES, WHICH EXPOSES US TO INHERENT RISKS OF
INTERNATIONAL BUSINESS
We expect that sales to such international customers will continue to
account for a significant portion of our net revenues for the foreseeable
future. Accordingly, we are subject to risks inherent in our international
business activities, including:
o unexpected changes in regulatory requirements;
o tariffs and other trade barriers, including current and future
import and export restrictions;
o difficulties in collecting accounts receivables;
o difficulties in staffing and managing international operations;
o potentially adverse tax consequences, including restrictions on the
repatriation of earnings;
o the burdens of complying with a wide variety of foreign laws
(particularly with respect to intellectual property) and license
requirements;
o the risks related to international political instability and to the
recent global economic turbulence and adverse economic circumstances
in Asia;
o difficulties in protecting intellectual property rights in some
foreign countries; and
o limited ability to enforce agreements and other rights in some
foreign countries.
We are subject to the risks associated with the imposition of legislation
and regulations relating to the import or export of high technology products. We
cannot predict whether quotas, duties, taxes or other changes or restrictions
upon the importation or exportation of our products will be implemented by the
United States or other countries. Because sales of our products have been
denominated to date primarily in United States dollars, increases in the value
of the United States dollar could increase the price of our products so that
they become relatively more expensive to customers in the local currency of a
particular country, leading to a reduction in sales and profitability in that
country. Future international activity may result in increased foreign currency
denominated sales. Gains and losses on the conversion to United States dollars
of accounts receivable, accounts payable and other monetary assets and
liabilities arising from international operations may contribute to fluctuations
in our results of operations. Some of our customer purchase orders and
agreements are governed by foreign laws, which may differ significantly from
United States laws. Therefore, we may be limited in our ability to enforce our
rights under such agreements and to collect damages, if awarded.
23
IF WE DELIVER PRODUCTS WITH DEFECTS, OUR REPUTATION WILL BE HARMED, AND THE
SALES AND MARKET ACCEPTANCE OF OUR PRODUCTS WILL DECREASE
Our products are complex and have contained errors, defects and bugs when
introduced or as new versions are released. If we deliver products with errors,
defects or bugs or that have reliability, quality or compatibility problems, our
reputation and the market acceptance and sales of our products could be harmed,
which could adversely affect our ability to retain existing customers or attract
new customers. Further, if our products contain errors, defects and bugs, then
we may be required to expend significant capital and resources to alleviate
these problems. Further, these defects or problems could interrupt or delay
sales to our customers. If any of these problems are not found until we have
commenced commercial production, we may be required to incur additional
development costs and product repair or replacement costs. Defects could also
lead to liability as a result of product liability lawsuits against us or
against our customers. We have agreed to indemnify our customers in some
circumstances against liability from defects in our products. A successful
product liability claim could seriously harm our business, financial condition
and results of operations. In addition, these problems may divert our technical
and other resources from other development efforts.
WE WILL CONTINUE TO BE CONTROLLED BY A PRINCIPAL STOCKHOLDER, WHICH MAY HAVE THE
EFFECT OF PREVENTING OR DELAYING A CHANGE OF CONTROL OF OUR COMPANY, AND THE
INTERESTS OF THE PRINCIPAL STOCKHOLDER MAY NOT ALWAYS COINCIDE WITH THOSE OF OUR
STOCKHOLDERS
As of December 31, 2000, our executive officers and directors and their
affiliates own, in the aggregate, approximately 28% of our outstanding common
stock. Entities affiliated with Texas Pacific Group own approximately 21% of our
outstanding common stock as of December 31, 2000 and are able to exercise
control over us subject to the fiduciary duties of its representatives on the
board of directors under Delaware law. The interests of Texas Pacific Group may
not always coincide with our interests or the interests of other stockholders.
Texas Pacific Group, through its representatives on our board of directors,
could cause us to enter into transactions or agreements, which we would not
otherwise consider absent Texas Pacific Group's influence.
Texas Pacific Group is also a principal stockholder of Paradyne Networks,
which is a customer of ours. In addition, three members of our current board of
directors, Messrs. Epley, Geeslin and Stanton, and one member of its Executive
Committee, Mr. Epley, are also currently directors of, and have direct or
indirect equity interests in, Paradyne Networks. Accordingly, our continuing
supplier relationship with Paradyne Networks, and any other potential business
dealings between Paradyne Networks and us, could create conflicts of interest
for GlobeSpan's principal stockholder and its directors.
We have waived in our amended and restated certificate of incorporation the
application to us of section 203 of the Delaware General Corporation Law.
Section 203 of the Delaware General Corporation Law is a statute that generally
prohibits an "interested stockholder" from engaging in a "business combination"
with a corporation for three years following the time this person became an
interested stockholder. An "interested stockholder" is defined generally as a
person owning 15% or more of a corporation's voting stock or an affiliate or
associate of that person. A "business combination" is defined to include a
variety of transactions, including mergers and sales of 10% or more of a
corporation's assets. A business combination with an interested stockholder is
allowed, however, if the business combination is approved by at least 66 2/3% of
the shares held by the corporation's disinterested stockholders. By waiving
Section 203, it will be easier for us to enter into transactions with our
significant stockholders, including Texas Pacific Group, without giving our
disinterested stockholders the opportunity to approve the transaction.
WE HAVE ANTITAKEOVER DEFENSES THAT COULD DELAY OR PREVENT AN ACQUISITION OF OUR
COMPANY
Some of the provisions of our certificate of incorporation and bylaws and
the provisions of Delaware law could have the effect of delaying, deferring or
preventing our acquisition. For example, we have authorized but unissued shares
of preferred stock which could be used to fend off a takeover attempt, our
stockholders may not take actions by written consent, our stockholders are
limited in their ability to make proposals at stockholder meetings and our
directors may be removed only for cause and upon the affirmative vote of at
least 80% of our outstanding voting shares.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL WHICH MIGHT NOT BE AVAILABLE OR WHICH,
IF AVAILABLE, COULD BE ON TERMS ADVERSE TO OUR STOCKHOLDERS
We expect that our current cash and cash equivalents, including internally
generated funds, will meet our working capital and capital expenditure needs for
at least one year. After that, we may need to raise additional funds, and we
cannot be certain that we will be able to obtain additional financing on
favorable terms, if at all. We may also require additional capital for the
24
acquisition of businesses, products and technologies that are complementary to
ours. Further, if we issue equity securities, the ownership percentage of our
stockholders would be reduced, and the new equity securities may have rights,
preferences or privileges senior to those of existing holders of our common
stock. If we cannot raise needed funds on acceptable terms, we may not be able
to develop or enhance our products, take advantage of future opportunities or
respond to competitive pressures or unanticipated requirements, which could
seriously harm our business, operating results and financial condition.
OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE, WHICH MIGHT ADVERSELY
AFFECT THE VALUE OF OUR COMMON STOCK OR MAKE IT DIFFICULT FOR OUR STOCKHOLDERS
TO SELL THEIR SHARES AT FAVORABLE PRICES
The market price of our common stock has fluctuated significantly. Since
our common stock began trading publicly, the reported per share sale price of
our common stock on the NASDAQ National Market has been as high as $167.00 and
as low as $8.79. Reductions in our stock price may make our stock less
attractive as an acquisition currency and may therefore make it difficult for us
to consummate acquisitions on terms acceptable to us. The trading price of our
common stock will likely continue to fluctuate significantly in response to the
following factors, some of which are beyond our control:
o variations in our performance and prospects;
o changes in financial estimates of our net revenues and operating
results or buy/sell recommendations by securities analysts;
o announcements by our competitors or our customers of changes in
their financial estimates or their net revenues or operating results;
o investor perception of GlobeSpan and the industry in which we
operate;
o announcements by us of significant contracts, acquisitions,
strategic partnerships, joint ventures or capital commitments;
o loss or decrease in sales to a major customer or failure to complete
significant transactions;
o general financial and other market conditions;
o domestic and international economic conditions; and
o announcements by us or our competitors of key design wins and
product introductions.
In addition, public stock markets have experienced, and are currently
experiencing, extreme price and trading volume volatility, particularly in high
technology sectors of the market. This volatility has significantly affected the
market prices of securities of many technology companies for reasons frequently
unrelated to or disproportionately impacted by the operating performance of
these companies. These broad market fluctuations may adversely affect the market
price of our common stock.
WE COULD BE SUBJECT TO CLASS ACTION LITIGATION DUE TO STOCK PRICE VOLATILITY,
WHICH, IF IT OCCURS, WILL DISTRACT MANAGEMENT AND RESULT IN SUBSTANTIAL COSTS,
AND COULD RESULT IN JUDGMENTS AGAINST US
In the past, securities class action litigation has often been brought
against companies following periods of volatility in the market price of their
securities. We may be the target of similar litigation in the future. Securities
litigation could result in substantial costs and divert management's attention
and resources, which could cause serious harm to our business, financial
condition and results of operations.
25
ITEM 2. PROPERTIES
Our facility in Red Bank, New Jersey, comprises our corporate headquarters.
We believe we have adequate space, and any additional space required will be
available to us on commercially reasonable terms. A summary of our leased
facilities is as follows:
LOCATION SIZE LEASE
(SQUARE FEET) EXPIRATION DATE
Red Bank, NJ
Headquarters/office................ 100,000 7/31/11
Middletown, NJ
Office............................. 78,120 3/31/03
Boston, MA
Office............................. 26,173 2/28/06
Paris, France
Office............................. 12,000 8/30/02
Santa Clara, CA
Office............................. 4,754 7/31/03
Santa Clara, CA
Office............................. 64,750 3/31/11
Irvine, CA
Office............................. 31,720 9/30/05
New Dehli, India
Office............................. 7,000 6/30/02
Eatontown, NJ
Warehouse.......................... 9,200 5/31/05
San Diego, CA
Office............................. 15,111 4/31/06
We have executed a fifteen year lease for 200,000 square feet in a building
in Old Bridge, New Jersey that is currently under construction. This lease will
commence upon completion of the building, which is anticipated in November 2001.
ITEM 3. LEGAL PROCEEDINGS
The Company is not presently involved in any material legal proceedings.
However, the Company is subject to various other legal proceedings and claims,
either asserted or unasserted, which arise in the ordinary course of business.
While the outcome of these claims cannot be predicted with certainty, management
does not believe that the outcome of any of these legal matters will have a
material adverse effect on the Company's business, results of operation or
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to stockholders during the fourth quarter of the
year ended December 31, 2000.
26
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
Our Common Stock is traded on the Nasdaq National Market System under the
symbol "GSPN". The following table sets forth, for the periods indicated, the
low and high bid prices per share for our Common Stock as reported by the Nasdaq
National Market, as adjusted for the Company's three-for-one stock split on
February 28, 2000.
LOW HIGH
2000
First Quarter........................................... $ 23.58 $ 167.00
Second Quarter.......................................... 42.00 128.00
Third Quarter........................................... 95.50 148.50
Fourth Quarter.......................................... 17.69 129.89
LOW HIGH
1999
Second Quarter (from June 23, 1999)..................... $ 8.79 $ 14.38
Third Quarter........................................... 14.33 39.42
Fourth Quarter.......................................... 16.33 30.96
As of February 28, 2001 there were approximately 750 holders of record of
our Common Stock. The last reported sales price of our Common Stock on March 23,
2001 was $26.93 per share.
DIVIDEND POLICY
No cash dividends have been paid on the Common Stock. We currently intend
to retain all future earnings, if any, for use in our business and we do not
anticipate paying any cash dividends on our Common Stock in the foreseeable
future.
ITEM 6. SELECTED HISTORICAL FINANCIAL DATA
The following selected historical financial data was derived from financial
statements audited by PricewaterhouseCoopers LLP, independent accountants, for
the respective periods. This information should be read in conjunction with
management's discussion and analysis of financial condition and results of
operations and the financial statements, including the notes thereto, included
elsewhere in this Form 10-K. The "Predecessor Company" represents the operations
of the Advanced Transmission Technology Division of AT&T Paradyne Corporation
prior to our formation in August of 1996.
Predecessor The Company
Company
Seven Five
Months Months
Ended Ended Year Ended
July 31, December 31, December 31,
----------------------------------------------------------------------------------
1996 1996 1997 1998 1999 2000
----------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
Net revenues $ 1,597 $ 2,360 $ 22,546 $ 31,464 $ 56,220 $ 348,098
Cost of sales - 496 7,565 9,882 20,879 142,430
Cost of sales related to termination charge - - - - 1,119 -
---------------------------------------------------------------------------------------
Gross profit 1,597 1,864 14,981 21,582 34,222 205,668
Operating expenses
Research and development (including
non-cash compensation of $16,761 for the year
ended December 31, 2000) 2,524 1,616 8,358 18,694 26,531 115,411
Selling, general and administrative
(including non-cash compensation of $7,356
for the year ended December 31, 2000) 1,492 644 4,572 10,217 14,389 53,504
Amortization of intangible assets and other - 404 1,000 583 - 131,832
In process research and development - - - - - 44,854
---------------------------------------------------------------------------------------
Total operating expenses 4,016 2,664 13,930 29,494 40,920 345,601
---------------------------------------------------------------------------------------
(Loss) income from operations (2,419) (800) 1,051 (7,912) (6,698) (139,933)
Interest expense - non-cash - - - - - 43,439
Interest (income) expense, net - - (91) 134 (1,133) (1,902)
Foreign exchange (gain) - - - - - (63)
---------------------------------------------------------------------------------------
(Loss) income before income taxes and
extradordinary items (2,419) (800) 1,142 (8,046) (5,565) (181,407)
Provision (benefit) for income taxes - - 300 (217) - 15,131
---------------------------------------------------------------------------------------
Net (loss) income before extraordinary item (2,419) (800) 842 (7,829) (5,565) (196,538)
Preferred stock deemed dividend and accretion - - - - (3,466) -
---------------------------------------------------------------------------------------
Net income (loss) attributable to common
stockholders before extraordinary item (2,419) (800) 842 (7,829) (9,031) (196,538)
Extraordinary item - gain on the redemption
of the beneficial conversion feature - - - - - 43,439
---------------------------------------------------------------------------------------
Net income (loss) attributable to common
stockholders (2,419) (800) 842 (7,829) (9,031) (153,099)
Other comprehensive income (loss):
Unrealized loss on marketable securities - - - - (22) -
Foreign currency translation loss - - - - - (77)
---------------------------------------------------------------------------------------
Comprehensive income (loss) attributable
to common stockholders $ (2,419) $ (800) $ 842 $ (7,829) $ (9,053) $ (153,176)
=======================================================================================
(Loss) earnings per share basic:
Income (loss) before extraordinary item $ (0.02) $ 0.02 $ (0.22) $ (0.19) $ (3.03)
==========================================================================
Extraordinary item $ - $ - $ - $ - $ 0.67
==========================================================================
Net income (loss) $ (0.02) $ 0.02 $ (0.22) $ (0.19) $ (2.36)
==========================================================================
(Loss) earnings per share diluted:
Income (loss) before extraordinary item $ (0.02) $ 0.02 $ (0.22) $ (0.19) $ (3.03)
==========================================================================
Extraordinary item $ - $ - $ - $ - $ 0.67
==========================================================================
Net income (loss) $ (0.02) $ 0.02 $ (0.22) $ (0.19) $ (2.36)
==========================================================================
Shares used in computing (loss) earnings per share:
Basic 34,312 34,546 36,254 6,613 64,924
Diluted 34,312 38,119 36,254 46,613 64,924
December 31,
--------------
1997 1998 1999 2000
---- ---- ---- ----
Balance Sheet Data:
Cash and cash equivalents and short-term investments $ 875 $ 12 $ 36,668 $ 99,129
Working capital (deficit) 2,423 (2,655) 44,616 164,156
Total assets 10,215 13,430 70,991 905,129
Long-term liabilities, less current portion -- 5,506 443 26,396
Retained earnings (accumulated deficit) 42 (7,787) (13,352) (166,451)
Total stockholders' equity (deficit) $ 6,448 $ (1,293) $ 55,433 $ 803,551
See Note 12 to the Financial Statements for an explanation of the method used to
calculate earnings per share. Earnings per share data is not presented for the
Predecessor Company, since the Predecessor Company did not have its own capital
structure. As a result, this information would not be meaningful.
28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING COMMENTARY SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS AND RELATED NOTES CONTAINED ELSEWHERE IN THIS FORM 10-K. THE
INFORMATION IN THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SUCH STATEMENTS ARE BASED UPON
CURRENT EXPECTATIONS THAT INVOLVE RISKS AND UNCERTAINTIES. ANY STATEMENTS
CONTAINED HEREIN THAT ARE NOT STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE
FORWARD-LOOKING STATEMENTS. FOR EXAMPLE, THE WORDS "BELIEVES," "ANTICIPATES,"
"PLANS," "EXPECTS," "INTENDS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. GLOBESPAN'S ACTUAL RESULTS AND THE TIMING OF CERTAIN
EVENTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DISCREPANCY INCLUDE,
BUT ARE NOT LIMITED TO, THOSE SET FORTH UNDER "CERTAIN BUSINESS RISKS" AND
ELSEWHERE IN THIS FORM 10-K. ALL FORWARD-LOOKING STATEMENTS IN THIS DOCUMENT ARE
BASED ON INFORMATION AVAILABLE TO GLOBESPAN AS OF THE DATE HEREOF AND GLOBESPAN
ASSUMES NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS.
OVERVIEW
GlobeSpan, Inc. is a leading provider of advanced integrated circuits that
enable broadband digital communications to homes and business enterprises. We
design, develop and supply these integrated semiconductor chips, or chip sets,
for use in DSL networks, which utilize the existing network of copper telephone
wires known as the local loop for the high-speed transmission of data.
Our products target the rapidly growing market for high-speed data
transmission applications such as Internet access, telecommuting and networking
among branch offices. These transmission applications are expanding to include
voice and video transmissions over the same copper wire. We sell our integrated
circuits to equipment manufacturers for incorporation into products that are
sold to telecommunications service providers and end-users worldwide.
In an effort to provide system-level products to our customers, we have
developed System-On-Chip solutions that integrate the functionality of multiple
discrete components, memory, microprocessors and software onto a single chip.
These system-level products allow our customers to reduce the time it takes for
their products to reach the market and to focus their resources on adding
features and functions to differentiate their product offerings from those of
their competitors. Our recent acquisitions provide us with additional design and
product development resources and expertise. We are utilizing these skills and
resources to add greater networking functionality to our chip sets and to
capture more of the system functions used in DSL system solutions in our
products.
We have shipped our chip set solutions to a broad base of leading
communications equipment manufacturers including, Alcatel, Cisco Systems, Intel
Corporation, Lucent Technologies, NEC Corporation, Nokia Corporation, and Nortel
Networks, among others.
Historically, a significant portion of our net revenues in any quarter or
annual period has been derived from sales to relatively few customers, and we
expect this trend to continue. In the years ended December 31, 2000, 1999 and
1998, our customers who individually represented more than 10% of our net
revenues accounted for 62.6%, 41.2%, and 60.9%, respectively, of our net
revenues. In 2000 our top three customers were Cisco Systems, Lucent
Technologies and Nortel Networks, which accounted for 27.8%, 23.6% and 11.2% of
our net revenues, respectively. In 1999, our top three customers were Cisco
Systems, Lucent Technologies and Ascom Hasler AG, which accounted for 41.6%,
7.1% and 6.2% of our net revenues, respectively. In 1998, our top three
customers were Cisco Systems, NEC Corporation and Ascom Hasler AG, which
accounted for 48.3%, 12.6% and 9.2% of our net revenues, respectively. We do not
have long-term purchase contracts with any of our customers that obligate them
to continue to purchase our products, and they could cease purchasing products
from us at any time. Because fluctuations in orders from our major customers
could cause our net revenues to fluctuate significantly in any given quarter or
annual period, we do not believe that period-to-period comparisons of our
financial results are necessarily meaningful and should not be relied upon as an
indication of future performance.
Members of the group comprising our largest customers change frequently due
to our lack of long-term contracts with our customers, the timing of our
customers' product implementations, demand cycles in the sales of our customers'
products and our long sales cycle. In particular, the amount of revenues we
derive from our customers depends upon their success in selling DSL equipment to
29
telecommunications service providers for use in DSL service deployments. Our
largest customers in any particular period have varied with the timing of DSL
deployments and the identity of the telecommunications service provider
initiating the deployment. Further, since we are a worldwide supplier, our net
revenues and customers may be influenced by local economic conditions that
influence our customers' level of business with us. Our long sales cycle is
another factor in the frequent change of our principal customers. In general,
our customers will evaluate our products for three to six months prior to
incorporating our products into their products and beginning volume production.
As a result, our principal customers will vary depending on their stage in the
sales cycle.
Historically, a significant portion of our net revenues has been derived
from customers outside of North America, and we expect this trend to continue.
In 2000, approximately 35.6% of our net revenues were derived from customers
outside of the United States, of which 3.0% were derived from customers based in
Europe, 25.5% were derived from customers based in Asia and 7.1% were derived
from customers based in other international markets. In 1999, approximately
47.1% of our net revenues were derived from customers outside of the United
States, of which 9.1% were derived from customers based in Europe, 23.2% were
derived from customers based in Asia and 14.8% were derived from customers based
in other international markets. In 1998, approximately 32.6% of our net revenues
were derived from customers outside of the United States, of which 11.8% were
derived from customers based in Europe, 9.4% were derived from customers based
in Asia and 11.4% were derived from customers based in other international
markets. Substantially all of our net revenues to date have been denominated in
United States dollars.
Competition and technological change in the rapidly evolving DSL market has
and may continue to influence our quarterly and annual net revenues and results
of operations. Average selling prices of our chip sets and associated gross
margins tend to be higher at the time we introduce new products and decline over
time due to competitive pressures. We expect this pattern to continue with
existing and future products. Further, our gross margins are impacted by our
customer concentration and product mix. For example, purchases from our major
customers are generally at lower average selling prices and certain of our
products, such as discrete components, are generally lower margin products.
Our product development and marketing strategy is focused on generating
design wins with DSL equipment manufacturers. The sales cycle for design wins
includes detailed testing and evaluation of our products, followed by a product
development cycle. Due to these cycles, which may be up to 12 months or longer,
and because the end-user market for DSL services is an emerging market, we
invest significant resources in research and development and marketing in
advance of generating substantial revenues related to these investments.
Additionally, the rate and timing of customer orders may vary significantly from
month-to-month. Our backlog has fluctuated from quarter-to-quarter and has not
been predictive of quarterly results. Accordingly, if sales of our products do
not occur when we expect and we are unable to predict or adjust our estimates on
a timely basis, our expenses and inventory levels may increase as a percentage
of net revenues and total assets, respectively.
Our net losses have resulted from our significant investment in research
and development, in building sales and marketing and general and administrative
infrastructure and from the effects of purchase accounting for our acquisitions.
These expenses have exceeded our gross profits. We expect to continue to invest
significant resources in this infrastructure in advance of realizing revenues
associated with these expenses.
Each of the acquisitions we made in 2000 was accounted for as a purchase
acquisition. Under purchase accounting, we recorded the market value of our
shares of common stock issued in connection with the purchases and the amount of
direct transaction costs as the cost of acquiring the companies. That cost was
allocated to the individual assets acquired and liabilities assumed, including
various identifiable and intangible assets such as in process research and
development, acquired technology, acquired trademarks and trade names and
acquired workforce, based on their respective fair values. We allocated the
excess of the purchase cost over the fair value of the net assets to intangible
assets. We estimate that the purchase of Ficon, T.sqware, iCompression, ATecoM
and the intangible assets of PairGain will result in annual amortization and
other non-cash acquisition related charges of approximately $225 to $250
million, using useful lives of two to four years. As a result, purchase
accounting treatment of our recent acquisitions will result in a net loss for
the foreseeable future, which could have a material adverse effect on the market
value of our stock. We will continue to seek out other acquisition
opportunities. Accordingly, we expect to incur substantial operating losses for
the foreseeable future.
30
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, statement of
operations data. Our results of operations are reported as a single business
segment.
Year Ended December 31,
------------------------------------
2000 1999 1998
---- ---- ----
STATEMENT OF OPERATIONS DATA:
Net revenues $ 348,098 $ 56,220 $ 31,464
Cost of sales 142,430 20,879 9,882
Cost of sales related to termination charge -- 1,119 --
----------------------------------------------
Gross profit 205,668 34,222 21,582
Operating expenses
Research and development (including non-cash
compensation of $16,761 for the year ended
December 31, 2000) 115,411 26,531 18,694
Selling, general and administrative (including
non-cash compensation of $7,356 for the year ended
December 31, 2000) 53,504 14,389 10,217
In process research and development 44,854 -- --
Amortization of intangible assets 131,832 -- 583
----------------------------------------------
Total operating expenses 345,601 40,920 29,494
----------------------------------------------
(Loss) from operations (139,933) (6,698) (7,912)
Interest expense - non cash 43,439 -- --
Interest (income) expense, net (1,902) (1,133) 134
Foreign exchange (gain) (63) -- --
----------------------------------------------
(Loss) before income taxes and extraordinary item (181,407) (5,565) (8,046)
Provision (benefit) for income taxes 15,131 -- (217)
----------------------------------------------
(Loss) before extraordinary item (196,538) (5,565) (7,829)
Preferred stock deemed dividend and accretion -- (3,466) --
----------------------------------------------
(Loss) attributable to common stockholders before
extraordinary item (196,538) (9,031) (7,829)
Extraordinary item 43,439 -- --
----------------------------------------------
Net (loss) attributable to stockholders $(153,099) $ (9,031) $ (7,829)
==============================================
The following table sets forth, for the periods indicated, certain statement of
operations data as a percentage of net revenues. Our results of operations are
reported as a single business segment.
Year Ended December 31,
------------------------------------
2000 1999 1998
---- ---- ----
STATEMENT OF OPERATIONS DATA:
Net revenues 100.0% 100.0% 100.0%
Cost of sales 40.9 37.1 31.4
Cost of sales related to termination charge - 2.0 -
--------------------------------------------
Gross profit 59.1 60.9 68.6
--------------------------------------------
Operating expenses:
Research and development (including non-cash
compensation of 4.7% for the year ended December 31,
2000) 33.1 47.2 59.4
Selling, general and administrative (including
non-cash compensation of 2.1% for the year ended
December 31, 2000) 15.4 25.6 32.5
In process research and development 12.9 - -
Amortization of intangible assets 37.9 - 1.9
--------------------------------------------
Total operating expenses 99.3 72.8 93.8
--------------------------------------------
31
(Loss) from operations (40.2) (11.9) (25.1)
Interest expense - non cash 12.5 - -
Interest (income) expense, net (0.6) (2.0) 0.4
--------------------------------------------
(Loss) before income taxes and extraordinary item (52.1) (9.9) (25.6)
Provision (benefit) for income taxes 4.4 - (0.7)
--------------------------------------------
(Loss) before extraordinary item (56.5) (9.9) (24.9)
Preferred stock deemed dividend and accretion - (6.1) -
--------------------------------------------
(Loss) attributable to common stockholders before
extraordinary item (44.0) (16.0) (24.9)
Extraordinary item 12.5 - -
--------------------------------------------
Net (loss) attributable to stockholders (44.0)% (9.9)% (24.9)%
============================================
RESULTS OF OPERATIONS IN THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
NET REVENUES. Our net revenues were $348.1 million, $56.2 million and $31.5
million in the years ended December 31, 2000, 1999 and 1998, respectively. These
amounts represent increases of 519.2% from 1999 to 2000, and 78.7% from 1998 to
1999. The net increase in revenues was primarily due to the increases in unit
volume shipments to existing customers, the expansion of our customer base and
the introduction of new products, and, to a lesser extent, net revenues from
acquired businesses. Net revenues from customers outside of North America
represented 35.6%, 47.1%, and 32.6% of our net revenues in the years ended
December 31, 2000, 1999 and 1998, respectively. Net revenues from customers
outside of North America represent a portion of our net revenues due to the
third party manufacturing of our customers' product at offshore locations and
the implementation of DSL in international markets. We expect that net revenues
generated from customers outside of North America will continue to account for a
significant percentage of our net revenues.
GROSS PROFIT. Our gross profit was $205.7 million, $34.2 million and $21.6
million in the years ended December 31, 2000, 1999 and 1998, respectively. These
amounts represent an increase of 501.0% from 1999 to 2000 and 58.6% from 1998 to
1999. Our gross margin was 59.1%, 60.9% and 68.6% in the years ended December
31, 2000, 1999 and 1998, respectively. The decrease in gross margin each year
was related to lower average selling prices due to increased unit volume
shipped. The increase in gross profit dollars was the result of higher net
revenues. We expect gross margins may decrease in the future due to a number of
factors, including pressures on average selling prices, product mix and customer
mix. During 1999, in consideration for modifying pricing terms for the sale of
our products under certain cooperative development agreements with Paradyne
Networks, we agreed to pay a license fee to Paradyne Networks on products sold
to all customers up to an aggregate amount of $1.5 million. As of March 1999, we
had incurred and paid approximately $300,000 to Paradyne Networks under that
arrangement. In connection with terminating the cooperative development
agreements and entering into a new Supply Agreement effective December 1998 with
Paradyne Networks, we agreed to pay Paradyne Networks the remaining $1.2
million, which was recorded as termination charge. This amount was paid and
recorded through cost of goods sold in 1999.
RESEARCH AND DEVELOPMENT. Research and development expenditures are
comprised primarily of salaries and related expenses of employees engaged in
research, design and development activities. They also include related supplies,
license fees for acquired technologies used in research and development,
equipment expenses and depreciation and amortization. Included in research and
development expenditures for the year ended December 31, 2000 is $16.7 million
of non-cash compensation. During the year ended December 31, 2000, we exchanged
our common stock with employee principals of an acquired entity which was
considered compensation and we granted certain employees stock options at less
than fair market value. The deferred stock compensation recorded is being
amortized over the respective vesting periods ranging from six months to four
years. Our research and development expenditures were $115.4 million (including
non-cash compensation of $16.7 million), $26.5 million and $18.7 million, in the
years ended December 31, 2000, 1999 and 1998, respectively. These amounts
represent increases of 335.0% (272.2% excluding non-cash compensation) from 1999
to 2000 and 41.9% from 1998 to 1999. The increase in research and development
spending during 2000 is attributable primarily to the increase in the number of
employees engaged in research, design and development activities during 2000.
Research and development expenditures represented 33.1% (28.4% excluding
non-cash compensation), 47.2% and 59.4% of net revenues in the years ended
December 31, 2000, 1999 and 1998, respectively. The decrease in research and
development expenditures as a percentage of revenues was due to our increased
revenue. The dollar amount of our research and development expense may increase
in the future due to planned additional increases in personnel and related
support expenses, prototyping costs and depreciation resulting from increased
capital investment.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expense is primarily comprised of salaries and related costs for sales, general
and administrative personnel as well as general non-personnel related expenses.
32
Included in selling, general and administrative expense for the year ended
December 31, 2000 is $7.4 million of non-cash compensation. During the year
ended December 31, 2000, we exchanged our common stock with employee principals
of an acquired entity which was considered compensation, we granted certain
employees stock options at less than fair market value and we granted options to
non-employees. The deferred stock compensation recorded is being amortized over
the respective vesting periods ranging from six months to four years. The
non-employee options, valued at $1.5 million, were recorded to expense when they
were issued as the performance required to earn those options was complete. Our
selling, general and administrative expense was $53.5 million (including $7.4
million of non-cash compensation), $14.4 million, and $10.2 million in the years
ended December 31, 2000, 1999 and 1998, respectively. These amounts represent
increases of 271.8% (220.7% excluding non-cash compensation) from 1999 to 2000
and 40.8% from 1998 to 1999. Selling, general and administrative expense
represented 15.4% (13.3% excluding non-cash compensation), 25.6% and 32.5% of
net revenues in the years ended December 31, 2000, 1999 and 1998, respectively.
The increase in dollars resulted from the increase in sales, marketing and
administrative personnel and related expenses including expenses from our
acquisitions, increased commissions and administrative costs. The decrease in
the percentage of selling, general and administrative expense as a percentage of
net revenues was due to higher net revenues. The dollar amount of our selling,
general and administrative expense may increase in the future due to increases
in personnel, higher commissions and administrative costs.
IN PROCESS RESEARCH AND DEVELOPMENT. During the year ended December 31,
2000, we completed several acquisitions that had development projects which were
not yet complete at the date of the acquisitions. The amount allocated to in
process research and development, or IPR&D, of $44.9 million was expensed upon
acquisition, as it was determined that the underlying projects had not reached
technical feasibility, had no alternative future use and successful development
was uncertain. The increase in the dollar amount and percentage is the result of
expensing IPR&D acquired. See "Financial Statements- Note 3."
AMORTIZATION OF INTANGIBLE ASSETS. During the year ended December 31, 2000,
we completed several acquisitions. The increase in dollar amount and percentage
of amortization expense is the result of our amortizing the intangible assets
acquired on a straight-line basis over their estimated useful lives.
Amortization expense prior to 2000 is related to the core technology we acquired
from Lucent Technologies in 1996. Our expense for amortization was $131.8
million, $0.0 million and $0.6 million in the years ended December 31, 2000,
1999, and 1998, respectively.
INTEREST EXPENSE NON-CASH. As part of the purchase price for the
Microelectronics Group of PairGain, we issued a subordinated redeemable
convertible note with a beneficial conversion feature measured by the price of
our common stock at closing of the acquisition and the conversion price as
defined. We amortized the difference between the price of our common stock at
the closing of the acquisition and the conversion price of approximately $43.4
million through August 9, 2000, the date we repaid the note. The increase in
dollar amount and percentage is the result of the amortization.
INTEREST INCOME (EXPENSE), NET. Interest income for the year ended December
31, 2000 was $4.9 million, offset by interest expense of $3.0 million, resulting
in net interest income of $1.9 million. Net interest income for the year ended
December 31, 1999 was $1.1 million, which resulted from interest earned on
invested cash, net of interest expense on bank borrowings and other debt, and
other non-operating expenses. The increase in interest income, net of $.8
million was primarily the result of higher cash balances during 2000, and a
reduction in interest expense from outstanding debt, offset by $2.0 million of
interest expense related to the subordinated redeemable convertible note.
PROVISION FOR INCOME TAXES. Our effective tax rate for the year ended
December 31, 2000, was 10.9%, excluding the tax effect of non-cash interest
expense and the extraordinary gain related to the subordinated redeemable
convertible note issued in connection with the PairGain acquisition. The 2000
effective rate is impacted by permanent differences which resulted from the
Company's acquisitions, and an increase in the valuation allowance. During 1999
and 1998, the Company incurred losses and therefore had established a full
valuation allowance against its net deferred tax asset, resulting in an
effective tax rate of 0.0%.
EXTRAORDINARY GAIN. In connection with the repayment of the subordinated
redeemable convertible note issued by us to PairGain, the Company recognized a
gain of $43.4 million on the redemption of the beneficial conversion feature.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2000, the FASB issued SFAS 138, "Accounting for Certain Hedging
Activities", which amended Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities". Statement 138 must be adopted concurrently
with the adoption of Statement 133. The Company will be required to adopt these
statements for the year ending December 31, 2001. Statements 133 and 138
establish methods of accounting for derivative financial instruments and hedging
33
activities related to those instruments as well as other hedging activities.
Because we currently hold no derivative financial instruments and do not
currently engage in hedging activities, adoption of these Statements is not
expected to have a material impact on our financial condition or results of
operations.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Total assets at December 31, 2000 were $905.1 million, an increase of
$834.1 million, or 1,175.0% from December 31, 1999 total assets of $71.0
million. The increase from December 31, 1999 is primarily a result of intangible
assets from our acquisitions during 2000, as well as increases in cash and cash
equivalents, accounts receivable and inventories, primarily as a result of the
significant growth in our revenues during 2000.
As of December 31, 2000, we had working capital of approximately $164.2
million, of which $88.5 million was in cash and cash equivalents and $10.6
million in short-term marketable securities. As of December 31, 1999, we had
working capital of approximately $44.6 million, of which $24.7 million was in
cash and cash equivalents and $12.0 million in short-term marketable securities.
Net cash provided by operating activities was $7.3 million for the year
ended December 31, 2000, compared to net cash used in operating activities of
$12.8 million for the year ended December 31, 1999. The increase was primarily
due to higher revenues during the year ended December 31, 2000 compared to the
year ended December 31, 1999. Net cash used in operating activities for the year
ended December 31, 1998 was $3.4 million. The increase in net cash used from the
year ended December 31, 1999 to the year ended December 31, 1998 was primarily
due to the timing of expenditures.
Net cash generated from investing activities amounted to $7.8 million for
the year ended December 31, 2000. Net cash received from the acquisition of
businesses of $19.0 million, proceeds from the maturities of marketable
securities of $19.8 million and the sale of an intangible asset of $.5 million,
were offset by purchases of property and equipment and purchases of marketable
securities of $18.9 million and $12.6 million, respectively for the year ended
December 31, 2000. Net cash used in investing activities amounted to $16.8
million and $4.8 million for the years ended December 31, 1999 and 1998,
respectively. The net cash used primarily related to investments in marketable
securities and preferred stock during the year ended December 31, 1999 and
capital expenditures during the year ended December 31, 1998.
Cash flows provided by financing activities of $48.5 million for the year
ended December 31, 2000 primarily consisted of net proceeds from a follow-on
public offering and other proceeds from the issuances of common stock of $139.8
million, offset by a $90.0 million repayment of a subordinated redeemable
convertible note issued by us in connection with our acquisition of the
Microelectronics Group of PairGain and other miscellaneous items. Net cash
provided by financing activities was $54.2 million and $7.3 million in the years
ended December 1999 and 1998, respectively and was provided by the issuance of
common and preferred stock, other debt and bank borrowings.
We believe that our sources of capital, including internally generated
funds and the net proceeds from our follow-on public offering, net of the
repayment of the subordinated redeemable convertible note, will be adequate to
satisfy our anticipated working capital and capital expenditure needs for at
least one year. After that, we may need to raise additional funds, and we cannot
be certain that we will be able to obtain additional financing on favorable
terms, if at all. We may also require additional capital for the acquisition of
businesses and products and technologies that are complimentary to ours.
Further, if we issue equity securities, the ownership percentage of our
stockholders would be reduced, and the new equity securities may have rights,
preferences or privileges senior to those of existing holders of our common
stock. If we can not raise needed funds on acceptable terms, we may not be able
to develop or enhance our products, take advantage of future opportunities or
respond to competitive pressures or unanticipated requirements, which could
seriously harm our business, operating results or financial condition.
ALTHOUGH WE EXPERIENCED NO SIGNIFICANT YEAR 2000 DISRUPTIONS WE WILL CONTINUE TO
MONITOR DEVELOPMENTS
The "Year 2000 Issue" refers generally to the problems that some software
may have in determining the correct century of the year. In late 1999, we
completed our Year 2000 compliance project. As a result of our efforts, we
experienced no significant disruptions related to Year 2000. We are not aware of
any material problems resulting from Year 2000 issues, either with our products,
our internal systems, or the products and services of suppliers. The incremental
costs related to the Year 2000 project were not material to the results of our
operations, financial position or cash flows. We have not experienced any
significant issues and will continue to monitor throughout Year 2000 our
34
critical computer applications, and those of our suppliers, to ensure that any
Year 2000 matters that may arise are addressed promptly.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The primary objective of our investment activities is to preserve principal
while at the same time maximizing the income we receive from our investments
without significantly increasing risk. Some of the securities that we may invest
in may be subject to market risk. This means that a change in prevailing
interest rates may cause the principal amount of the investment to fluctuate.
For example, if we hold a security that was issued with a fixed interest rate at
the then-prevailing rate and the prevailing interest rate later rises, the
principal amount of our investment will probably decline. To minimize this risk
in the future, we intend to maintain our portfolio of cash equivalents and
short-term investments in a variety of securities, including commercial paper,
money market funds, government and non-government debt securities and
certificates of deposit. As of December 31, 2000, substantially all of our
investments were in money market funds, certificates of deposits, or
high-quality commercial paper.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the financial statements of the Company included herein and listed
under the heading "(a) (1) Financial Statements" of Part IV Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. ANNUAL DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference to the sections of the Company's proxy statement
for the 2001 Annual Meeting of Stockholders entitled "Election of Directors."
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the sections of the Company's proxy statement
for the 2001 Annual Meeting of Stockholders entitled "Executive Compensation,"
"Compensation Committee Report," "Certain Transactions" and "Compensation of
Directors."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the section of the Company's proxy statement
for the 2001 Annual Meeting of Stockholders entitled "Stock Ownership of
Principal Shareholders and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the section of the Company's proxy statement
for the 2001 Annual Meeting of Stockholders entitled "Certain Transactions."
35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements- The following financial statements are
included at the indicated page of this Form 10-K and incorporated into this Item
14(a)(1) by reference:
Report of Independent Accountants....................................37
Consolidated Balance Sheets..........................................38
Consolidated Statements of Operations................................39
Consolidated Statements of Changes in Stockholders' Equity...........40
Consolidated Statements of Cash Flows................................41
Notes to Consolidated Financial Statements...........................42
(a)(2) Financial Statement Schedule--Schedule II--Valuation and Qualifying
Accounts
The financial statement schedule has not been included herein since the
schedule has been included in the financial statements included elsewhere in
this Form 10-K.
(a)(3) Exhibits- See Index to Exhibits
(b) Reports on Form 8-K -- The Company filed one report on Form 8-K/A
during the fourth quarter ended December 31, 2000. Information regarding
such report is as follows:
--------------------------- -----------------------------------------------
Date of Report Item Reported On
--------------------------- -----------------------------------------------
--------------------------- -----------------------------------------------
October 10, 2000 Filing to amend previously filed Form 8-K to
include accountants' consents
--------------------------- -----------------------------------------------
36
Report of Independent Accountants
To the Board of Directors and Stockholders of GlobeSpan, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of changes in stockholders'
equity and of cash flows present fairly, in all material respects, the financial
position of GlobeSpan, Inc. and its subsidiaries at December 31, 2000 and 1999,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
Florham Park, New Jersey
January 24, 2001
37
GLOBESPAN, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31,
2000 1999
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 88,489 $ 24,657
Short-term investments 10,640 12,011
Accounts receivable, less allowance for
doubtful accounts of $5,403 and $337,
respectively 59,922 9,160
Accounts receivable from affiliates - 146
Inventories 60,281 10,656
Deferred income taxes 14,838 -
Prepaid expenses and other current assets 5,168 3,101
----- -----
Total current assets 239,338 59,731
Property and equipment, net 24,394 5,853
Intangible assets, net 636,682 -
Other assets 4,715 5,407
----- -----
Total assets $ 905,129 $ 70,991
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 36,502 $ 4,333
Accounts payable to affiliates 2,313 80
Accrued expenses and other liabilities 15,825 2,049
Payroll and benefit related liabilities 17,128 7,688
Current portion of capital lease obligations 3,414 965
----- ---
Total current liabilities 75,182 15,115
Other long-term liabilities 1,428 -
Deferred Taxes 21,524 -
Capital lease obligations, less current portion 3,444 443
----- ---
Total liabilities 101,578 15,558
------- ------
Commitments and contingencies (Note 15)
Stockholders' equity:
Preferred stock, par value $0.001; 10,000,000
shares authorized; none issued or outstanding - -
Common stock, par value $0.001; 400,000,000
shares authorized; 72,247,190 and 58,134,678
shares issued and outstanding, respectively 72 58
Stock purchase warrant 1 1
Additional paid-in capital 1,043,519 77,378
Notes receivable from stock sales (5,262) (7,412)
Deferred stock compensation (68,229) (1,218)
Accumulated other comprehensive loss (99) (22)
Accumulated deficit (166,451) (13,352)
--------- --------
Total stockholders' equity 803,551 55,433
------- ------
Total liabilities and stockholders' equity $ 905,129 $ 70,991
========= ========
The accompanying notes are an integral part of these financial statements.
38
GLOBESPAN, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Years Ended December 31,
- --
2000 1999 1998
---- ----- ----
Net revenues $ 348,098 $ 56,220 $ 31,464
Cost of sales 142,430 20,879 9,882
Cost of sales related to termination charge -- 1,119 --
--------- --------- ---------
Gross profit 205,668 34,222 21,582
--------- --------- ---------
Operating expenses:
Research and development (including non-cash
compensation of $16,761 for the year ended
December 31, 2000) 115,411 26,531 18,694
Selling, general and administrative
(including non-cash compensation of $7,356 for
the year ended December 31, 2000) 53,504 14,389 10,217
In process research and development 44,854 -- --
Amortization of intangible assets 131,832 -- 583
--------- --------- --------
Total operating expenses 345,601 40,920 29,494
--------- --------- ---------
(Loss) from operations (139,933) (6,698) (7,912)
Interest expense non-cash 43,439 -- --
Interest (income) expense, net (1,902) (1,133) 134
Foreign exchange (gain) (63) -- --
-------- ------ ------
(Loss) before income taxes and extraordinary
item (181,407) (5,565) (8,046)
Provision (benefit) for income taxes 15,131 -- (217)
-------- ------ ------
(Loss) before extraordinary item (196,538) (5,565) (7,829)
Preferred stock deemed dividend and accretion -- (3,466) --
-------- ------ ------
Loss attributable to common stockholders before
extraordinary item (196,538) (9,031) (7,829)
Extraordinary item - gain on the redemption of the
beneficial conversion feature 43,439 -- --
--------- --------- ---------
Net loss attributable to common stockholders (153,099) (9,031) (7,829)
======== ====== ======
Other comprehensive loss:
Unrealized loss on marketable securities -- 22 --
Foreign currency translation loss 77 -- --
--------- --------- ---------
Comprehensive loss attributable to common
stockholders $(153,176) $ (9,053) $ (7,829)
========= ========= ========
Basic and diluted (loss) per share:
Loss before extraordinary item $ (3.03) $ (0.19) $ (0.22)
Extraordinary item 0.67 -- --
--------- --------- ---------
Net loss $ (2.36) $ (0.19) $ (0.22)
========= ========= =========
Basic and diluted weighted average shares 64,924 46,613 36,254
========= ========= =========
The accompanying notes are an integral part of these financial statements.
39
GLOBESPAN, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except share data)
Notes Accumulated
Common Stock Stock Additional Receivable Deferred Other
------------ Purchase Paid-in From Stock Comprehensive
Shares Amount Warrant Capital Stock Sales Compensation (Loss)
---------- ------ -------- ---------- ----------- ------------ -------------
Balance-December 31, 1997 36,860,022 $ 37 $ 1 $ 7,214 $ (794) $ (52) $ -
Net loss
Distribution to Communication Partners,
L.P. (Note 10) 3,653 (3,653)
Exercise of employee stock options 127,962 61
Non-employee stock options 44 (44)
Amortization of non-employee stock
options 20
Benefit from exercise of nonqualified
stock options 2
Repayment of note receivable 5
Forfeiture of restricted stock (192,189) (64) 64
---------- ------ -------- ---------- ---------- ------------ ----------
Balance-December 31, 1998 36,795,795 37 3,654 3,604 (725) (76) -
Net loss
Issuance of common stock due to initial
public offering, net of costs 11,212,500 11 49,729
Net exercise of warrants 2,173,500 2 (3,653) 3,651
Forgiveness of subordinated loan to
Communication Partners, L.P. 100
Issuance of common stock and exercise
of stock options 3,568,521 4 7,091 (6,775)
Issuance and conversion of Series A
preferred stock, net of costs 4,384,362 4 14,601
Preferred dividend attributable to
beneficial conversion feature (2,616)
Stock options issued at less than fair
market value 1,218 (1,162)
Amortization of non-employee stock
options 20
Repayment of notes receivable 336
Interest earned on notes receivable (248)
Accumulated other comprehensive loss (22)
---------- ------ -------- ---------- ---------- ------------ ----------
Balance - December 31, 1999 58,134,678 58 1 77,378 (7,412) (1,218) (22)
Net loss
Issuance of common stock due to
secondary public offering, net of costs 1,406,250 1 132,970 -
Issuance of common stock and exercise
of stock options 1,971,952 2 5,442
Acquisitions and acquisition related
stock options issued at less than fair
value 10,734,310 11 843,418 (85,420)
Redemption of Beneficial Conversion
Feature (47,340)
Tax benefit for deferred stock
compensation 30,116
Interest eaned on and repayment of
notes receivable 2,150
Stock options issued at less than fair
market value (563)
Amortization of compensatory stock
options 18,972
Options issued to non-employees 1,535
Accumulated other comprehensive loss (77)
---------- ------ -------- ---------- ---------- ------------ ----------
Balance - December 31, 2000 72,247,190 $ 72 $ 1 $1,043,519 $ (5,262) $ (68,229) $ (99)
========== ====== ======== ========== ========== ============ ==========
40
Total
Accumulated Stockholders'
Deficit Equity
----------- -------------
Balance-December 1997 $ 42 $ 6,448
Net loss (7,829) (7,829)
Distribution to Communication Partners,
L.P. (Note 10) -
Exercise of employee stock options 61
Non-employee stock options -
Amortization of non-employee stock
options 20
Benefit from exercise of nonqualified
stock options 2
Repayment of note receivable 5
Forfeiture of restricted stock -
---------- -------------
Balance-December 31, 1998 (7,787) (1,293)
Net loss (5,565) (5,565)
Issuance of common stock due to initial
public offering, net of costs 49,740
Net exercise of warrants -
Forgiveness of subordinated loan to
Communication Partners, L.P. 100
Issuance of common stock and exercise
of stock options 320
Issuance and conversion of Series A
preferred stock, net of costs 14,605
Preferred dividend attributable to
beneficial conversion feature (2,616)
Stock options issued at less than fair
market value 56
Amortization of non-employee stock
options 20
Repayment of notes receivable 336
Interest earned on notes receivable (248)
Accumulated other comprehensive loss ( 22)
---------- -------------
Balance December 31, 1999 (13,352) 55,433
Net loss (153,099) (153,099)
Issuance of common stock due to
secondary public offering, net of costs 132,971
Issuance of common stock and exercise
of stock options 5,444
Acquisitions and acquisition related
stock options issued at less than fair
value 758,009
Redemption of Beneficial Conversion
Feature (47,340)
Tax benefit for deferred stock
compensation 30,116
Interest eaned on and repayment of
notes receivable 2,150
Stock options issued at less than fair
market value (563)
Amortization of compensatory stock
options 18,972
Options issued to non-employees 1,535
Accumulated other comprehensive loss (77)
---------- -------------
Balance - December 31, 2000 $ (166,451) $ 803,551
========== =============
The accompanying notes are an integral part of these financial statements.
41
GLOBESPAN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended
December 31,
---------------------------------------
2000 1999 1998
---------- ---------- -------
Cash flow (used in) provided by operating activities:
Net (loss) $(153,099) $(5,565) $(7,829)
Adjustments to reconcile net (loss)
to cash (used in) provided by
operating activities:
Deferred income taxes (7,914) -- 500
Tax benefits from the exercise of
employee stock options 21,997 -- --
Non-cash compensation 22,585 -- --
Issuance of non-employee stock options 1,535 -- --
Provision for bad debts 5,066 276 12
Amortization of intangible assets 131,832 -- --
Provision for inventory obsolescence 167 -- 95
Amortization and depreciation 10,368 3,513 2,657
In process research and development 44,854 -- --
Changes in assets and liabilities:
(Increase) decrease in accounts
receivable (54,816) (5,686) 1,059
(Increase) in inventories (49,221) (9,744) (888)
(Increase) in prepaid expenses and
other assets (999) (3,278) (1,698)
Increase (decrease) in accounts
payable 29,062 1,955 (194)
Increase in accrued expenses and
other current liabilities 5,843 5,736 2,886
--------- --------- -------
Net cash provided by (used in) operating
activities 7,260 (12,793) (3,400)
--------- --------- -------
Cash flows used in investing activities:
Capital expenditures (18,902) (1,229) (4,810)
Sale of intangible asset 500
Net cash received from acquisition of
businesses (See note 9) 18,975 -- --
Purchases of marketable securities (12,631) (111,087) --
Proceeds from sale/maturities of
marketable securities 19,860 97,564 --
Investment in preferred stock -- (2,000) --
--------- --------- -------
Net cash provided by (used in) investing
activities 7,802 (16,752) (4,810)
--------- ------- ------
Cash flows provided by financing
activities:
(Repayments of) proceeds from borrowings
under subordinated note payable (90,000) (4,900) 5,000
(Repayments of) proceeds from borrowings
under line of credit (192) (2,466) 2,466
Proceeds from issuance of common and
preferred Stock 139,788 62,049 61
Proceeds from repayment of notes receivable 2,070 88 5
Repayments of capital lease borrowings (3,161) (581) (185)
--------- --------- -------
Net cash provided by financing activities 48,505 54,190 7,347
--------- --------- -------
Net increase (decrease) in cash and cash
Equivalents 63,567 24,645 (863)
Effect of exchange rates on cash and cash
equivalents 265 -- --
Cash and cash equivalents at beginning of
period 24,657 12 875
--------- --------- -------
Cash and cash equivalents at end of period $ 88,489 $ 24,657 $ 12
========= ========= =======
Supplemental disclosure of cash flow Information:
Cash paid:
Interest $ 2,890 $ 442 $ 145
========= ========= =======
Income taxes $ 116 $ -- $ 492
========= ========= =======
Supplemental non-cash financing activities:
Conversion of preferred stock into
common stock $ -- $ 12,000 $ --
========= ========= =======
Notes receivable for sale of stock $ -- $ 7,023 $ --
========= ========= =======
Forgiveness of subordinated note payable $ -- $ 100 $ --
========= ========= =======
Equipment acquired under capital lease $ 4,664 $ 1,191 $ 861
========= ========= =======
The accompanying notes are an integral part of these financial statements.
42
GLOBESPAN, INC.
NOTES TO FINANCIAL STATEMENTS
(In thousands, except share and per share data)
1. Nature of Business and Basis of Presentation
GlobeSpan, Inc. is a leading provider of advanced integrated circuits that
enable broadband digital communications to homes and business enterprises. We
design, develop and supply these integrated semiconductor chips, or chip sets,
for use in digital subscriber line, or DSL networks, which utilize the existing
network of copper telephone wires known as the local loop for the high-speed
transmission of data.
Our products target the rapidly growing market for high-speed data
transmission applications such as Internet access, telecommuting and networking
among branch offices. These transmission applications are expanding to include
voice and video transmissions over the same copper wire. We sell our integrated
circuits to equipment manufacturers for incorporation into products that are
sold to telecommunications service providers and end-users worldwide.
Pursuant to a Purchase Agreement dated June 18, 1996, three direct
wholly-owned subsidiaries and two indirect wholly-owned subsidiaries of
Communication Partners, L.P. (formerly Paradyne Partners, L.P.), acquired
certain assets of AT&T Paradyne Corporation from its parent company, Lucent
Technologies Inc. ("Lucent"), in exchange for $146 million in cash and notes and
the assumption of certain liabilities effective July 31, 1996. The assets and
liabilities were purchased by four separate operating subsidiaries of
Communication Partners, L.P., including GlobeSpan Technologies (subsequently
GlobeSpan, Inc.) (the "Company").
Assets acquired by the Company for $2.0 million consisted of certain
research and development activities, patents and customer licenses related to
carrierless amplitude phase modulation technique (generally referred to as "CAP
Technology") which is used to transmit data over copper telephone wires. In
addition, certain customer rent and lease agreements of AT&T Paradyne
Corporation were acquired directly by Rental Acquisition Corp. and Lease
Acquisition Corp., and certain net assets relating to the manufacturing,
marketing and research activities for data communications and networking
products for commercial end users and network service providers were acquired by
Paradyne Networks (all of which are direct or indirect subsidiaries of
Communication Partners, L.P.). Paradyne Networks also entered into a product
distribution agreement with Lucent. Additionally, certain assets and liabilities
of AT&T Paradyne Corporation were retained by Lucent or disposed of prior to the
transaction. All assets and liabilities and activities acquired by subsidiaries
of Communication Partners, L.P., other than the Company, or retained by Lucent
have been excluded from the accompanying financial statements.
The total purchase price of the Company has been allocated as follows:
Core Technology (See Note 2)... $ 2,000
-------
Total Assets................. $ 2,000
=======
Liabilities Assumed............ $ --
-------
Total Net Assets Acquired.... $ 2,000
=======
The accompanying financial statements include the accounts of the Company.
See discussion of related party transactions in Note 16. As of December 31, 2000
and December 31, 1999, Communication Partners, L.P. or other entities affiliated
with Texas Pacific Group owned 21% and 59%, respectively, of the Company's
outstanding stock.
The Company is a leading worldwide provider of advanced digital subscriber
line (DSL) integrated circuits which enable high-speed data transmission over
the existing network of copper telephone wires known as the local loop. The
Company sells integrated circuits as chip sets to manufacturers of DSL equipment
for incorporation into products which are sold to telecommunications service
providers and end users. On June 23, 1999, the Company completed its initial
public offering ("IPO") of 11,212,500 shares of common stock at $5.00 per share.
Net proceeds received by the Company, after deducting offering costs, totaled
$49.7 million.
On August 2, 2000, we completed a follow-on public offering of 8.625
million shares of common stock at a price of $100.00 per share. Of the 8.625
million shares of common stock, 1.406 million shares were sold by the Company,
resulting in proceeds from the offering of $133.0 million, net of related
expenses, and 7.219 million shares were sold by selling shareholders (including
1.125 million shares sold by selling shareholders upon exercise by the
underwriters of
43
their over-allotment option). The Company did not receive any of the proceeds
from the sales of shares by the selling shareholders. The Company used the
proceeds from this offering to repay the subordinated redeemable convertible
note issued by us in connection with our acquisition of certain employees and
technology of the Microelectronics Group of PairGain, and the balance is being
used for general corporate purposes, including working capital, sales and
marketing expenditures, development of new products and services and
acquisitions.
2. Summary of Significant Accounting Policies
The significant accounting principles and practices used in the preparation
of the accompanying financial statements are summarized below:
Principles of Consolidation
The consolidated financial statements include the accounts of GlobeSpan,
Inc. and all of its wholly-owned subsidiaries. The financial condition and
results of operations for the year ended December 31, 2000 include the results
of acquired subsidiaries from their effective dates (See Note 3). All
intercompany transactions and balances are eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods presented. These estimates include assessing the
collectability of accounts receivable, the use and recoverability of inventory,
the realizability of deferred tax assets and useful lives or amortization
periods of intangible assets. Actual results could differ from those estimates.
The markets for the Company's products are characterized by intense competition,
rapid technological development and frequent new product introductions, all of
which could impact the future realizability of the Company's assets.
Revenue Recognition
Revenue from product sales is recognized upon shipment to the customer,
when the risk of loss has been transferred to the customer, price and terms are
fixed, and when no significant vendor obligations exist and collection of the
resulting receivable is reasonably assured. Substantially all of our revenue is
from product sales.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
on a first-in, first-out basis. Of the total inventory of $60.3 million at
December 31, 2000, $57.2 million was finished goods inventory and the remaining
$3.1 million was work in process. Substantially all of the inventory at December
31, 1999 was finished goods inventory.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is provided on a straight-line basis over the estimated useful
lives of the related assets, ranging from three to five years. Leasehold
improvements are amortized on a straight-line basis over the lesser of the terms
of the leases or the estimated useful lives of the assets. Gains or losses on
disposals of property and equipment are recorded in current operations.
Intangibles Assets
Intangible assets at December 31, 2000 consist of the excess of the
purchase price of acquired businesses over the fair value of net assets acquired
(goodwill) of $676.7 million, and other acquired intangibles including core
technology and workforce of $82.8 million and $9.0 million, respectively. These
assets are being amortized over periods ranging from 2 to 4 years. Amortization
expense and accumulated amortization related to intangible assets, as of and for
the year ended December 31, 2000 was $131.8 million. We periodically evaluate
the recoverability of the carrying amount of intangible assets whenever events
or changes in circumstances indicate that the carrying amount may not be
recoverable. Current and estimated future profitability and undiscounted cash
flows are the primary indicators used to assess the recoverability of intangible
assets.
44
There were no intangible assets at December 31, 1999 and 1998. Amortization
expense related to intangible assets for the years ended December 31, 1998 and
1997 was $0.6 million and $1.0 million, respectively. This amortization expense
was related to the core technology acquired by the Company at its inception (See
Note 1).
Product Warranties
The Company provides purchasers of its products with certain warranties
that correspond with the warranties from its contract manufacturers. Warranty
expense has been immaterial for all periods presented.
Research and Development Costs
Costs incurred in connection with the research and development of the
Company's products and enhancements to existing products are expensed as
incurred unless technological feasibility has been established. Based on the
Company's product development process, technological feasibility is established
upon completion of a working model. Costs incurred by the Company between
completion of the working model and the point at which the product is ready for
general release have not been material. Accordingly, research and development
costs have been expensed as incurred.
Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes, which
requires use of the asset and liability method. Deferred income taxes are
recorded for temporary differences between financial statement carrying amounts
and the tax bases of assets and liabilities. Deferred tax assets and liabilities
reflect the tax rates expected to be in effect for the years in which the
differences are expected to reverse. A valuation allowance is provided if it is
more likely than not that some or all of the deferred tax asset will not be
realized.
Comprehensive Income
The Company follows Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income ("FAS No. 130"). This statement requires
companies to classify items of other comprehensive income by their nature in the
financial statements and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in the
equity section of the statement of operations. The Company adopted FAS No. 130
in 1998. The Company reported other comprehensive loss of $77 and $22 for the
years ended December 31, 2000 and 1999, respectively.
Long-Lived Assets
The impairment of long-lived assets is assessed by Management using factors
including probable comparable fair market values, anticipated future cash flows,
and the aggregate value of the related businesses taken as a whole. These
factors are periodically reviewed to determine whether current events or
circumstances require an adjustment to the carrying values or estimated useful
lives of fixed or intangible assets in accordance with the provisions of FAS No.
121, "Accounting for the Impairment of Long-Lived Assets."
Stock Splits
In February 1998, the board of directors approved a 1.5-to-1 stock split.
In March 1999, the board of directors approved a 1-for-3 reverse stock split. On
January 21, 2000, the Company's board of directors approved a 3-for-1 stock
split applicable to all issued and outstanding shares of our common stock, par
value $0.001. This 3-for-1 stock split was effected in the form of a stock
dividend and became effective on February 25, 2000, when stockholders of record
received two additional shares of common stock for each outstanding share of
common stock held as of the record date.
All share, stock option and stock warrant information included in the
accompanying financial statements and related notes have been restated for all
periods to reflect these stock splits.
45
Recent Accounting Pronouncements
In June 2000, the FASB issued SFAS 138, "Accounting for Certain Hedging
Activities", which amended Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities", Statement 138 must be adopted concurrently
with the adoption of Statement 133. The Company will be required to adopt these
statements for the year ending December 31, 2001. Statements 133 and 138
establish methods of accounting for derivative financial instruments and hedging
activities related to those instruments as well as other hedging activities.
Because we currently hold no derivative financial instruments and do not
currently engage in hedging activities, adoption of these Statements is not
expected to have a material impact on our financial condition or results of
operations.
Reclassifications:
Certain reclassifications have been made to conform prior-year amounts to
the current year presentation.
3. Acquisitions
On January 31, 2000, the Company acquired all of the issued and outstanding
shares of Ficon Technology, Inc. ("Ficon"), a leading provider of solutions in
the areas of IP, ATM and Voice over Packet, which enable service providers to
build next generation communications infrastructure. The acquisition was
accounted for as a purchase transaction. The Company acquired such Ficon shares
for $5 million in cash and the right for Ficon shareholders to receive up to a
maximum of 1,959,999 shares of the Company's common stock. A portion of these
shares may be issued in the future based upon the continued employment of
certain Ficon shareholders and the completion of development milestones mutually
agreed to by the parties. As of December 31, 2000, 422,729 shares have been
issued as a result of continued employment and 500,000 shares have been issued
as a result of the completion of development milestones. Up to an additional
537,271 shares may be issued as a result of continued employment and an
additional 499,999 shares are subject to issue at the completion of certain
additional development milestones.
On February 24, 2000, the Company acquired certain technology and employees
of the Microelectronics Group of PairGain Technologies, Inc. ("PairGain"),
designers of integrated circuits and software for DSL applications. The
acquisition was accounted for as a purchase transaction. The Company paid
3,243,591 shares of its common stock and issued to PairGain a $90.0 million
subordinated redeemable convertible note (the "Note"). The terms of the Note
gave the Company the option to redeem the Note, in cash, within the first six
months after its issue, or thereafter, be converted at the option of PairGain,
into 2,919,237 shares of the Company's common stock. The Company redeemed the
Note for a cash payment of $90.0 million during the year ended December 31,
2000, plus interest, which accrued at an annual rate of 5.0% through the date of
redemption. In connection with the repayment of the Note, the Company recognized
the redemption of the beneficial conversion feature, previously recorded, for
$47.3 million and a gain on the associated redemption of $43.4 million. The
beneficial conversion feature was recorded upon issuance of the Note and
reflected the intrinsic value of the beneficial conversion feature. Such amount
was amortized as interest expense non-cash over the period the beneficial
conversion feature was first available. For the year ended December 31, 2000,
$43.4 million was recorded as interest expense non-cash.
On April 27, 2000, we acquired all the issued and outstanding shares of
T.sqware, Inc. ("T.sqware"), a provider of fully programmable scalable network
processors supporting high-speed data communications. The transaction was
accounted for as a purchase transaction. We paid for these shares by issuing
2,022,182 shares of our own common stock and assuming the outstanding T.sqware
options for the equivalent of 177,569 options to purchase our common stock.
On June 30, 2000, we acquired all of the issued and outstanding shares of
iCompression, Inc., ("iCompression"), a supplier of advanced signal processing
technology for delivering voice, video and data for the broadband infrastructure
in applications such as broadband video conferencing. The transaction was
accounted for as a purchase transaction. We paid for these shares by issuing
3,470,152 shares of our common stock and assuming the outstanding iCompression
options for the equivalent of approximately 529,727 options to purchase our
common stock.
On September 21, 2000, we acquired all of the issued and outstanding shares
of ATecoM Inc., ("ATecoM"), a provider of technology which allows for the
transmission of video over ATM ("asynchronous transfer mode") networks. The
transaction was accounted for as a purchase transaction. We paid for these
shares by issuing 42,668 shares of our own common stock and assuming the
outstanding ATecoM options for the equivalent of 8,446 options to purchase our
common stock.
46
The following is a summary of all consideration paid for the acquisitions
of Ficon, PairGain, T.sqware, iCompression, and ATecoM during the year ended
December 31, 2000:
Fair value of common stock issued $717,436
Subordinated redeemable convertible note issued 90,000
Cash paid 8,231
Transaction costs 5,104
---------
Total purchase price $820,771
=========
The assets and liabilities of the acquired entities were recorded at their
appraised fair market value at the dates of acquisition. The allocations were as
follows:
Cash and short-term investments $36,364
Accounts receivable 867
Prepaid and other assets 2,297
Property and equipment 4,441
Goodwill and intangibles 763,500
---------
807,469
In process research and development 44,854
Liabilities assumed (31,522)
---------
Total purchase price $820,771
=========
Each of the acquisitions we made in 2000 was accounted for as a purchase
and have been included in the Company's results of operations from their closing
dates. The excess of purchase price over the fair value of net assets acquired,
reflected as intangible assets, is being amortized on a straight-line basis over
periods ranging from two to four years.
The amount allocated to in process research and development ("IPR&D") of
$44.9 million was expensed upon acquisition, as it was determined that the
underlying projects had not reached technical feasibility, had no alternative
future use and successful development was uncertain. In the allocation of the
acquisition purchase price to IPR&D, consideration was given to the following
for the projects under development at the time of the acquisition:
- - the present value of the forecasted cash flows and income that were
expected to result from the project;
- - the status of the project;
- - completion costs;
- - project risks;
- - the value of core technology; and
- - the stage of completion of the project.
In valuing core technology, the relative allocations to core technology and
IPR&D were consistent with the relative contribution of the projects. The
determination of the value of IPR&D was based on efforts completed as of the
date the respective entities were acquired.
Some of the shares of common stock issued to the principals of Ficon are
subject to forfeiture if their employment ceases with the Company, and are
recorded as deferred stock compensation. The deferred stock compensation
recorded was $28.8 million, which reflects the estimated fair value of common
stock issued. This amount is being amortized over the three year vesting period
on a straight line basis.
The Company also granted stock options to employees, including those of
other acquired entities, at various discounts to fair market value as part of
its long-term employee retention strategy and has recorded additional deferred
stock compensation associated with such option grants amounting to $60.8 million
during the year ended December 31, 2000. These amounts are being amortized over
vesting periods ranging from six months to four years on a straight line basis.
The following unaudited pro forma information represents a summary of the
results of operations as if the Ficon, Pairgain, T.sqware, iCompression, and
ATecoM acquisitions occurred on January 1, 1999.
47
Year ended December 31,
2000 1999
---- -----
Revenue $ 351,946 $ 62,960
============ ==========
Net loss $ (232,569) $(259,064)
============ ==========
Net loss per common share $ (3.41) $ (4.60)
============ ==========
The pro forma results are based on various assumptions and are not
necessarily indicative of what would have occurred had these transactions been
consummated on January 1, 1999. A charge of $44.9 million related to IPR&D is
included in all periods presented.
4. Concentration of Risk and Customer Information
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of cash equivalents and trade receivables.
The Company does not generally require collateral from its customers and
substantially all of its trade receivables are not subject to collateral
requirements. At December 31, 2000 and 1999, five of the Company's customers
accounted for $54,445 (90.9%), and $6,473 (70.7%), of net accounts receivable,
respectively.
Sales to three customers amounted to approximately $217,800 (62.6%),
$30,854 (54.9%), and $22,042 (70.1%) of total revenues for the years ended
December 31, 2000, 1999, and 1998, respectively. Revenues from customers who
represented more than 10% of net revenues were as follows:
Years Ended
December 31,
2000 1999 1998
------------- ---------- -------
Net revenues:
Customer A............. $96,494 $ 23,185 $ 15,190
Customer B............. 82,234 -- --
Customer C............. 39,040
Customer D............. -- -- 3,974
The Company's sales to overseas customers are predominantly denominated in
the U.S. dollar. Revenues by geographic region for the years ended December 31,
2000, 1999, and 1998 were as follows:
Years Ended
December 31,
------------
2000 1999 1998
----------- --------- --------
Net revenues:
North America ......... $224,276 $29,760 $21,214
Europe ................ 10,291 5,091 3,712
Mexico/Latin America .. 24,713 7,725 3,063
Asia .................. 88,766 13,061 2,973
Australia ............. 52 583 502
-------- ------- -------
$348,098 $56,220 $31,464
======== ======= ========
A single vendor manufactures substantially all of the chip sets sold by the
Company. Purchases from this vendor approximated 90%, 75%, and 81%, of total
inventory purchases for the years ended December 31, 2000, 1999, and 1998,
respectively. If this vendor were to become unwilling or unable to continue to
manufacture these chip sets in required volumes, the Company would have to
identify and qualify acceptable alternative vendors. The inability to develop
alternative sources, if required in the future, could result in delays or
reductions in product shipments.
5. Property and Equipment
Property and equipment consists of the following:
48
December 31,
---------------
2000 1999
------- -------
Computers and equipment $21,591 $5,604
Office furniture and fixtures 1,650 156
Software 8,393 2,668
Leasehold improvements 1,813 1,132
Property under capital leases,
primarily computers and equipment 6,557 2,052
Construction in progress 656 -
----- -----
40,660 11,612
Less: accumulated depreciation (16,266) (5,759)
------- ------
$ 24,394 $ 5,853
======== =======
Included in operating expenses is depreciation expense of $9,275, $3,247,
and $2,054 for the years ended December 31, 2000, 1999, and 1998, respectively.
Accumulated amortization on assets accounted for as capital leases, amounted to
approximately $1,420, $484 and $47 as of December 31, 2000, 1999 and 1998,
respectively.
6. Marketable Securities
Marketable securities are included in cash equivalents, short-term
investments and other long-term assets, as appropriate. At December 31, 2000 and
1999, marketable securities totaling $10,778 and $13,523 were available-for-sale
and recorded at fair value:
Gross Unrealized Gross Unrealized Unrealized
Cost Holding Gains Holding Gains (Losses) Market Value
--------------------------------------------------------------
December 31, 2000 $10,778 $0 $0 $10,778
December 31, 1999 $13,545 $0 ($22) $13,523
Proceeds from the sale of available-for-sale securities during the years
ended December 31, 2000 and 1999 were approximately $19.8 million and $0 for
which there was an immaterial associated gain or loss.
7. Defined Contribution Plan
The Company participates in a 401(k) plan covering substantially all
employees, which was maintained by Paradyne Networks until June 1999. Benefits
vest based on number of years of service. The Company's policy is to match
two-thirds of an employee's contributions, up to 6.0% of an employee's annual
salary. Additionally, the board of directors may grant discretionary
contributions based on an employee's age. Contributions to the plan paid by
Paradyne Networks on behalf of the Company amounted to approximately $348 for
the year ended December 31, 1998. In addition, the Company accrued $179 for
discretionary contributions as of December 31, 1998. Contributions to the plan
by the Company amounted to approximately $1,423 and $541 for the years ended
December 31, 2000 and 1999.
8. Termination of BankAmerica Business Credit Line of Credit
Effective September 30, 1999, a termination agreement and mutual release
was signed by BankAmerica Business Credit and the Company with regard to a $5.0
million revolving line of credit (the "Credit Line"), which bore interest at the
bank's prime rate plus 1.5%. The Credit Line contained certain financial
covenants and restrictions as to various matters including our ability to pay
cash dividends or to effect mergers or acquisitions, incur certain other
indebtedness or to make certain investments without the bank's prior approval.
The Company was in compliance with such financial covenants and restrictions at
the time of termination of the agreement. Borrowings under the Credit Line were
collateralized by substantially all of the Company's assets. The Credit Line was
scheduled to expire in May 2003.
9. Supplemental Cash Flow Data
The Company acquired cash of approximately $31.9 million in connection with
the acquisitions of T.sqware and iCompression completed during the second
quarter of 2000 and used cash of approximately $12.9 million in connection with
the purchases of Ficon, certain technology and employees of PairGain and ATecoM
completed during the first quarter and third quarters of 2000, resulting in net
cash received from acquisitions of approximately $19.0 million during the year
ended December 31, 2000, as follows:
49
Purchase price $ 820,771
Common stock issued (717,436)
Subordinated redeemable
convertible note payable (90,000)
Accrued transaction costs (434)
-----------
Cash paid $ 12,901
Less: cash acquired (31,876)
----------
Net cash received from
acquisition of businesses $(18,975)
=========
10. Stock Purchase Warrant
In connection with the Company's inception (see Note 1), the Company issued
a warrant to acquire 3,937,500 shares of its common stock at an exercise price
of $2.24 per share to Lucent. The warrant was due to expire upon payment or
transfer by Paradyne Networks, an affiliated company, of its long-term debt
which was due to mature on June 30, 2000 and upon the sale or merger of the
Company (as provided in the Stock Warrant Agreement) at a price less than the
exercise price. The warrant includes other provisions, including certain
anti-dilution provisions.
In August 1998, Paradyne Networks settled its outstanding long-term debt
which was due on June 30, 2000. As a term of such settlement, the Company agreed
to extend the exercise period of the outstanding stock purchase warrant to the
earlier of June 30, 2001 or the consummation of a qualifying business
combination, as defined. In connection therewith, the Company recorded a $3,653
distribution to the Parent based on the increase in the fair value of the
warrant resulting from the extension of the outstanding warrant term. (See Note
16).
Upon the closing of the IPO, the outstanding warrant to purchase common
stock issued to Lucent Technologies was net exercised for 2,173,500 shares of
common stock.
11. Income Taxes
Deferred tax assets (liabilities) are comprised of the following:
December 31,
-----------------
2000 1999
------ ------
Net intangible assets $ - $ 616
Net depreciable assets 3,534 (48)
Accrued expenses 4,553 219
Deferred Compensation 9,655 --
Net operating loss carryforwards 20,398 3,965
Other 892 174
--- ---
39,032 4,926
Less valuation allowance[1] (35,325) (4,926)
-------- -------
Net deferred tax assets 3,707 --
Net intangible assets (10,393) --
-------- --
Net deferred tax liability $ (6,686) $ --
======== =======
[1] The December 31, 2000 valuation allowance includes $7,913 from acquired
companies.
The Company has acquired and generated federal and state net operating loss
carryforwards of approximately $68,809 and $14,330 as of December 31, 2000 and
December 31, 1999, respectively, which are due to expire between 2007 and 2020.
Section 382 of the Internal Revenue Code of 1986, as amended, places a
limitation on the utilization of federal net operating loss carryforwards when
an ownership change occurs. Generally, an ownership change occurs when a greater
than 50% change in ownership takes place over a three-year test period. The
annual utilization of net operating loss carryforwards generated prior to such
change in ownership is limited, in any one year, to a percentage of the fair
market value of the Company at the time of the ownership change.
The Company has provided a valuation allowance against certain of its
deferred tax assets because of uncertainty regarding their realizability,
primarily due to the expectation of tax return deductions related to future
employee stock option exercises.
50
The Company's income taxes payable have been reduced by the tax benefits
associated with dispositions and exercise of employee stock options. The Company
receives an income tax benefit calculated as the difference between the fair
market value of the stock issued at the time of exercise and the option price.
These benefits were credited directly to shareholders' equity and amounted to
$30,116 for the year ended December 31, 2000.
The components of the provision (benefit) for income taxes are as follows:
Years Ended
December 31,
2000 1999 1998
---------- ---------- --------
Current:
Federal $18,678 $ -- $ (649)
State 4,368 -- (23)
--------- --------- ---------
23,046 -- (672)
--------- --------- ---------
Deferred:
Federal (26,621) (1,595) (1,834)
State (3,780) (281) (761)
Change in valuation allowance 22,486 1,876 3,050
---------- --------- ---------
(7,915) -- 455
---------- --------- ---------
Income tax provision (benefit) $ 15,131 $ -- $ (217)
========= ========= =========
The provision (benefit) for income taxes differs from the amount of income
tax determined by applying the applicable U.S. income tax rate to income before
taxes, excluding amounts associated with the beneficial conversion feature in
2000, as follows:
Years Ended
December 31,
---------------
2000 1999 1998
---------- ---------- -------
U.S. statutory rate (35.0)% (34.0)% (34.0)%
State taxes 2.1 (5.9) (6.6)
Amortization of intangible assets 13.1 -- --
In process research and
development 11.4
Net operating loss utilized 2.9 -- --
Other .1 -- --
Change in valuation allowance 16.3 39.9 37.9
---- ---- -----
Effective tax rate 10.9% 0.0% (2.7)%
==== ==== =====
12. Earnings per Share
The Company has adopted Statement of Financial Accounting Standards No.
128, Earnings per Share ("FAS 128"), which requires the presentation of basic
earnings per share ("Basic EPS") and diluted earnings per share ("Diluted EPS")
by all entities that have publicly traded common stock or potential common
stock. Basic EPS is computed by dividing income available to common stockholders
by the weighted average number of common shares outstanding during the period.
Diluted EPS gives effect to all dilutive potential common shares outstanding
during the period. The computation of Diluted EPS does not assume conversion,
exercise or contingent exercise of securities that would have an anti-dilutive
effect on earnings. The dilutive effect of the outstanding stock warrants and
options is required to be computed using the treasury stock method. As of
December 31, 2000 and 1999, the Company had outstanding options, restricted
stock and a warrant to purchase an aggregate of 17,371,585 and 8,572,575 shares
of common stock, respectively, which were not included in the calculation of
earnings per share for such periods, due to the anti-dilutive nature of these
instruments.
The computations of Basic EPS and Diluted EPS for the years ended December
31, 2000, 1999 and 1998 are as follows:
51
2000 1999 1998
---- ---- ----
Numerator:
Loss before extraordinary item $(196,538) $ (5,565) $ (7,829)
Preferred stock dividend and accretion -- (3,466) --
Loss attributable to common shareholders before --------- -------- --------
extraordinary item (196,538) (9,031) (7,829)
Extraordinary item 43,439 -- --
--------- -------- --------
Net loss attributable to common stockholders $(153,099) $ (9,031) $ (7,829)
========= ======== ========
Denominator:
Basic shares 64,924 46,613 36,254
Effect of dilutive stock options -- -- --
Diluted shares 64,924 46,613 36,254
========= ======== ========
Basic and diluted loss per share:
Loss attributable to common stockholders before
extraordinary item $ (3.03) $ (0.19) $ (0.22)
Extraordinary item $ 0.67 -- --
---------- --------- ---------
Net loss attributable to common stockholders $ (2.36) $ (0.19) $ (0.22)
========= ======== ========
13. Stockholders' Equity
In June 2000, the Company amended its certificate of incorporation to
increase the number of authorized shares of common stock, $0.001 par value, to
400,000,000 shares.
On January 21, 2000, the Company's board of directors approved a 3-for-1
stock split applicable to all issued and outstanding shares of its common stock,
par value $0.001. The 3-for-1 stock split was effected in the form of a stock
dividend and became effective on February 25, 2000 when stockholders of record
received two additional shares of common stock for each outstanding share of
common stock held on the record date.
In March 1999, the Company's board of directors approved the amendment of
the certificate of incorporation to increase its authorized capital to
10,000,000 shares of preferred stock, $0.001 par value and 100,000,000 shares of
common stock $0.001 par value. The increase in the authorized preferred shares
was approved by the Company's stockholders in May 1999 and was executed on June
18, 1999.
Series A Redeemable Convertible Preferred Stock
In May 1999, the Company designated 1,461,454 shares of preferred stock as
Series A Preferred Stock ("Series A Stock"). The Series A Stock was convertible,
at the option of the holder, into shares of common stock at any time after the
date of issuance at a conversion rate of $8.211 per share and automatically
converted upon consummation of the company's IPO. Holders of Series A Stock were
entitled to receive dividends prior to any payment of dividends on the Company's
common stock, at a rate of $0.81 per share per annum, when and if declared by
the Company's board of directors. Such dividends were not cumulative. In the
event of a liquidation, dissolution or winding up of the Company, holders of the
Series A Stock were entitled to a distribution ratably with other common
stockholders of the Company, on an as-if converted basis. The Series A Stock
carried voting rights equal to one vote per share, on an as-converted basis. In
addition, the Company was precluded from certain specific corporate actions
without the consent of at least 66.6% of the holders of the Series A Stock.
In May 1999, the Company completed the sale of an aggregate 1,461,454
shares of Series A Stock and warrants to purchase an aggregate 900,000 shares of
common stock for gross proceeds of $12.0 million to two investors (the "Series A
Investors"). The warrants issued to the Series A Investors were exercisable for
a five year term and at exercise prices equal to $5.00 per share for the first
225,000 shares, $6.25 per share for the second 225,000 shares, $7.50 per share
for the third 225,000 shares and $8.75 per share for the last 225,000 shares.
Since the issuance of the aforementioned Series A Stock included a
non-detachable conversion feature, that was "in-the-money" at the date of
issuance and was immediately exercisable, the Company recognized a charge of
approximately $2.6 million for the beneficial conversion feature attributable to
the common stockholders for the year ended December 31, 1999. In addition, the
carrying value of the Series A Stock was accreted to its redemption value in
52
1999. The accretion which totaled $0.9 million, and the beneficial conversion
feature related to the Series A Stock have been included in the net loss
attributable to common stockholders for the year ended December 31, 1999.
Upon consummation of the IPO, the Series A Stock converted into 4,384,362
shares of common stock.
14. Stock Option Plans and Employee Stock Purchase Plan
1996 Equity Incentive Plan
In December 1996, the Company adopted the 1996 Equity Incentive Plan (the
"1996 Plan") pursuant to which, as amended, nonqualified or incentive stock
options, stock bonus and restricted stock awards (collectively, "Stock Awards")
to purchase up to 10,165,899 of the Company's common stock may be granted to
employees, directors and consultants. Stock Awards granted under the 1996 Plan
generally vest in equal installments over a four-year period. The exercise price
of incentive stock options granted under the 1996 Plan may not be less than the
fair market value of the underlying shares (110% of the fair market value in the
case of a 10% voting shareholder) at the grant date. Each stock option is
exercisable for ten years (five years in the case of a 10% voting stockholder)
from the date of grant. Through December 31, 2000, no stock options had been
granted to a 10% stockholder.
Under the 1996 Plan, certain individuals to whom stock options have been
granted may elect to exercise those options prior to the lapse of the full
vesting period. Upon termination of employment, the Company may repurchase any
unvested shares issued pursuant to such election at the exercise price. During
the years ended December 31, 2000 and 1998, the Company repurchased 179,162 and
192,189 shares under such provision. No shares had been repurchased during the
year ended December 31, 1999. At December 31, 2000, 1999 and 1998, there were
647,536, 2,249,784 and 506,250 shares, respectively, issued and outstanding that
were subject to this repurchase provision.
Stock bonuses and restricted stock awards issued under the 1996 Plan
provide that shares awarded may not be sold or otherwise transferred until
restrictions established by the underlying agreements have elapsed. Upon
termination of employment, the Company may repurchase shares upon which
restrictions have not lapsed. The 1996 Plan provides that the price for each
restricted stock award shall not be less than 85% of the fair market value of
the share at the date of grant.
Notes receivable from stock sales result from the exercise of stock options
for promissory notes. The notes are full recourse promissory notes bearing
interest at fixed rates ranging from 5.22% to 6.16% and are collateralized by
the stock issued upon exercise of the stock options. The notes including accrued
interest thereon mature five years from the date of issuance.
1999 Supplemental Stock Option Plan
In December 1999, the Company's board of directors approved the adoption of
the 1999 Supplemental Stock Option Plan (the "1999 Supplemental Plan"). Upon
adoption of the 1999 Supplemental Plan, the Company reserved 6,000,000 shares of
its common stock, for issuance under the 1999 Supplemental Plan. During 2000,
the Company reserved an additional 5,315,000 shares of its common stock, for
issuance under the 1999 Supplemental Plan. Under the 1999 Supplemental Plan, the
Company may grant incentive or nonqualified stock options to non-officer
employees and consultants. The 1999 Supplemental Plan will be administered by
the Compensation Committee of the board of directors in accordance with the
terms of the 1999 Supplemental Plan.
1999 Equity Incentive Plan
In March 1999, the Company's board of directors approved the adoption of
the 1999 Equity Incentive Plan (the "1999 Plan"). The 1999 Plan was approved by
the Company's stockholders in May 1999. Upon adoption of the 1999 Plan with the
closing of the Company's IPO, the Company reserved 3,000,000 shares of its
common stock, together with the shares of common stock remaining available for
issuance under the 1996 Plan, for issuance under the 1999 Plan. The number of
shares reserved for issuance under the 1999 Plan shall automatically increase
each year beginning May 1, 2000, by the lesser of 5.0% of the total number of
shares of common stock then outstanding or 3,000,000 shares. Under the 1999
Plan, the Company may grant incentive or nonqualified stock options, stock
appreciation rights, restricted stock or stock units to employees, non-employee
directors and consultants. The 1999 Plan will be administered by the
Compensation Committee of the board of directors in accordance with the terms of
the 1999 Plan.
53
1999 Director Stock Option Plan
In March 1999, the Company's board of directors approved the adoption of
the 1999 Director Stock Plan (the "Director Plan"). The Director Plan was
approved by the Company's shareholders in May 1999. The Company reserved 750,000
shares of its common stock for issuance under the Director Plan. Under the
Director Plan, the Company may only grant nonqualified stock options to
non-employee directors. The Director Plan provides for automatic grants to
non-employee directors of the Company at defined intervals. Each non-employee
director of the Company was granted an option to purchase 30,000 shares of
common stock at the fair market value at the date in which the non-employee
director was appointed or at $5.00 with the consummation of the Company's IPO,
an additional option to purchase 15,000 shares of common stock on the date of
the Company's annual stockholders' meeting in the year 2000 and an additional
option to purchase 15,000 shares of common stock on the date of the Company's
annual stockholders' meeting in the year 2001, provided that the director
continues to serve as a director of the Company. Each non-employee director
elected to serve will be granted an option to purchase 30,000 shares of common
stock on the date he or she is first elected to the board of directors and an
additional option to purchase 15,000 shares of common stock on the date of the
Company's annual stockholder's meeting in the calendar year following such
initial election. At each annual stockholders' meeting following the annual
meeting during which each non-employee director received the second option to
purchase 15,000 shares of common stock, each non-employee director will be
granted an option to purchase 7,500 shares of common stock. Stock options
granted pursuant to the Director Plan vest upon the director's completion of
twelve months of service during which he or she attended at least 75% of the
meetings of the Company's board of directors.
A summary of the Company's Stock Option Plans showing granted, exercised
and forfeited stock options (in thousands) since December 31, 1997 is as
follows:
Weighted
Average
Purchase
Options Price
-------- ---------
Balance at
December 31, 1997. 4,098 $ .33
Granted........... 1,856 $3.01
Exercised......... (128) $ .49
Forfeited......... (147) $1.14
Balance at
December 31, 1998. 5,679 $1.18
Granted........... 5,806 $14.86
Exercised......... (3,564) $2.00
Forfeited......... (72) $2.95
--------
Balance at
December 31, 1999. 7,849 $10.91
Granted........... 10,576 $65.85
Exercised......... (1,497) $1.56
Forfeited......... (544) $74.00
---------
Balance at
December 31, 2000. 16,384 $45.23
The following table summarizes information about outstanding stock options
(in thousands) as of December 31, 2000:
Options Outstanding Options Exercisable
Weighted-
Average Weighted Exercisable Weighted
Actual Ranges Outstanding Remaining Average at Average
of Exercise at December Contractual Exercise December Exercise
Prices 31, 2000 Life Price 31, 2000 Price
-------------- ----------- ----------- -------- ---------- --------
$0.33 - 07.99 3,890 7.7 $3.10 2,899 $2.01
$10.40-19.83 1,216 8.8 $17.32 386 $17.07
$20.13 - 29.06 2,619 8.9 $23.17 1,814 $23.00
$30.19 - 39.61 1,685 9.2 $32.02 6 $37.00
$40.63 - 48.29 822 9.2 $44.89 228 $43.19
$50.13 - 59.00 81 9.7 $54.03 0
$60.88 - 69.50 1,797 9.2 $63.46 0
$73.19 - 79.75 783 9.3 $75.16 18 $75.25
$80.00 - 89.44 417 9.4 $83.69 0
$90.00 - 98.06 371 9.4 $94.26 121 $95.06
$100.00 - 107.81 675 9.6 $102.48 1 $100.50
$110.00 - 119.56 1,690 9.5 $116.30 0
$120.56 - 129.81 222 9.6 $126.43 25 $123.62
$130.38 - 139.130 100 9.4 $132.82 13 $133.39
$141.63 - 146.00 16 9.6 $143.57 0
- -------------------------------------------------------------------------------
$0.33 - 146.00 16,384 8.8 $45.23 5,511 $14.86
54
The Company has, in connection with the acquisitions discussed in Note 3,
assumed the stock option plans of each acquired company. During the year ended
December 31, 2000, a total of approximately 721,000 shares of the Company's
common stock have been reserved for issuance under the assumed plans and the
related options are included in the preceding table.
Employee Stock Options
The Company accounts for stock options granted to employees in accordance
with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees. Had the compensation cost for the Stock Option Plan been determined
based on the fair value at the grant dates for awards under the 1996 Plan
consistent with the method of Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation ("FAS 123"), the Company's net
(loss) and fully diluted earnings per share on a pro forma basis would have been
($230,553), ($14,368) and ($9,236) and ($3.55), ($.31) and ($.25) for the years
ended December 31, 2000, 1999 and 1998, respectively, calculated with the use of
the Black-Scholes option-pricing model. The following assumptions were used for
the years ended December 31, 2000, 1999 and 1998: (1) risk-free interest rate of
6.3%, 5.9% and 4.6% respectively; (2) dividend yield of 0.00%; (3) expected life
of four years for December 31, 2000 and 1999 and five years for December 31,
1998; and (4) volatility of 100% for December 31, 2000 and 1999 and .001% for
December 31, 1998. Results may vary depending on the assumptions applied within
the model.
During 2000 and 1999, the Company granted stock options to employees to
purchase shares of common stock at exercise prices less than the estimated fair
market value of the Company's common stock at the time of grant. In connection
with these issuances, the Company recorded $89,552, and $1,218 of deferred
compensation, of which $22,582 and $56 was recognized during 2000 and 1999,
respectively, as compensation expense. The deferred compensation is being
amortized over the vesting period, which is generally four years. The Company
determined the amount of deferred compensation as the difference between the
fair market value of the Company's Common Stock and the exercise price on the
date of grant.
Non-employee Options
In fiscal 2000 and 1998, the Company granted 32,000 and 16,500 stock
options, respectively, to non-employees. In accordance with the requirements of
EITF 96-18, the Company recorded $1,535 and $44, respectively, reflecting the
estimated fair value of these options utilizing the Black-Scholes option-pricing
model. The Company has amortized this obligation to expense over the period
services were performed. In 1999, there were no stock options granted to
non-employees.
Employee Stock Purchase Plan
On March 12, 1999, the Company's board of directors approved the adoption
of an Employee Stock Purchase Plan (the "Purchase Plan"). The Purchase Plan was
approved by the Company's stockholders in May 1999 and was contingent upon the
closing of the Company's initial public offering of its common stock (the "IPO")
on June 22, 1999. The Company reserved 1,200,000 shares of its common stock for
issuance under the Purchase Plan, which shall automatically increase each year
beginning February 1, 2000, by the lesser of 2.0% of the total number of shares
of common stock then outstanding or 1,200,000 shares. The Purchase Plan permits
each eligible employee, as defined, to purchase shares of the Company's common
stock through payroll deductions, provided that the aggregate amount of each
employee's payroll deductions does not exceed 15.0% of his cash compensation.
Purchases of common stock will occur on January 31 and July 31 of each year. The
Purchase Plan is administered by the Compensation Committee of the board of
directors in accordance with the terms of the Purchase Plan.
15. Commitments and Contingencies
The Company leases certain facilities for office and research and
development activities under agreements that expire at various dates through
2011. In addition, the Company leases certain computer and office equipment
under agreements that are classified as capital leases, the net book value of
which was $4,744 and $1,568 at December 31, 2000 and 1999, respectively. Minimum
required future lease payments under the Company's capital and operating leases
at December 31, 1999 are as follows:
55
Capital Operating
Leases Leases
Years Ended December 31,
2001 $4,172 $ 8,356
2002 2,591 8,099
2003 1,295 6,643
2004 6 6,307
2005 4 6,251
Thereafter -- 28,756
------- ------
Total minimum lease payments 8,068 $64,412
Less: amount representing interest (1,210)
------
Present value of net minimum lease payments 6,858
Less: current portion (3,414)
------
$ 3,444
=======
Rent expense for the years ended December 31, 2000, 1999, and 1998
approximated $2,850, $1,049 and $868 respectively, and is included in operating
expenses. In December 1998, the Company subleased additional office space from
Paradyne Networks on a month to month basis. Rent expense relating to these
additional spaces amounted to $44 for the year ended December 31, 1999.
The semiconductor and telecommunications industries are characterized by
substantial litigation regarding patent and other intellectual property rights.
The Company is party to various inquiries or claims in connection with these
rights. Although the ultimate outcome of these matters is not presently
determinable, management believes that the resolution of these matters will not
have a material adverse effect on the Company's financial position and results
of operations.
16. Related Party Transactions
During the years ended December 31, 2000, 1999, and 1998, the Company
recorded product sales of $8,355, $3,224, and $962, respectively, related to
goods sold to Paradyne Networks. Receivables related to such product sales as of
December 31, 1999 amounted to $146. At December 31, 2000, the Company had a
payable to Paradyne Networks in the amount of $2,313. Sales reflect, through
June 30, 1998, a discount, equal to cost plus 15%, provided to Paradyne Networks
pursuant to a Cooperative Development Agreement. In July 1998, the Company
revised its discounted pricing arrangement with Paradyne Networks that had
existed under the Cooperative Development Agreement. Paradyne agreed to modify
the pricing terms such that Paradyne Networks purchased products from the
Company at preferential prices. In exchange, the Company agreed to pay a 1.25%
fee based on net revenues up to an aggregate amount of $1.5 million. In March
1999, the Company and Paradyne Networks agreed to terminate the Cooperative
Development Agreement. In connection with such termination agreement, the
Company agreed to pay Paradyne Networks an aggregate of $1.5 million, less the
amounts previously paid of approximately $0.3 million (or approximately $1.2
million) to terminate the July discount pricing arrangement with Paradyne
Networks. Such payment was made in 1999 and was charged to cost of sales.
In addition, GlobeSpan and Paradyne Networks as part of the Termination
Agreement affirmed that the earlier technology license provisions of the
Cooperative Development Agreement were never implemented. In conjunction with
the signing of the Termination Agreement, GlobeSpan and Paradyne Networks also
entered into a four-year Supply Agreement which gave Paradyne Networks
preferential pricing and other terms in connection with the sale by GlobeSpan of
products to Paradyne Networks. Under the terms of the Supply Agreement,
GlobeSpan is required to honor Paradyne Networks ' orders for GlobeSpan's
products in quantities at least consistent with Paradyne Networks' past ordering
practices and must afford Paradyne Networks at least the same priority for
Paradyne Networks' orders as GlobeSpan affords its other similarly situated
customers. GlobeSpan also granted Paradyne Networks a standard customer immunity
under GlobeSpan's intellectual property rights with respect to any of Paradyne
Networks' products which incorporate GlobeSpan's products.
In 1998, Paradyne Networks provided operating, management and other
administrative services for the Company pursuant to an Intercompany Services
Agreement. Paradyne Networks charged the Company for the cost of such services,
without markup, in accordance with the Intercompany Services Agreement, which
amounted to $231 for the year ended December 31, 1998. In the opinion of
management, the method of allocation was reasonable.
56
In February and December 1998, the Company purchased fixed assets from
Paradyne Networks for an aggregate cost of $1,442. These assets were sold at
their net book value since the transaction involved entities under common
control.
In September 1998, the Company purchased from Paradyne Networks certain
GlobeSpan chip sets which it held in its inventory in the amounts of $98.
GlobeSpan purchased these chip sets for resale to other customers.
In December 1998, the Company subleased additional office space from
Paradyne Networks. In connection therewith, the Company reimbursed approximately
$392 of Paradyne Networks' moving expenses, the cost of which is included in
operating expenses for the year ended December 31, 1998.
17. Valuation and Qualifying Accounts
Balance at Additions - Balance at
Beginning Costs and End of
Classification of Period Expenses Deductions (a) Period
(In thousands)
Year ended December 31, 2000:
Allowance for doubtful accounts $337 5,094 (28) $5,403
Valuation allowance-deferred tax asset $4,926 30,399 - $35,325
Inventory obsolescence reserve $95 167 - $262
Year ended December 31, 1999:
Allowance for doubtful accounts $61 306 (30) $337
Valuation allowance-deferred tax asset $3,050 1,876 - $4,926
Inventory obsolescence reserve $95 - - $95
Year ended December 31, 1998:
Allowance for doubtful accounts $49 61 (49) $61
Valuation allowance-deferred tax asset $ - 3,050 - $3,050
Inventory obsolescence reserve $ - 95 - $95
(a) Represents accounts written off as uncollectible.
18. Quarterly Results of Operations (Unaudited)
Three Months Ended
Mar. 31, Jun. 30, Sep. 30, Dec. 31, Mar. 31, Jun. 30, Sep. 30, Dec. 31,
2000 2000 2000 2000 1999 1999 1999 1999
----------- ----------- ----------- ----------- ----------- ---------- ---------- -------
(In thousands except per share data)
Statement of Operations:
Net revenues $31,060 $75,901 $110,353 $ 130,784 $ 8,641 $9,434 $ 17,032 $21,113
Gross profit 19,580 46,548 65,224 74,316 4,621 6,198 10,448 12,955
(Loss) income from operations (13,643) (64,850) (32,519) (28,921) (3,687) (2,246) (811) 46
(Loss) income before taxes
and extraordinary item (22,899) (88,700) (42,147) (27,661) (3,869) (5,830) (258) 926
(Loss) income before
extraordinary item (22,899) (88,700) (50,386) (34,553) (3,869) (5,830) (258) 926
Net (loss) income attributed
to common shareholders (22,899) (88,700) (6,947) (34,553) (3,869) (5,830) (258) 926
(Loss) income before
extraordinary item per
common share - basic (.39) (1.42) (0.74) (.49) (0.11) (0.14) (0.01) 0.02
======= ======= ======== =========== ======== ======= ======== ======
Net (loss) income per common
share - basic (.39) (1.42) (0.10) (.49) (0.11) (0.14) (0.01) 0.02
======= ======= ======== =========== ======== ======= ======== ======
(Loss) income before
extraordinary item per
common share - fully diluted (.39) (1.42) (0.74) (.49) (0.11) (0.14) (0.01) 0.02
======= ======= ======== =========== ======== ======= ======== ======
Net (loss) income per
common share - fully diluted $ (.39) $ (1.42) $ (0.10) $ (.49) $ (0.11) $(0.14) $ (0.01) $ 0.01
======= ======= ======== =========== ======== ======= ======== ======
57
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities
Exchange Act of 1934, the registrant has caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
GLOBESPAN, INC.
March 30, 2001 By /s/ Armando Geday
-----------------------------------------------
Armando Geday
President, Chief Executive Officer and Director
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Armando Geday and Robert McMullan, or
either of them, each with the power of substitution, his attorney-in-fact, to
sign any amendments to this Form 10-K (including post-effective amendments), and
to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
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.
SIGNATURE TITLE DATE
/s/ Armando Geday President, Chief Executive March 30, 2001
- ------------------------ Officer and Director
Armando Geday
/s/ Robert McMullan Vice President and Chief March 30, 2001
- ------------------------ Financial Officer
Robert McMullan
/s/ Thomas Epley Director March 30, 2001
- ------------------------
Thomas Epley
/s/ Keith Geeslin Director March 30, 2001
- ------------------------
Keith Geeslin
/s/ David Stanton Director March 30, 2001
- ------------------------
David Stanton
Director March 30, 2001
- ------------------------
Dipanjan Deb
/s/ James Coulter Director March 30, 2001
- ------------------------
James Coulter
/s/ Barbara Connor Director March 30, 2001
- ------------------------
Barbara Connor
/s/ Federico Faggin Director March 30, 2001
- ------------------------
Federico Faggin
Director March 30, 2001
- ------------------------
John Marren
58
INDEX TO EXHIBITS
EXHIBIT
NUMBER
2.1 Agreement and Plan of Merger among the Company, FTI Acquisition Corp.
and Ficon Technology, Inc., dated January 12, 2000, (incorporated herein
by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K
filed on March 10, 2000).
2.2 Asset Purchase Agreement between the Company and PairGain Technologies,
Inc., dated January 24, 2000 (incorporated herein by reference to
Exhibit 2.2 to the Company's Current Report on Form 8-K filed on March
10, 2000).
2.3 Agreement and Plan of Merger among the Company, Needles Acquisition
Corp. and T.sqware, Inc., dated April 20, 2000 (incorporated herein by
reference to Exhibit 2.1 to the Company's Current Report on Form 8-K
filed on May 12, 2000).
2.4 Amended and Restated Agreement and Plan of Merger among the Company,
Indigo Acquisition Corp. and iCompression, Inc., dated June 13, 2000
(incorporated into this document by reference to Exhibit 2.4 to the
Company's Registration Statement on Form S-3 filed on July 3, 2000 (File
No. 333-40782)).
3.1 Form of Restated Certificate of Incorporation of the Registrant
(incorporated herein by reference to Exhibit 3.2 to the Company's
Registration Statement on Form S-1 (File No. 333-75173)).
3.2 Amended and Restated Bylaws of the Registrant (incorporated herein by
reference to Exhibit 3.4 to the Company's Registration Statement on Form
S-1 (File No. 333-75173)).
4.1 Specimen Common Stock certificate (incorporated herein by reference to
Exhibit 4.2 to the Company's Registration Statement on Form S-1 (File
No. 333-75173)).
4.2 Investors' Rights Agreement between the Company, Intel Corporation,
Cisco Systems, Inc. and Communication Partners, L.P., dated May 6, 1999
(incorporated herein by reference to Exhibit 10.20 to the Company's
Registration Statement on Form S-1 (File No. 333-75173)).
4.3 Warrant for the purchase of Common Stock made by the Company and held by
Cisco Systems, Inc., dated May 6, 1999 (incorporated herein by reference
to Exhibit 10.21 to the Company's Registration Statement on Form S-1
(File No. 333-75173)).
4.4 Warrant for the purchase of Common Stock made by the Company and held by
Cisco Systems, Inc., dated May 6, 1999 (incorporated herein by reference
to Exhibit 10.22 to the Company's Registration Statement on Form S-1
(File No. 333-75173)).
4.5 Registration Rights Agreement between the Company and PairGain
Technologies, Inc., dated February 24, 2000 (incorporated herein by
reference to Exhibit 10.1 to the Company's Current Report on Form 8-K
filed on March 10, 2000).
4.6 Registration Rights Agreement between the Several Persons named in Annex
I thereto, dated January 28, 2000 (incorporated herein by reference to
Exhibit 4.7 to the Company's Registration Statement on Form S-3 filed on
July 7, 2000).
4.7 Instrument Defining Rights of Stockholders of Registrant (incorporated
into this document by reference to the Company's Form 8-A (File No.
000-26401)).
10.1* Form of Indemnification Agreement entered into by the Company with each
of its directors and executive officers (incorporated herein by
reference to Exhibit 10.1 to the Company's Registration Statement on
Form S-1 (File No. 333-75173)).
10.2* 1999 Equity Incentive Plan (incorporated herein by reference to Exhibit
10.2 to the Company's Registration Statement on Form S-1 (File No.
333-75173)).
10.3* Employee Stock Purchase Plan (incorporated herein by reference to
Exhibit 10.3 to the Company's Registration Statement on Form S-1 (File
No. 333-75173)).
10.4* 1999 Director Stock Plan (incorporated herein by reference to Exhibit
10.4 to the Company's Registration Statement on Form S-1 (File No.
333-75173)).
10.5# Lease Agreement between Shav Associates and the Company, dated March 20,
2001.
59
10.6 Termination Agreement between the Company and Paradyne Corporation,
dated December 31, 1998 (incorporated herein by reference to Exhibit
10.10 to the Company's Registration Statement on Form S-1 (File No.
333-75173)).
10.7* Employment Agreement between the Company and Armando Geday, dated April
1, 1997 (incorporated herein by reference to Exhibit 10.12 to the
Company's Registration Statement on Form S-1 (File No. 333-75173)).
10.8+ Agreement for the Manufacture and Sale of ASIC Products between the
Company and Lucent Technologies Inc. Microelectronics, dated March 23,
1999 (incorporated herein by reference to Exhibit 10.15 to the Company's
Registration Statement on Form S-1 (File No. 333-75173)).
10.9 Intellectual Property Agreement among the Company, Lucent Technologies
Inc. and Paradyne Corporation, dated July 31, 1996 (incorporated herein
by reference to Exhibit 10.16 to the Company's Registration Statement on
Form S-1 (File No. 333-75173)).
10.10 Tax Matters Agreement between the Company and Paradyne Corporation,
dated July 31, 1996 (incorporated herein by reference to Exhibit 10.17
to the Company's Registration Statement on Form S-1 (File No.
333-75173)).
10.11+ Product Supply Agreement between the Company and Paradyne Corporation
dated March 16, 1999 (incorporated herein by reference to Exhibit 10.18
to the Company's Registration Statement on Form S-1 (File No.
333-75173)).
10.12 AT&T Trademark and Patent Agreement between the Company, AT&T Corp. and
Paradyne Corporation, dated July 31, 1996 (incorporated herein by
reference to Exhibit 10.19 to the Company's Registration Statement on
Form S-1 (File No. 333-75173)).
10.13 Covenant Not to Sue between the Company and Intel Corporation, dated May
6, 1999 (incorporated herein by reference to Exhibit 10.23 to the
Company's Registration Statement on Form S-1 (File No. 333-75173).
10.14 1999 Supplemental Plan (incorporated herein by reference to Exhibit 4.4
to the Company's Registration Statement on Form S-8 (File No.
333-40720)).
10.15 T.Sqware, Inc. 1997 Stock Option Plan (incorporated herein by reference
to Exhibit 4.6 to the Company's Registration Statement on Form S-8 (File
No. 333-40720)).
10.16 T.Sqware, Inc. 1997 Stock Option Plan Sub Plan for French Employees
(incorporated herein by reference to Exhibit 4.7 to the Company's
Registration Statement on Form S-8 (File No. 333-40720)).
10.17 2000 Stock Option Plan Sub Plan for French Employees (incorporated
herein by reference to Exhibit 4.5 to the Company's Registration
Statement on Form S-8 (File No. 333-40720)).
10.18 iCompression, Inc. 1998 Equity Incentive Plan (incorporated herein by
reference to Exhibit 4.8 to the Company's Registration Statement on Form
S-8 (File No. 333-40720)).
10.19 Internext Compression, Inc. 1997 Equity Incentive Plan (incorporated by
reference to Exhibit 4.9 to the Company's Registration Statement on Form
S-8 (File No. 333-40720)).
10.20 Ultima Communication, Inc. 1999 Stock/Option Issuance Plan (incorporated
herein by reference to Exhibit 4.9 to the Company's Registration
Statement on Form S-8 (File No. 333-49864)).
10.21 AtecoM, Inc. 1996 Stock Plan (incorporated herein by reference to
Exhibit 4.3 to the Company's Registration Statement on Form S-8 (File
No. 333-49864)).
21.1# Subsidiaries of the Company.
23.1# Consent of PricewaterhouseCoopers LLP.
24.1# Power of Attorney (included on signature page).
+ Certain portions of this exhibit have been granted confidential treatment by
the Commission. The omitted portions have been separately filed with the
Commission.
* Constitutes a management contract or compensatory plan or arrangement.
# Filed herewith.
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