UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
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
______________________
GLOBESPANVIRATA, 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
______________________
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, 2002 (based on the closing price for the common
stock on the Nasdaq National Market on such date) was approximately
$1,270,000,000. As of February 28, 2002, 140,695,878 shares of common stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the Proxy Statement to be filed in connection with the
2002 Annual Meeting of Stockholders are incorporated by reference into Part III
of this Form 10-K report where indicated.
GLOBESPANVIRATA, INC.
FORM 10-K
DECEMBER 31, 2001
TABLE OF CONTENTS
Item Page No.
---- -------
PART I
1. Business................................................................. 1
2. Properties...............................................................24
3. Legal Proceedings........................................................25
4. Submission of Matters to a Vote of Security Holders......................26
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters....26
6. Selected Historical Financial Data.......................................26
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................29
7A. Quantitative and Qualitative Disclosures About Market Risk...............39
8. Financial Statements and Supplementary Data..............................39
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.....................................................39
PART III
10. Directors and Executive Officers of the Registrant.......................39
11. Executive Compensation...................................................39
12. Security Ownership of Certain Beneficial Owners and Management...........39
13. Certain Relationships and Related Transactions...........................39
PART IV
14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K..........40
Signatures...............................................................66
i
PART I
ITEM 1. BUSINESS
COMPLETION OF MERGER WITH VIRATA CORPORATION
On December 14, 2001, we completed a merger with Virata Corporation under
an Agreement and Plan of Merger, dated as of October 1, 2001. Under that
agreement, a wholly-owned subsidiary of our company merged with and into Virata
and Virata became our wholly-owned subsidiary. At the effective time of the
merger, we changed our name from "GlobeSpan, Inc." to "GlobespanVirata, Inc."
The merger with Virata was accounted for as a purchase; accordingly, operating
results for Virata have been included from the date of acquisition. Unless
otherwise indicated, any financial information prior to the date of acquisition
excludes Virata's results of operations.
GENERAL
GlobespanVirata is a leading provider of integrated circuits, software and
system designs for broadband communication applications that enable high-speed
transmission of data, voice and video to homes and business enterprises
throughout the world. Currently, our integrated circuits, software and system
designs are primarily used in digital subscriber line, or DSL, applications,
which utilize the existing network of copper telephone wires, known as the local
loop, for high-speed transmission of data. We sell our products to more than 300
telecommunications equipment manufacturers for incorporation into their products
for use in systems deployed by telecommunications service providers and end
users in more than 30 countries.
Consumers and business users demand reliable and fast ways to connect to
the Internet and to each other through networks. One approach available to them
for achieving this goal is DSL technology. Our products target the rapidly
growing market for high-speed data transmission applications such as Internet
access, telecommuting and networking among branch offices. DSL applications are
expanding to also include voice and video transmissions over the same copper
wire.
It is our objective to help DSL service providers and equipment makers meet
the challenges that face them in deploying DSL technology within the existing
communications infrastructure. In an effort to assist our customers in meeting
these challenges, we have developed integrated solutions that combine the
functionality of entire systems, including multiple discrete components, memory,
microprocessors and software, in production ready reference designs utilizing
our chip sets. These chip set solutions are known as "System-On-Chip" solutions
and achieve system-level functionality through silicon and software. 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.
In our on-going effort to increase our ability to offer System-On-Chip
solutions to our customers, we have completed a number of acquisitions and
mergers that have expanded our intellectual property, design and product
development resources and system-level 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.
INDUSTRY OVERVIEW
THE LAST MILE IS THE BOTTLENECK TO HIGH-SPEED NETWORK ACCESS
In recent years, consumers have increasingly demanded instantaneous access
to the vast amount of information available on the Internet. Demand from
consumers is driven by four primary factors:
o the extent of the information and entertainment sources,
including video and audio files, available on the Internet has
increased dramatically;
o the number and quality of services offered through the Internet,
such as video communication and lower cost telephone services, is
growing rapidly;
1
o a growing number of small business owners and telecommuters
require the same access speeds from their home offices and small
networks as those achieved by participants in large corporate
networks; and
o the performance and affordability of the products, such as
personal computers, integrated access devices and set top boxes,
used to connect to today's communication networks enables more
people to connect than ever before.
Simultaneous with the growth in consumer demand is the improvement in the
quality and complexity of the data available on, and through, the Internet. In
order to access the types of complex files now available over the Internet, an
end user must have a sophisticated means of connecting to the network.
Increasingly, consumers are turning to broadband access services in order to
achieve their network connection goals reliably and to transfer information
within practical time periods.
When a consumer connects to the Internet and wishes to receive or download
information, the information must travel to the user's computer, or other
networking device, through the main transmission channels, also known as the
network backbone, to the central office of the service provider, and then to the
local lines, also known as the "local loop" or "last mile", which connect the
end-user to the network. While the network backbone is capable of delivering
data at very high speeds, an access bottleneck continues to exist in the local
loop because the copper wire telephone lines that make the last mile connection
were originally designed for voice traffic rather than high- speed data
transmission. As a result, access to the Internet and private communications
networks over the last mile infrastructure has typically been limited to
transmission rates of up to 56 Kbps using standard dial-up analog modems, or 128
Kbps using integrated services digital network, or ISDN, modems. At these rates,
several minutes may be required to access a media rich website, and several
hours may be required to download large files.
COMPETITION TO DELIVER HIGH-SPEED NETWORK ACCESS
This communications bottleneck has created opportunities for network
service providers and equipment manufacturers who must continually develop and
improve solutions for overcoming the last mile bandwidth challenges in order to
keep pace with consumer demand. As traffic increases, high-speed data, voice and
video transmission services have become a key competitive service offering for
these providers. In an effort to provide greater bandwidth in the local loop,
network service providers have deployed higher speed access services, such as T1
or E1 lines. These services, however, are typically too costly for the average
consumer.
Some service providers have also developed alternatives for overcoming the
bottleneck problem, that do not rely on the local loop, including cable,
wireless and direct broadcast satellite systems. Cable competes effectively with
DSL high-speed data transmission technologies, particularly in the residential
market, because it enables fast data transmission speeds at competitive prices
over the existing infrastructure of coaxial cable. Cable services are deployed
over the cable television infrastructure at transmission rates of up to 10
megabits per second or Mbps. 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 can 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 future market for high-speed data
transmission services, particularly for large businesses.
DSL TECHNOLOGY ENABLES HIGH-SPEED DATA TRANSMISSION OVER COPPER TELEPHONE WIRE
Another alternative available to overcome the bottleneck of the last mile
is DSL. DSL technology uses sophisticated digital signal processing techniques
to achieve high-speed data transmission over the copper telephone wires of the
existing local loop. DSL utilizes more of the bandwidth on copper telephone
lines than is currently used for plain old telephone service, also referred to
as POTS, thereby allowing for greater bandwidth with which to send and receive
information. By utilizing frequencies between 26kHz and 1MHz, DSL can encode
more data to achieve higher data rates than would otherwise be possible in the
restricted frequency range of POTS. Specifically, DSL currently provides
2
downstream transmission rates up to 8 Mbps, using the existing local loop copper
wire infrastructure. The transmission speeds of DSL will continue to increase
and improve as the technology evolves.
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 same vicinity, and allows a higher level of security;
LOW COST INFRASTRUCTURE. Because DSL uses the same local loop copper
telephone lines that are 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 consumer and the service provider
over other last mile technology solutions; and
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.
In order to utilize the frequencies above the voice audio spectrum, DSL
equipment must be installed on both ends of the local loop. In a typical
deployment of DSL service, DSL customer premises equipment, or CPE, 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 provider's central office, or CO, over a copper telephone wire that is
terminated by a digital subscriber line access multiplexer, or DSLAM, unit
located at the CO. One DSLAM typically provides DSL connections for many users.
CHALLENGES TO DSL SERVICE PROVIDERS
Telephone companies recognize that the satellite, wireless, fiber, and
cable service providers are serious threats to win consumer and business end
users that have traditionally been served by them. As a result, 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 worldwide have invested and
continue to actively invest resources in the rapid deployment of DSL.
These DSL service providers are currently in various stages of worldwide
deployment from start-up to ramp-up, and are in competition to attract users
from other broadband data transmission alternatives. To continue to be a
compelling alternative, DSL service providers 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 Facilitate 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
The projected growth of DSL subscribers worldwide 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
3
must design next generation products that overcome the challenges presented by
the stringent and varying feature, function, performance and cost demands of the
worldwide 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,
consumer demands for new features and continuous improvements in
DSL product 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 manufacturers 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 manufacturers 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
with a suite of data interfaces, protocol processing, and system
management functions to efficiently offer a broad range of
services to businesses and consumers;
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 consumers as possible
at the greatest speeds.
THE OPPORTUNITY FOR DEVELOPERS OF INTEGRATED CIRCUITS
We believe that equipment manufacturers can best meet the challenges set
forth above by designing their system-level products with System-On-Chip
integrated circuit and software solutions. Using a System-On-Chip solution will
enable equipment manufacturers to achieve increased programmability while
meeting the service providers increasing demand for products that use less power
and space. System-On-Chip solutions also help satisfy the goals of lower cost
and higher performance.
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 System-On-Chip solutions. In addition, these solutions must overcome
real-world impairments of the local loop, such as line noise, which could
otherwise degrade transmission performance.
Realizing the benefits of System-On-Chip solutions as well as their
limitations in creating such solutions, DSL equipment manufacturers are turning
to integrated circuit developers, like GlobespanVirata, to bring
high-performance, cost-effective solutions to market that include multiple
system functions.
THE GLOBESPANVIRATA SOLUTION
We are a leading worldwide provider of DSL highly integrated circuits,
software and system designs that enable high-speed data, voice and video
transmission over the local loop and are well equipped to deliver to equipment
manufacturers and service providers products to meet the challenge of the last
mile bottleneck. We have over eight years of field experience in implementing
DSL technology encompassing more than 300 customers and more than 50 worldwide
telephone service providers in more than 30 countries. Approximately 800 of our
employees are involved in product development and customer support. The breadth
of our employee base combined with our extensive understanding of DSL in the
field has resulted in GlobespanVirata having one of the most extensive bases of
knowledge in the industry. Our expertise has also been enhanced through the
acquisition of technology companies with communications network knowledge in
voice processing, video processing, application specific network processing,
communication protocols, and data switching, routing and security. As a result,
we understand the requirements for DSL system solutions that include
asynchronous transfer mode, or ATM, and Internet protocol, or IP, packet and
cell aggregation, switching and traffic management, voice and video
transmission, voice gateways, auto-configuration for plug and play
installations, and recognize the harsh and varying conditions of the local loop
that impact reliable data transmission. We believe that the depth
4
and breadth of our experience and expertise in the broadband field and the broad
range of our technological solutions distinguish us from our competitors. Among
our key areas of expertise are:
BREADTH OF DSL EXPERTISE. We have expertise in both asymmetric DSL, or
ADSL, and symmetric DSL, or SDSL, applications. ADSL and SDSL
configurations that we offer include VDSL, HDSL, HDSL2, HDSL4, and SHDSL.
ADVANCED SYSTEM-LEVEL EXPERTISE. Our system-level expertise enables us
to offer multiple system functions that can be cost-effectively
incorporated into complete System-On-Chip solutions. These System-On-Chip
solutions allow for the optimization of the performance, cost, and time to
market of system products used to deliver network services using DSL
access. Additionally, our system-level expertise allows us to provide
comprehensive step-by-step reference design guides to our customers in
order to enable them to rapidly bring innovative DSL systems products to
market. The local loop environment is characterized by various impairments
that affect DSL operations and make reliable high-speed data, voice and
video transmission difficult to achieve. To minimize the effects of these
impairments on the reliability and quality of services provided by DSL
access, we will continue to incorporate our system-level understanding of
these factors into our DSL chip set system solutions.
SOFTWARE EXPERTISE. 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 add features and optimize
performance to keep current 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 with a wide range
of feature options through software control.
ALGORITHM EXPERTISE. A key component of our continued success is the
expertise that we have developed in the areas of processes and techniques
used to transform data, voice and video content from analog to digital
format. We have also developed essential processes and techniques that are
used to remove echo voice signals that would otherwise interfere with
network transmissions. Specific elements of our algorithm expertise are:
COMMUNICATIONS 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. 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. 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.
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. 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.
VIDEO PROCESSING ALGORITHMS. 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
5
content of the subject for transmission over broadband networks or for
storage on CD-ROMs or hard disk drives. We use these algorithms with
our proprietary digital signal processing technology in our video
encoding and decoding chip sets.
ECHO CANCELLATION ALGORITHMS. 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. Without
these techniques it would be difficult to conduct a conversation,
since transmission signal delays through a wide area network system
sometimes cause echo signals of speech to be reflected back to the
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 cancellation products.
ATM AND IP PROTOCOL EXPERTISE. ATM and IP protocol are being used to
build the next generation of communication infrastructure. 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 video applications. These
technologies represent critical components of broadband access systems and
application specific network devices.
APPLICATION SPECIFIC NETWORK PROCESSING EXPERTISE. 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 in central office
applications manage the data traffic flow to each local loop and aggregates
this traffic into a single high-speed data stream to core switching
equipment. The network processor platforms in the customer premise
application manage protocol processing, data routing and security
functions, control functions for a wide range of physical interfaces, and
auto configuration for plug and play installations. 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.
SIGNAL CONVERSION EXPERTISE. Signal conversion is an area of expertise
that allows us to transform 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.
DIGITAL SIGNAL PROCESSING EXPERTISE. 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. 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 cancellation,
and video processing algorithms. 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 consumption and costs normally
associated with conventional, general purpose digital signal processors.
The performance and flexibility of our digital communications processor
enables our customers to implement multiple DSL configurations using
different line codes through a simple software download.
THE TECHNOLOGICAL ADVANTAGES OF OUR SOLUTIONS
Using the areas of expertise highlighted above, we are able to create
broad-based solutions with the following advantages:
COMPLETE SYSTEM-ON-CHIP. Our System-On-Chip solutions integrate the
functionality of multiple discrete components, memory and microprocessors
and software that provide DSL transmission, framing,
6
communication protocol handling, voice processing, data security, data
switching and routing, 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, ATM, or Ethernet data interfaces
and ATM and IP protocols on a single chip. We also offer application
software enabling 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.
COMPETITIVE TOTAL SYSTEM COST. The high levels of integration in our
System-On-Chip solutions for central office equipment and customer premises
products minimize total system cost. Highly integrated 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.
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 that 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 System-On-Chip solutions 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:
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, a particularly important factor
in the rapidly developing broadband market. We maximize our ability to compete
for design wins by using our extensive sales organization to access the greatest
number of customers and further penetrate our existing customer base.
TARGET ALL APPLICATIONS WITHIN THE DSL SEGMENT. Our strategy is to provide
the necessary technologies to enable all applications within the DSL segment. We
are currently shipping chip sets based upon ADSL, HDSL, HDSL2, HDSL4, 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.
LEVERAGE ADVANCED SYSTEM-LEVEL EXPERTISE. Our strategy is to leverage our
advanced system-level expertise in order to provide increasing amounts of
silicon content on both the central office and customer premise ends of the DSL
connection. We also intend to use our system-level knowledge 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.
7
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
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.
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,
and we will continue to seek acquisition opportunities to enhance our core
competencies. We are currently investing substantial development resources in
system-level knowledge, communications algorithms, signal processing and signal
conversion, voice compression, echo cancellation, data switching, routing and
security, application specific network processing, communication protocols, and
video compression algorithms. 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.
DRIVE INDUSTRY STANDARDS. We actively participate in the formulation of
world wide industry standards for broadband network access 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.
PRODUCTS
We offer a broad suite of chip set solutions for DSL, voice and video
processing, and network processing. Our product offerings include various
combinations of digital signal processors, network or communication processors,
integrated software on silicon, and analog front-end chips, and reference design
guides.
DSL PRODUCTS
We have designed a family of System-On-Chip integrated circuits for use in
home and business DSL products that incorporate a combination of multiple system
functions. We offer solutions for both the equipment that resides in a service
provider's central office as well as for the equipment that resides in the
customer's premises. Solutions can optionally include a DSL asymmetric or
symmetric modem, an application specific network processor, and Ethernet, PCI or
USB data interface.
ASYMMETRIC CENTRAL OFFICE CHIP SETS: TITANIUM FAMILY
Our asymmetric digital subscriber line, commonly referred to as ADSL, chip
sets, marketed as Titanium, provide cost-effective, high-speed local loop access
for Internet and other applications where downstream transmission rates to end
users are faster than upstream transmission rates from end users. This
asymmetric transmission is provided over one pair of copper telephones wires
with downstream data transmission rates ranging from 32 Kps to 8 Mbps. ADSL also
allows the telephone line to be used simultaneously for standard telephone voice
service and data transmission. Our Titanium family of chip sets are multi-port
in density, ranging from 4 to 24 ports per digital signal processor chip and
from 4 to 8 ports per analog front end chip.
Our ADSL chip sets are designed to meet the ANSI standard specification
T1.413, and International Telecommunications Union, or ITU, standard G.992.1 for
8 Mbps configuration (known also as G.dmt), including
8
Annex A, B and C options to these standards. Our chip sets also meet ITU
standard G.992.2 (known as G.Lite), exceeding the standard's 1.5 Mbps
specification with speeds up to 4 Mbps.
SYMMETRIC CENTRAL OFFICE CHIP SET: ORION FAMILY
Our symmetric digital subscriber line, also known as SDSL, chip sets,
marketed as Orion, provide cost-effective network access where downstream
transmission rates to end users are the same as upstream transmission rates from
end users. Our SDSL chip sets are available in different DSL configurations,
including IDSL, HDSL, HDSL2, HDSL4 and G.SHDSL. Our Orion family of chip sets
are also multi-port in density, ranging from 2 to 8 ports per chip.
G.SHDSL delivers symmetric data rates from 192 Kbps to 2.3 Mbps over one
standard copper wire pair and up to 4.6 Mbps over two copper wire pairs at
distances much greater than traditionally deployed SDSL solutions. Additionally,
the extended reach of G.SHDSL allows service providers to increase their
customer service area by 30%.
CUSTOMER PREMISES EQUIPMENT CHIP SETS: TITANIUM USB, TITANIUM PCI, TITANIUM PLUS
E'NET AND ARGON
We offer both asymmetric and symmetric DSL CPE chip sets used in the
equipment that resides in the end user's home or office. Our Titanium USB chip
set provides ADSL network access through a PC USB connection. Our Titanium PCI
chip set provides ADSL network access through a personal computer interface.
ADSL network access with router and bridge capabilities through Ethernet
connections are provided by our Titanium Plus E'Net and Argon chip sets. Our
asymmetric DSL CPE products support Annex A, B and C standards to meet all
international DSL market needs.
COMMUNICATIONS AND NETWORK PROCESSORS
Our communications processor, which is marketed as Helium, is a single
integrated circuit, programmable processor that is used primarily in CPE
products to provide network communication functions and added value features for
the end user. The Helium chip is a highly integrated solution that includes PCI,
USB, and Ethernet controllers as well as flexible expansion interfaces to enable
customers to add capabilities such as home wireless networking. Our ISOS
software works in combination with the Helium chip to manage data, routing,
bridging, switching and protocol conversions needed to encapsulate and route
information packets. Additional features of these products include system
management, firewall security, embedded web server, auto-configuration of DSL
services and Universal Plug-and-Play. We also offer customers a full set of
software development tools including compilers, linkers and other
special-purpose tools to enable the customer to design additional applications.
We are currently sampling a programmable network communications processor,
which combines both hardware and software implementations to yield high
performance and flexible processing of communication protocols used in DSL
network access systems. This product performs ATM and IP processing, traffic
management and aggregation of multiple symmetric or asymmetric DSL access line
into a single high-speed connection into the wide area network. We expect that
the product will be primarily used in DSLAMs and equipment designed for use in
digital loop carriers and multi-dwelling or business multi-tenant unit
applications. Our network communications processor also has applications in
voice gateway cards, multi-service wide area network switches and edge routers.
The product's flexible hardware and software implementation will also permit a
seamless migration from today's predominantly ATM networks to tomorrow's
converged IP networks.
VOICE AND VIDEO PROCESSING PRODUCTS
VOICE SOLUTIONS: iVOX AND AZURITE
Voice over Packet, or VoP, solutions enable telecom carriers to move their
voice services away from traditional circuit-switched networks to packet-based
networks, thereby reducing operational costs and providing a lower cost
alternative to traditional telephone services. Our products meet the
requirements of both competing protocols for this emerging standard--IP and ATM.
We offer complete and scaleable VoDSL and VoIP solutions for both CO and CPE
applications, including trunking gateways, integrated access devices,
multi-dwelling units, next generation digital loop carriers and DSLAMs. Our iVOX
chip set is designed to meet the needs of carriers that want to transition voice
traffic from the traditional PSTN to more efficient packet based networks. Our
Azurite solutions provide fully integrated, standards compliant and fully tested
software and hardware for VoIP and VoDSL applications. Azurite chip sets include
our ISOS solution that helps to simplify the customization of vertical
applications. Additionally, our software features that offer solutions for a
wide variety of voice and telephony applications.
9
VIDEO SOLUTIONS: iTVC15
MPEG is an established international standard for compressing analog voice
signals to digital format for storage and transmission over digital networks.
MPEG is used in High Definition Television, or HDTV, Digital Video Disc, or DVD,
and other applications in order to reduce the number of bits needed to represent
audio and video data. We have a single chip solution, marketed as the iTVC15(TM)
chip, that incorporates MPEG-2 audio and video encoding and decoding, transport,
with screen display controller. The nature of our single chip solution allows
integrated circuit companies, electronics makers and personal computer companies
to reduce the cost of designing and manufacturing next generation digital video
products.
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 organization. As of December 31,
2001, we employed 175 sales, marketing and technical support professionals. Our
sales managers are dedicated to principal customers to promote close cooperation
and communication. In addition, our design and applications engineering staff is
actively involved with customers during all phases of design and production and
provides customer support through our worldwide sales offices, which are
generally in close proximity to customers' facilities. To complement our direct
sales and customer support efforts, we also utilize independent manufacturers'
representatives to support the sales managers by providing leads, nurturing
customer relationships, closing design wins and securing customer orders.
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. 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. Our advanced technical support and comprehensive field support
also ensures that our customers' products perform optimally in real world
deployment environments.
CUSTOMERS
We sell our products worldwide to over 300 companies that manufacture data
communications products. Our chip sets are incorporated by our customers into
the following products:
o 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 Ethernet (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, 2001, 2000 and 1999, our top
customers, defined as those customers who individually represented at least ten
percent of our net revenues accounted for 38.7%, 62.6% and 41.2%, respectively,
of our total net revenues. In 2001, our top customers were Lucent Technologies
and Cisco Systems, which accounted for 26.6% and 12.1% of our net revenues. For
the year ended December 31, 2001, on an unaudited pro forma combined basis, our
top customers were Lucent Technologies, Ambit Microsystems and Cisco Systems,
which accounted for 28.8%, 17.2% and 13.4% of our combined net revenues,
respectively. The unaudited pro forma combined revenue includes revenues for the
twelve month period
10
ended December 31, 2001, as if the merger were consummated on January 1, 2001.
In 2000, our top 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 customer was Cisco Systems which accounted for
41.6% of our net revenues. We do not have long-term 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 has substantial expertise in DSL system solution
technology including DSL modems, network processors, voice and video
compression, and network communications software. Since our founding in August
1996, we have invested significant resources to expand our product development
and support group. As of December 31, 2001, approximately 822 employees were
engaged in product development and support. The number of employees engaged in
these activities may decrease due to the reorganization and restructuring plan
adopted during the first quarter of 2002. 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 network
processors, voice and video processing, and data switching, routing, and
security technologies into our integrated circuits and software solutions for
the DSL market.
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, 2001, 2000 and 1999 were $138.0 million (including $22.9
million of non-cash compensation), $115.4 million (including $16.8 million of
non-cash compensation) and $26.5 million, respectively.
MANUFACTURING
We do not own or operate a semiconductor fabrication facility. Currently,
we depend primarily on Agere Systems, United Microelectronics Corporation, or
UMC, and Taiwan Semiconductor Manufacturing Company, Ltd., or TSMC, to deliver
to us sufficient quantities of semiconductor chips or chip sets. Agere Systems
delivers to us assembled and fully-tested devices. UMC and TSMC deliver to us
semiconductor devices in wafer form that we, in turn, have assembled and tested
at various subcontract assembly and test companies located in Asia.
We have had a series of manufacturing arrangements with Agere Systems, the
latest of which became effective in March 1999. Under this agreement, Agere
Systems will fill orders for chip sets in accordance with agreed-upon quantity,
price, lead-time and other terms. 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. Further, Agere
Systems has the right to discontinue the supply of any chip set upon 12 months'
notice (as long as Agere Systems fills our orders for commercially reasonable
quantities of that chip set during the notice period). In addition, Agere
Systems' ability to manufacture our chip sets is limited by its available
capacity, and under some circumstances Agere Systems may allocate its available
capacity to its other customers.
In October 1999, we entered into an agreement with 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.
We have an agreement with UMC that became effective in December 1999 which
provides us with the ability to obtain delivery of specified chip sets in
accordance with the agreement's terms. 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.
On some occasions we have experienced delays and may in the future
experience delays in receiving products from Agere Systems, UMC or TSMC. Any
problems associated with the delivery, quality or cost of wafer fabrication,
assembly or testing of our products could adversely affect our business,
financial condition and results of operations. If we are required for any reason
to seek a new manufacturer of the chips or chip sets presently manufactured by
Agere Systems, UMC or TSMC, we could experience a serious adverse impact on our
business. Such a new manufacturer may not be available and, in any event,
switching to a new manufacturer would require a delay of six months or more and
would
11
involve significant expense and disruption to our business. We have also relied
on Zilog, Inc. and LSI Logic Corporation to manufacture certain of our products.
We intend to continue to secure multiple sources of wafer fabrication, assembly
and test to reduce our dependence on any single source, provide additional
manufacturing capacity, and access diverse manufacturing technologies. There can
be no assurance that we will be able to successfully qualify and secure such
additional sources of supply.
COMPETITION
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. In the past year, there have been
announcements by other integrated circuit companies that they intend to enter
the DSL chip set market. Our customers place a premium on interoperability and
compliance with open standards in our products. Consequently, our industry is
marked by low barriers to entry and continual change in the competitive
landscape. 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,
Conexant Systems, Infineon Technologies, Integrated Telecom
Express, Intel Corporation, and Texas Instruments;
o for symmetric DSL products, Conexant Systems, Infineon
Technologies, and MetaLink;
o for communications and network processor products, Intel
Corporation, Motorola Corporation, Texas Instruments and various
providers of application-specific integrated circuits; and
o for voice compression products, Texas Instruments, Broadcom, and
Centillium.
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 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. Currently, we have filed suit against a number of
employees in the state of California, a jurisdiction which limits the efficacy
of non-competition agreements.
We rely in part on patents to protect our proprietary technologies and
processes and to enhance our ability to obtain cross-licenses of intellectual
property from others either to obtain access to intellectual property we do not
possess or to more
12
favorably resolve potential intellectual property claims against us. As of
December 31, 2001, we had 79 patents in the United States and a number of issued
and pending 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 2019. In addition, as of December 31,
2001, we had 272 patent applications pending in the United States Patent and
Trademark Office. 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. It is our policy to require customers to obtain a
software license contract before we provide them with certain computer programs.
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.
EMPLOYEES
As of December 31, 2001, we had 1155 full-time employees, including 822
employees engaged in product development and support, 175 engaged in sales and
marketing and 158 engaged in general and administrative activities. In
connection with the Virata merger, we adopted a reorganization and restructuring
plan during the first quarter of 2002. The plan calls for the elimination of
redundant functions, which is expected to result in a decrease in the number of
employees during 2002.
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.
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 and 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 fluctuated in the past and are
likely to fluctuate significantly in the future on a quarterly and annual basis
due to a number of factors, many of which are outside of our control. 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 changes in the timing and size of semiconductor orders from, and
shipments to, our existing and new customers;
o the loss of or decrease in sales to a significant customer or a
failure to complete significant transactions;
13
o the mix of our products 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 products 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;
o the volume and average cost of products manufactured; and
o our ability to attract and retain key personnel.
Variations will also be caused by factors related to the development of the
DSL market and the competition we would 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 products relative to those
of our competitors.
Variations will also be caused by other factors affecting our business,
many of which are substantially outside of the control of 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
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.
WE MAY NOT ACHIEVE THE POTENTIAL BENEFITS FROM THE MERGER WITH VIRATA, WHICH MAY
HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL AND OPERATING RESULTS.
We consummated the merger with Virata with the expectation that the merger
would result in benefits to the combined company. To realize any benefits or
synergies from the merger, we will face the following post-merger challenges:
o combining product offerings effectively and efficiently;
o retaining and assimilating the management, employees and sales
forces of each company;
o selling the existing products of each company to the other
company's customers;
o retaining existing customers, strategic partners and suppliers of
each company;
o developing new products that utilize the assets and resources of
both companies;
14
o realizing expected cost savings and synergies from the merger;
and
o developing and maintaining consistent standards, controls,
procedures, policies and information systems.
If we are not successful in addressing these and other challenges, then the
benefits of the merger will not be realized and, as a result, our operating
results and the market price of our common stock may be adversely affected.
Further, we cannot assure you that our continued growth rate will equal the
historical growth rates experienced either by our company or Virata prior to the
merger.
THE GENERAL ECONOMIC SLOWDOWN, AND SLOWDOWN IN SPENDING IN THE
TELECOMMUNICATIONS INDUSTRY SPECIFICALLY, HAS AND MAY CONTINUE TO ADVERSELY
AFFECT OUR BUSINESS AND OPERATING RESULTS.
The worldwide telecommunications industry has experienced and may continue
to experience further reductions in component inventory levels and equipment
production volumes and delays in the build-out of new infrastructure. This
slowdown has resulted in a decrease in spending on DSL equipment by service
providers and lower-than-expected sales volume for DSL equipment manufacturers.
If any of these trends continue, it could result in lower than expected demand
for our products and 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.
PRICE COMPETITION AMONG OUR COMPETITORS AND VOLUME PURCHASES BY LARGE CUSTOMERS
MAY RESULT IN A DECLINE OF THE GROSS MARGINS FOR OUR PRODUCTS IN THE FUTURE.
We expect that price competition among our competitors and volume purchases
of our products at discounted prices will reduce our gross margins in the
future. We anticipate that average per-unit selling prices of DSL products will
continue to decline as product technologies mature. Since we do not manufacture
our own products, we may be unable to reduce manufacturing costs in response to
declining average per-unit selling prices. Many of our potential competitors are
larger, with greater resources, and therefore may be able to achieve greater
economies of scale and are less vulnerable to price competition.
Further, we expect that average per-unit selling prices of our products
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.
THE RECENT RAPID EXPANSION OF OUR OPERATIONS HAS PLACED A STRAIN ON MANAGEMENT,
PERSONNEL AND OTHER RESOURCES.
From December 31, 1998 to December 31, 2001, the Company has increased from
177 to 1,155 employees. The number of employees at December 31, 2001 included
440 employees acquired as part of the merger with Virata. 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.
WE HAVE A HISTORY OF LOSSES, AND WE WILL INCUR SUBSTANTIAL LOSSES IN THE FUTURE,
WHICH MAY PREVENT US FROM ACHIEVING OR SUSTAINING PROFITABILITY OR POSITIVE CASH
FLOW.
We incurred a net loss attributable to common stockholders of $377.5
million, $153.2 million and $9.1 million in the years ended December 31, 2001,
2000 and 1999, respectively. We expect to continue to incur net losses, and
these losses may be substantial. Because of substantial operating expenses, we
will need to generate significant quarterly revenues to achieve profitability or
positive cash flow. 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.
Our ability to generate future revenues will depend on a number of factors, many
of which are beyond our control. These factors include:
o the rate of market acceptance of high speed network access;
o the rate of market acceptance of our products and the demand for
equipment that incorporates our products;
15
o changes in industry standards governing DSL technologies;
o the extent and timing of new customer transactions;
o personnel changes, particularly those involving engineering and
technical personnel;
o regulatory developments; and
o general economic trends.
Due to these factors, we may not be able to achieve or sustain
profitability or positive cash flow. Our ability to continue to operate our
business and implement our business strategy may thus be hampered and the value
of our stock may decline.
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. We expect this trend to continue. 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 or suffer a
substantial reduction in orders from these customers. For the year ended
December 31, 2001, our top customers defined as these customers who individually
represented at least 10% of our net revenues were Lucent Technologies and Cisco
Systems which accounted for 26.6% and 12.1% of our net revenues, respectively.
For the year ended December 31, 2001, on an unaudited pro forma combined basis,
our top customers were Lucent Technologies, Ambit Microsystems and Cisco
Systems, which accounted for 28.8%, 17.2% and 13.4% of our combined net
revenues, respectively. The unaudited pro forma combined revenue includes
revenues for the twelve month period ended December 31, 2001, as if the merger
were consummated on January 1, 2001. For the year ended December 31, 2000, our
top customers were Cisco Systems, Lucent Technologies and Nortel Networks, which
accounted for 27.8%, 23.6% and 11.2% of our net revenues, respectively. For the
year ended December 31, 1999, our top customer was Cisco Systems which accounted
for 41.6% of our net revenues. Our results in 2001 were adversely affected by
reduced purchases by some of our customers, reflecting their reduced sales of
DSL equipment.
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. It is also possible that equipment
manufacturers may design and develop internally, or acquire, their own
semiconductor technology, rather than continue to purchase these products from
third parties like us. If we are not successful in maintaining relationships
with key customers and winning new customers, sales of our products may decline.
In addition, because a significant portion of our business has been and is
expected to continue to be derived from orders placed by a limited number of
large customers, variations in the timing of these orders can cause significant
fluctuations in our operating results.
Furthermore, 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 us holding excess
or obsolete inventory, which has resulted and could again in the future result
in write-downs of inventory that would have a material adverse effect on our
operating results.
BECAUSE WE RELY ON THE TECHNOLOGY OF THIRD PARTIES, THE LOSS OF OR INABILITY TO
OBTAIN THE THIRD PARTY TECHNOLOGY COULD RESULT IN INCREASED COSTS OR DELAYS IN
THE PRODUCTION OR IMPROVEMENT OF OUR PRODUCTS.
We currently license technology of third parties to develop and manufacture
their products. If any of these third party providers were to change their
product offerings or terminate these licenses, we would incur additional
developmental costs and, perhaps, delays in production, or be forced to modify
our existing or planned software product offerings. In addition, if the cost of
any of these third party licenses or products significantly increases, we could
suffer a resulting increase in costs or delays in our ability to manufacture our
products or provide complete customer solutions and this could harm our results
of operations. We cannot be sure that such third party licenses or substitutes
will be available on commercially favorable terms.
16
BECAUSE MANUFACTURERS OF DSL EQUIPMENT MAY BE RELUCTANT TO CHANGE THEIR SOURCES
OF COMPONENTS, IF WE DO NOT ACHIEVE DESIGN WINS WITH MANUFACTURERS OF DSL
EQUIPMENT, WE MAY BE UNABLE TO SECURE SALES FROM THESE CUSTOMERS IN THE FUTURE.
Once a manufacturer of DSL equipment has designed a supplier's
semiconductor into its products, the manufacturer may be reluctant to change its
source of semiconductors due to the significant costs associated with qualifying
a new supplier. Accordingly, our failure to achieve design wins with
manufacturers of DSL equipment which have chosen a competitor's semiconductor
could create barriers to future sales opportunities for us with these
manufacturers.
WE MAY INCUR SUBSTANTIAL EXPENSES DEVELOPING PRODUCTS 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
receive limited orders for products during the period that potential customers
test and evaluate our products. 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 products 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 the realization of revenues from volume ordering of products by our
customers. In addition, achieving a design win with a customer does not
necessarily mean that this customer will order large volumes of our products and
we may never realize revenues from our efforts. A design win is not a binding
commitment by a customer to purchase 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.
FUTURE ACQUISITIONS MAY BE DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS, DILUTE
STOCKHOLDER VALUE OR DIVERT MANAGEMENT ATTENTION.
In the future, 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 may
otherwise offer growth opportunities. While there are currently no unannounced
purchase agreements for the acquisition 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 involve many risks,
including:
o difficulties in managing 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 the diversion of management's attention from other business
concerns;
o adverse effects on existing business relationships with our
customers or the acquired companies' customers;
o potential difficulties in completing projects associated with
purchased in-process research and development;
o the 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 the inability to retain employees of acquired companies.
Additionally, future acquisitions may require us to use substantial
portions of 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
17
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.
Furthermore, if we issue equity or convertible debt securities in
connection with an acquisition, the issuance may be dilutive to our existing
stockholders. 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.
IF LEADING EQUIPMENT MANUFACTURERS DO NOT INCORPORATE OUR PRODUCTS INTO
SUCCESSFUL PRODUCTS, SALES OF OUR PRODUCTS WILL SIGNIFICANTLY DECLINE.
Our products will not be sold directly to the end-user; rather, they will
be components of other products. As a result, we must rely upon equipment
manufacturers to design our products into their equipment. We must further rely
on this equipment to be successful. If equipment that incorporates our products
is not accepted in the marketplace, we may not achieve adequate sales volume of
products, which would have a negative effect on our results of operations.
Accordingly, we must correctly anticipate the price, performance and
functionality requirements of these DSL 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 DSL equipment manufacturing industry, or if a
small number of DSL 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 DSL 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 will rely on customers,
broadband and DSL equipment manufacturers, to produce reliable, successful DSL
systems by incorporating our products 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 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 our products is characterized by:
o intense competition;
o rapid technological change;
o frequent new product introductions by competitors;
o changes in customer demands; and
o evolving industry standards.
Additionally, the life cycles of some of our products will depend heavily
upon the life cycles of the end products into which our products will be
designed. Products with short life cycles require us to closely manage
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
18
seriously harmed.
WE WILL DEPEND ON A LIMITED NUMBER OF SUPPLIERS TO MANUFACTURE OUR PRODUCTS, AND
ANY DISRUPTION IN ANY OF THESE RELATIONSHIPS COULD PREVENT US FROM SELLING OUR
PRODUCTS OR RESULT IN SIGNIFICANT COSTS OR DELAYS.
We do not own or operate a semiconductor fabrication facility and intend to
continue to rely on third-party foundries and other specialist suppliers for all
of our manufacturing, assembly and testing requirements. However, these
foundries are not obligated to supply products to us for any specific period, in
any specific quantity or at any specific price, except as may be provided in a
particular purchase order that has been accepted by one of them. As a result, we
cannot directly control semiconductor delivery schedules, which could lead to
product shortages, quality assurance problems and increases in the costs of our
products. We may experience delays in the future and we cannot be sure that we
will be able to obtain semiconductors within the time frames and in the volumes
required by us at an affordable cost or at all. Any disruption in the
availability of semiconductors or any problems associated with the delivery,
quality or cost of the fabrication assembly and testing of our products could
significantly hinder our ability to deliver products to customers and may result
in a decrease in the sales of our products.
Our DSL chip designs are customized by a third-party foundry for their
specific manufacturing processes and IP cores. In order to second source or
switch foundry providers, our products would need to be re-designed for the
process technology and IP cores of the respective foundry. If we are required
for any reason to seek a new manufacturer of our products, 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. 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 products if our relationship with any of our
suppliers is terminated for any reason.
WE MAY BE REQUIRED TO OBTAIN LICENSES ON ADVERSE TERMS TO SELL INDUSTRY-STANDARD
COMPLIANT PRODUCTS.
We have received correspondence, including a proposed licensing agreement,
from Amati Corporation (which was acquired by Texas Instruments) stating that
Amati believes that it owns a number of patents that are required for some
products 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.
In order for us to comply with the ITU V.34, V.90 and ADSL standards, the
software embedded in our current and planned future products may use the
proprietary technology of various parties advancing or promoting these
standards. Where these parties are members of such working group or union, they
must provide a license upon reasonable terms, which may include the payment of a
reasonable royalty. However, if these parties are not members of such standard
setting group, there may be no limit on the terms or the amount of the royalty
with respect to such proprietary technology. As a result, the cumulative effect
of the terms and royalties with respect to the use of the proprietary technology
necessary to meet these industry standards could increase the cost of our
products to the point that they are no longer competitive and could limit our
ability to meet these industry standards.
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,
infringe on their intellectual property rights. The owners of those 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. As a result of
the merger with Virata, we expect to have significantly greater revenues,
operations in more countries, and more employees than either our company or
Virata had individually, prior to the merger. As a result, it can be expected
that some third parties who believe that they have claims against either
company, but who chose not to assert those claims because of
19
the size of each individual company, may now believe that those claims against
the larger combined company may be advantageous.
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 cannot acquire a required license on commercially
reasonable terms, that customer may choose not to use our products. From time to
time we or our customers have received letters from third parties claiming that
our or our customers' products infringe those third parties' intellectual
property rights.
We will have obligations to indemnify customers under some circumstances
for infringement of third-party intellectual property rights. From time to time
we have received letters from customers inquiring as to the scope of these
indemnity rights. If any claims from third-parties require us to indemnify
customers under our agreements, the costs could be substantial and our business
could be harmed. Moreover, we may be subject to claims based upon intellectual
property licensed from third parties against whom the combined company would
have limited, if any, indemnification rights.
DESPITE OUR EFFORTS TO PROTECT OUR INTELLECTUAL PROPERTY, THIRD PARTIES MAY GAIN
ACCESS TO OUR PROPRIETARY TECHNOLOGY AND USE IT TO COMPETE WITH US.
Despite our efforts to protect their proprietary rights, unauthorized
parties may attempt to copy aspects of our products or obtain and use
information that we regard as proprietary. We have relied 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 their intellectual property. In
particular, we will have to rely on these measures to protect our intellectual
property because, as a fabless semiconductor company, we will have third
parties, including potential competitors, such as Agere Systems, manufacture our
products. 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 will
continue to take steps to control access to, and the distribution of, our
proprietary information. We cannot guarantee, however, that such safeguards will
protect this intellectual property and other valuable competitive information.
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 we will continue to sell products.
There is a risk that our efforts to protect 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.
BECAUSE THE MARKETS IN WHICH WE COMPETE ARE HIGHLY COMPETITIVE, AND MANY OF OUR
COMPETITORS HAVE GREATER RESOURCES, WE CANNOT BE CERTAIN THAT OUR PRODUCTS WILL
BE ACCEPTED IN THE MARKETPLACE OR CAPTURE MARKET SHARE.
The market for software and communications semiconductor solutions is
intensely competitive. We expect competition to intensify as current competitors
expand their product offerings and new competitors enter the market. Given the
highly competitive environment in which we will operate, we cannot be sure that
any competitive advantages enjoyed by our products would be sufficient to
establish and sustain our products in the market. Any increase in price or other
competition could result in the erosion of our market share, to the extent we
have obtained market share, and would have a negative impact on our financial
condition and results of operations. We cannot be sure that we will have the
financial resources, technical expertise or marketing and support capabilities
to continue to compete successfully. We believe that we must compete on the
basis of a variety of factors, including:
o time to market;
o functionality;
20
o conformity to industry standards;
o performance;
o price;
o breadth of product lines;
o product migration plans; and
o technical support.
We face competition from a variety of vendors, including software and
semiconductor companies, which generally vary in size and in the scope and
breadth of products and services offered. We also face competition from
customers' or prospective customers' own internal development efforts. Many of
the companies that compete or may compete in the future against us have longer
operating histories, greater name recognition, larger installed customer bases
and significantly greater financial, technical and marketing resources. These
competitors may also have pre-existing relationships with our customers or
potential customers. As a result, they may be able to introduce new
technologies, respond more quickly to changing customer requirements or devote
greater resources to the development, promotion and sale of their products than
us. Our competitors may successfully integrate the functionality of our software
and communication processors into their products and thereby render our products
obsolete. Further, in the event of a manufacturing capacity shortage, these
competitors may be able to manufacture products when we are unable to do so.
We believe our principal competitors include or will include Alcatel
Microelectronics, Analog Devices, Broadcom, Centillium Communications, Conexant
Systems, Infineon Technologies, Integrated Telecom Express, Intel Corporation,
MetaLink, and Texas Instruments, as well as several privately held companies. In
addition, there have been a number of announcements by other semiconductor
companies and smaller emerging companies that they intend to enter the market
segments adjacent to or addressed by our products. Moreover, many of our
customers face significant competition in their markets. If these customers are
unable to successfully market and sell their products that incorporate our
products, these customers may cease to purchase our products, which may have a
negative impact on our results of operations.
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, fiber optics, satellite and
other wireless technologies. Many of these technologies will compete effectively
with DSL services. All of our products have been 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 LAWS OR REGULATIONS OR THE IMPOSITION OF NEW LAWS OR REGULATIONS BY
GOVERNMENT AGENCIES COULD IMPEDE THE SALE OF OUR PRODUCTS OR OTHERWISE HARM OUR
BUSINESS.
Changes in current or future laws or regulations or the imposition of new
laws or regulations by the Federal Communications Commission, other federal or
state agencies or foreign governments could impede the sale of our products or
otherwise harm our business. The FCC has broad jurisdiction over our target
market. Although current FCC regulations and the laws and regulations of other
federal or state agencies would not be directly applicable to our products, they
do apply to 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 some types
of 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 would 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
21
adversely affect our business.
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.
Our future success depends upon the continuing contributions of members of
our key management, sales, customer support and product development personnel.
The loss of any of such personnel could seriously harm us. While certain key
officers are subject to an employment agreement, we cannot be sure that we can
continue to retain their 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. There are many employers competing to hire qualified
technical personnel and we may have difficulty attracting and retaining such
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 in the past 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 CONTINUE
TO GENERATE SUBSTANTIAL SALES.
Sales of our products will 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 or abandonment of deployment by service
providers;
o lack of interoperability among multiple vendors' network
equipment;
o congestion in service providers' networks;
o inadequate security; and
o consumer preference for other broadband alternatives.
BECAUSE DSL DEPLOYMENTS MAY UTILIZE AN ALTERNATIVE CPE SOLUTION, WE MAY NOT BE
ABLE TO GENERATE SUBSTANTIAL SALES OF OUR PRODUCTS AND OUR RESULTS OF OPERATIONS
MAY BE NEGATIVELY IMPACTED.
Even if telecommunications service providers broadly deploy DSL
technologies, such deployments may move away from bridges and routers as the
dominant solution and utilize low-end USB modems or another solution where our
products are not required or our market share is substantially smaller. In such
an event, if we are unable to attain or increase our market share with respect
to the alternative deployment solution, then the demand for our products may
decrease, which would have a negative impact on our operating results. In
addition, even if we are able to participate in the market, the margins we
realize in connection with any such alternative solution may be substantially
less than the margins we currently realize. A significant decrease in our
margins would have a negative impact on our results of operations.
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.
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 2001, approximately 45.8% of our net revenues were derived from customers
outside of North America, of which 6.0% were derived from customers based in
Europe, 39.5% were derived from customers based in Asia and 0.3% were derived
from customers based in other international markets. In 2001, on an unaudited
pro forma combined basis, approximately 56.8% of our net revenues were derived
from customers outside of North America, of which 9.7% were derived from
customers based in Europe, 46.3% were derived from customers
22
based in Asia and 0.8% were derived from customers based in other international
markets. The unaudited pro forma combined revenue includes revenues for the
twelve month period ended December 31, 2001, as if the merger were consummated
on January 1, 2001. 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 North America, 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.
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 account 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 economic and political
instability and to the recent global military conflicts,
including any of the hostilities sparked by current events;
o difficulties in protecting intellectual property rights in some
foreign countries; and
o a 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.
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 products 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
23
in their 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 HAVE ANTITAKEOVER DEFENSES THAT COULD DELAY OR PREVENT AN ACQUISITION.
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 an acquisition of us. 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 the outstanding voting shares.
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.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL THAT 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
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.
ITEM 2. PROPERTIES
In February of 2002, we purchased a 200,000 square foot building in Old
Bridge, New Jersey for approximately $39.0 million. The building is currently
under construction, with the interior to be completed by the end of 2002. During
2001, we initiated and completed construction of a 7,000 square foot building in
Noida, India for approximately $2.0 million.
Our facility in Red Bank, New Jersey, currently comprises our corporate
headquarters and includes administration, sales and marketing, research and
development, and operations functions. 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
Santa Clara, CA
Office......................................... 47,432 8/05/04
Irvine, CA
Office......................................... 31,720 8/31/05
Cambridge, UK
Office......................................... 31,043 3/24/21
Israel
Office......................................... 30,440 4/30/06
Paris, France
Office......................................... 12,000 8/30/02
Santa Barbara, CA
Office......................................... 10,944 1/31/04
24
Eatontown, NJ
Warehouse...................................... 9,200 5/31/05
In addition, we lease various sales and marketing facilities in the United
States, Japan, Hong Kong, Taiwan, Korea, China and several other countries.
We have subleased or are actively seeking subtenants for the following
locations, which are still under lease:
SIZE LEASE
LOCATION (SQUARE EXPIRATION SUBLEASE
- -------- FEET) DATE STATUS
----- ---- ------
Middletown, NJ Partially
Office...................................... 78,120 3/31/03 sublet
Andover, MA Seeking
Office...................................... 23,509 2/28/06 subtenants
Santa Clara, CA Seeking
Office...................................... 4,754 7/31/03 subtenants
Santa Clara, CA Seeking
Office...................................... 64,750 3/31/08 subtenants
San Diego, CA 100%
Office...................................... 15,111 5/31/06 sublet
Maynard, MA Seeking
Office...................................... 17,489 9/14/05 subtenants
Cupertino, CA Partially
Office...................................... 21,580 1/31/07 sublet
Raleigh, NC Seeking
Office...................................... 42,972 11/30/10 subtenants
Raleigh, NC 100%
Office...................................... 12,944 12/31/03 sublet
Cambridge, UK Seeking
Office...................................... 6,000 6/24/03 subtenants
ITEM 3. LEGAL PROCEEDINGS
In November 2001, a securities class action, Collegeware Asset Management,
LP v. Fleetboston Robertson Stephens, Inc., et al., Civil Action No.
01-CV-10741, was filed in United States District Court for the Southern District
of New York against certain investment bank underwriters for our initial public
offering and our secondary public offering, and various officers and directors
of our company. The complaint alleges that the defendants violated federal
securities laws by issuing and selling our common stock in those offerings
without disclosing to investors that some of the underwriters had solicited and
received undisclosed and excessive commissions. The complaint seeks unspecified
damages on behalf of persons who purchased our stock during the period from June
23, 1999 through December 6, 2000. Other actions have been filed making similar
allegations regarding the initial public offerings of hundreds of other
companies(including Virata) that launched such offerings during 1999 and 2000.
All of these lawsuits (including the suit against us) have been coordinated for
pretrial purposes as In re Initial Public Offering Securities Litigation, Civil
Action No. 21-MC-92. We believe we have meritorious defenses to the claims
against us and will defend ourselves vigorously.
In addition, the semiconductor and telecommunications industries are
characterized by substantial litigation regarding patent and other intellectual
property rights. We are a party to various inquiries or claims in connection
with these rights. These claims have been referred to counsel, and they are in
various stages of evaluation and negotiation. If it appears necessary or
desirable, we may seek licenses for these intellectual property rights. We can
give no assurance that licenses will be offered by all claimants, that the terms
of any offered licenses will be acceptable to us or that in all cases the
dispute will be resolved without litigation, which may be time consuming and
expensive, and may result in injunctive relief or the payment of damages by us.
We are also involved in 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 our business, results of operation or financial condition.
25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 14, 2001, we held a Special Meeting of Stockholders, at which
our stockholders approved (i) the issuance of shares of our common stock
pursuant to the Agreement and Plan of Merger, dated as of October 1, 2001, with
Virata; and (ii) an amendment to our certificate of incorporation changing our
name to "GlobespanVirata, Inc.". On November 2, 2001, the record date for the
meeting, there were 74,241,959 shares outstanding and entitled to vote. The vote
on such matters was as follows:
1. The issuance of our common stock pursuant to the merger agreement:
For 51,131,673
Against 279,311
Abstaining 23,558
2. The changing of our name to GlobespanVirata, Inc.:
For 51,266,514
Against 129,689
Abstaining 38,339
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 our three-for-one stock split on February 28,
2000.
Low High
--- ----
2001
First Quarter.................................$ 18.00 $ 44.75
Second Quarter................................ 8.09 27.20
Third Quarter................................. 8.32 18.42
Fourth Quarter................................ 7.90 15.52
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
As of February 28, 2002 there were approximately 930 holders of record of
our common stock. The last reported sales price of our common stock on March 29,
2002 was $14.75 per share.
DIVIDEND POLICY
No cash dividends have been paid on our 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.
26
Year Ended December 31
----------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
(in thousands, except per share data)
Statement of Operations Data:
Net product revenues $ 22,546 $ 31,464 $ 56,220 $ 348,098 $ 254,545
Cancellation revenues - - - - 15,391
---------------------------------------------------------
Total net revenues 22,546 31,464 56,220 348,098 269,936
---------------------------------------------------------
Cost of sales 7,565 9,882 20,879 142,430 110,614
Cost of sales related to termination charge - - 1,119 - -
Cost of sales related to cancellation revenues - - - - 1,075
Cost of sales - Provision for excess &
obsolete inventory - - - - 80,852
---------------------------------------------------------
Gross profit 14,981 21,582 34,222 205,668 77,395
---------------------------------------------------------
Operating expenses
Research and development (including
non-cash compensation of $22,920 and $16,761
for the years ended December 31, 2001 and
2000, respectively) 8,358 18,694 26,531 115,411 138,037
Selling, general and administrative
(including non-cash compensation of $3,851
and $7,356 for the years ended December 31,
2001 and 2000, respectively) 4,572 10,217 14,389 53,504 43,983
Restructuring and other charges - - - - 44,752
Amortization of intangible assets and other 1,000 583 - 131,832 211,697
In process research and development - - - 44,854 21,000
---------------------------------------------------------
Total operating expenses 13,930 29,494 40,920 345,601 459,469
---------------------------------------------------------
(Loss) income from operations 1,051 (7,912) (6,698) (139,933) (382,074)
Interest expense - non-cash - - - 43,439
Interest (income) expense, net (91) 134 (1,133) (1,902) (442)
Foreign exchange (gain) - - - (63) -
---------------------------------------------------------
(Loss) income before income taxes and
extraordinary items 1,142 (8,046) (5,565) (181,407) (381,632)
Provision (benefit) for income taxes 300 (217) - 15,131 (4,111)
---------------------------------------------------------
Net (loss) income before extraordinary item 842 (7,829) (5,565) (196,538) (377,521)
Preferred stock deemed dividend and accretion - - (3,466) - -
---------------------------------------------------------
Net income (loss) attributable to common
stockholders before extraordinary item 842 (7,829) (9,031) (196,538) (377,521)
Extraordinary item - gain on the redemption
of the beneficial conversion feature - - - 43,439 -
---------------------------------------------------------
Net income (loss) attributable to common
stockholders 842 (7,829) (9,031) (153,099) (377,521)
Other comprehensive income (loss):
Unrealized loss (gain) on marketable
securities - - 22 - (88)
Foreign currency translation loss (gain) - - - 77 (112)
Comprehensive income (loss) attributable to --------- --------- --------- --------- ---------
common stockholders $ 842 $ (7,829) $ (9,053) $(153,176) $(377,321)
========= ========= ========= ========= =========
(Loss) income per share basic:
Income (loss) before extraordinary item $ 0.02 $ (0.22) $ (0.19) $ (3.03) $ (4.98)
Extraordinary item - 0.67
--------- --------- --------- --------- ---------
Net income (loss) $ 0.02 $ (0.22) $ (0.19) $ (2.36) $ (4.98)
========= ========= ========= ========= =========
(Loss) income per share diluted:
Income (loss) before extraordinary item $ 0.02 $ (0.22) $ (0.19) $ (3.03) $ (4.98)
Extraordinary item - - - .67 -
--------- --------- --------- --------- ---------
Net income (loss) $ 0.02 $ (0.22) $ (0.19) $ (2.36) $ (4.98)
========= ========= ========= ========= =========
Shares used in computing (loss) earnings per
share:
Basic 34,546 36,254 46,613 64,924 75,796
Diluted 38,119 36,254 46,613 64,924 75,796
27
December 31,
------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
(In thousands except per share data)
Balance Sheet Data:
Cash and cash equivalents and short-term
investments................................ $ 875 $ 12 $ 36,668 $ 99,129 $ 567,161
Working capital (deficit)................... 2,423 (2,655) 44,616 164,156 516,745
Total assets................................ 10,215 13,430 70,991 905,129 1,451,014
Long-term liabilities, less current
portion.................................... - 5,506 443 26,396 184,444
Retained earnings (accumulated deficit)..... 42 (7,787) (13,352) (166,451) (543,972)
Total stockholders' equity (deficit)........ $ 6,448 $ (1,293) $ 55,433 $ 803,551 $1,103,910
See Note 14 to the Financial Statements for an explanation of the method used to
calculate earnings per share.
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. GlobespanVirata'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 GlobespanVirata as of the date hereof and
GlobespanVirata assumes no obligation to update any such forward-looking
statements.
OVERVIEW
COMPLETION OF MERGER WITH VIRATA CORPORATION
On December 14, 2001, we completed a merger with Virata under an Agreement
and Plan of Merger, dated as of October 1, 2001. Under that agreement, a
wholly-owned subsidiary of our company merged with and into Virata and Virata
became our wholly-owned subsidiary. At the effective time of the merger, we
changed our name from "GlobeSpan, Inc." to "GlobespanVirata, Inc." The merger
with Virata was accounted for as a purchase; accordingly, operating results for
Virata have been included from the date of acquisition.
As a result of the merger with Virata, each outstanding share of Virata
common stock was converted into the right to receive 1.02 shares of our common
stock or approximately 65.9 million shares in the aggregate. In addition, at
that time, each then outstanding and unexercised stock option for shares of
Virata common stock, was converted into a stock option for our common stock,
having the same terms and conditions, except that the number of shares the stock
option related to was multiplied by 1.02 for an aggregate of approximately 13.6
million shares, and the exercise price was divided by 1.02.
In connection with the merger with Virata, we formulated a reorganization
and restructuring plan that was completed during the first quarter of 2002. As a
result of the plan, we expect to record restructuring and other charges of $15.0
million to $20.0 million during the first quarter of 2002. Additionally, we
recognized as liabilities assumed in the purchase business combination and
included in the allocation of the acquisition cost in accordance with SFAS No.
141, entitled "Business Combinations" and EITF 95-3, entitled "Recognition of
Liabilities in Connection with a Purchase Business Combination," the estimated
costs related to Virata facilities consolidation and the related impact on the
Virata outstanding real estate leases and Virata relocations and workforce
reductions, which resulted from the reorganization plan. We expect to obtain
synergies of $30.0 million to $35.0 million beginning in 2003. These synergies
will result from cost savings generated from the reorganization plan and
building on the combined strengths of the merged entity.
GENERAL
GlobespanVirata is a leading provider of integrated circuits, software and
system designs for broadband communication applications that enable high-speed
transmission of data, voice and video to homes and business enterprises
throughout the world. Currently, our integrated circuits, software and system
designs are primarily used DSL applications, which utilize the existing network
of copper telephone wires, known as the local loop, for high-speed transmission
of data. We sell our products to more than 300 telecommunications equipment
manufacturers for incorporation into their products for use in systems deployed
by telecommunications service providers and end users in more than 30 countries.
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, 2001, 2000 and
1999, our customers who individually represented more than 10% of our net
revenues accounted for 38.7%, 62.6% and 41.6%, respectively, of our net
revenues. In 2001 our top customers were Lucent Technologies and Cisco Systems,
which accounted for 26.6% and 12.1% of our net revenues, respectively. For the
year ended December 31, 2001, on an unaudited pro forma combined basis, our top
customers were Lucent Technologies, Ambit Microsystems and Cisco
29
Systems, which accounted for 28.8%, 17.2% and 13.4% of our combined net
revenues, respectively. The unaudited pro forma combined revenue includes
revenues for the twelve month period ended December 31, 2001, as if the merger
were consummated on January 1, 2001. In 2000, our top 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 customer was
Cisco Systems which accounted for 41.6% of our net revenues. We do not have
long-term 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 are subject to
frequent change 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 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.
Net revenues from customers outside of North America are primarily due to the
implementation of DSL in international markets and third party manufacturing of
our customers' product at locations outside of North America. In 2001,
approximately 45.8% of our net revenues were derived from customers outside of
North America, of which 6.0% were derived from customers based in Europe, 39.5%
were derived from customers based in Asia and 0.3% were derived from customers
based in other international markets. In 2001, on an unaudited pro forma
combined basis, approximately 56.8% of our net revenues were derived from
customers outside of North America, of which 9.7% were derived from customers
based in Europe, 46.3% were derived from customers based in Asia and .8% from
customers based in other international markets. The unaudited pro forma combined
revenue includes the revenues of GlobeSpan and Virata for the twelve-month
period ended December 31, 2001. In 2000, approximately 35.6% of our net revenues
were derived from customers outside of North America, 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 North America, 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. 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 customer
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, from the effects of purchase accounting for our acquisitions, as
a result of the provision for excess and obsolete inventory and restructuring
and other charges. 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.
30
Each of the acquisitions we made in 2001 and 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 tangible and identifiable intangible assets such as in process
research and development, acquired technology, acquired trademarks and trade
names, based on their respective fair values. We allocated the excess of the
purchase cost over the fair value of the net assets to goodwill. We estimate
that the amortization of intangible assets will result in annual amortization
and other non-cash acquisition related charges of approximately $75.0 million,
using useful lives of six months 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's discussion and analysis of our financial condition and results
of operations is based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. 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 our products are characterized by intense competition, rapid
technological development and frequent new product introductions, all of which
could impact the future realizability of our assets.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
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. Our revenue recognition policy is
significant because our revenue is a key component of our operations. In
addition, our revenue recognition determines the timing of certain expenses,
such as sales commissions. We follow very specific and detailed guidelines in
measuring revenue; however, certain judgments affect the application of our
revenue policy. Revenue results are difficult to predict, and any shortfall in
revenue or delay in recognizing revenue could cause our operating results to
vary significantly from quarter to quarter and could result in future operating
losses. Substantially all of our revenues for the years ended December 31, 2001,
2000 and 1999 were derived from product sales of our DSL semiconductor products.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined on a
first-in, first-out basis. We regularly review inventory values and quantities
on hand and write down our inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the
estimated market value based upon assumptions about future demand and market
conditions. Our estimates of future product demand may prove to be inaccurate,
in which case we may have understated or overstated the provision required for
excess and obsolete inventory. If actual market conditions are less favorable
than those expected by management, additional inventory write-downs may be
required. If our inventory is determined to be undervalued, we may have
over-reported our costs of goods sold in previous periods and would be required
to recognize such additional operating income at the time of sale. Therefore,
although we make every effort to ensure the accuracy of our estimates of future
product demand, any significant unanticipated changes in demand or technological
developments could have a significant impact on the value of our inventory and
our reported operating results.
31
VALUATION OF INTANGIBLES AND LONG-LIVED ASSETS
We assess the impairment of identifiable intangibles, long-lived assets and
related goodwill whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Factors we consider important which could
trigger an impairment review include the following:
o significant underperformance relative to expected historical or
projected future operating results;
o significant changes in the manner of our use of the acquired
assets or the strategy for our overall business;
o significant negative industry or economic trends;
o significant decline in our stock price for a sustained period;
and
o our market capitalization relative to net book value.
When we determine that the carrying value of intangibles, long-lived assets
and related goodwill may not be recoverable based upon the existence of one or
more of the above indicators of impairment, we measure any impairment based on
current and estimated future profitability and undiscounted cash flows.
As a result of the implementation of SFAS No. 142, entitled "Goodwill and
Other Intangible Assets," which is effective for fiscal year 2002, goodwill will
no longer be amortized to the income statement. In lieu of amortization, we are
required to perform an initial impairment review of our goodwill and future
impairment reviews, at least annually, thereafter. As a result of our initial
impairment review, we do not believe that any impairment charge is required.
However, there can be no assurance that a material impairment charge will not be
required as a result of future annual reviews.
PRODUCT WARRANTIES
We provide purchasers of our products with certain warranties that
correspond with the warranties from our contract manufacturers. Warranty expense
has been immaterial for all periods presented. However, there can be no
assurance that warranty expense will not be material in future periods.
INCOME TAXES
We account for income taxes under the provisions of Statement of Financial
Accounting Standards No. 109, entitled "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.
We have provided a valuation allowance against our deferred tax assets due
to the uncertainty of their realization. At such time as it is determined that
it is more likely than not that the deferred tax assets are realizable, the
valuation allowance will be reduced. The reduction in the valuation allowance
could have a material positive affect on our net results in the period in which
such determination is made. In addition, our effective tax rate would likely
increase significantly in periods subsequent to the initial reversal of the
valuation allowance.
32
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,
-----------------------------------
2001 2000 1999
---- ---- ----
Statement of Operations Data:
Net product revenues $ 254,545 $ 348,098 $ 56,220
Cancellation revenues 15,391 - -
-----------------------------------
Total net revenues 269,936 348,098 56,220
Cost of sales 110,614 142,430 20,879
Cost of sales related to termination charge - - 1,119
Cost of sales related to cancellation revenues 1,075 - -
Cost of sales - Provision for excess and obsolete
inventory 80,852 - -
-----------------------------------
Gross profit 77,395 205,668 34,222
-----------------------------------
Operating expenses:
Research and development (including non-cash
compensation of $22,920 and $16,761 for the years
ended December 31, 2001 and 2000, respectively) 138,037 115,411 26,531
Selling, general and administrative (including
non-cash compensation of $3,851 and $7,356 for
the years ended December 31, 2001 and 2000,
respectively) 43,983 53,504 14,389
Restructuring and other charges 44,752 - -
In process research and development 21,000 44,854 -
Amortization of intangible assets 211,697 131,832 -
-----------------------------------
Total operating expenses 459,469 345,601 40,920
-----------------------------------
(Loss) from operations (382,074) (139,933) (6,698)
Interest expense - non cash - 43,439 -
Interest (income) net (442) (1,902) (1,133)
Foreign exchange (gain) - (63) -
-----------------------------------
(Loss) before income taxes and extraordinary item (381,632) (181,407) (5,565)
Provision (benefit) for income taxes (4,111) 15,131 -
-----------------------------------
(Loss) before extraordinary item (377,521) (196,538) (5,565)
Preferred stock deemed dividend and accretion - - (3,466)
-----------------------------------
(Loss) attributable to common stockholders before
extraordinary item (377,521) (196,538) (9,031)
Extraordinary item 43,439 -
-----------------------------------
Net (loss) attributable to stockholders $(377,521) $(153,099) $(9,031)
===================================
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,
-----------------------------------
2001 2000 1999
---- ---- ----
Statement of Operations Data:
Net product revenues 94.3% 100.0% 100.0%
Cancellation revenues 5.7 - -
-----------------------------------
Total net revenues 100.0% 100.0% 100.0%
Cost of sales 41.0 40.9 37.1
Cost of sales related to cancellation revenues 0.4 - -
33
Cost of sales - Provision for excess and obsolete
inventory 29.9 - -
Cost of sales related to termination charge - - 2.0
-----------------------------------
Gross profit 28.7 59.1 60.9
-----------------------------------
Operating expenses:
Research and development (including non-cash
compensation of 8.5% and 4.7% for the years ended
December 31, 2001 and 2000, respectively) 51.1 33.1 47.2
Selling, general and administrative (including
non-cash compensation of 1.4% and 2.1% for the years
ended December 31, 2001 and 2000, respectively) 16.3 15.4 25.6
In process research and development 7.8 12.9 -
Amortization of intangible assets 78.4 37.9 -
Restructuring and other charges 16.6 - -
-----------------------------------
Total operating expenses 170.2 99.3 72.8
-----------------------------------
(Loss) from operations (141.5) (40.2) (11.9)
Interest expense - non cash - 12.5 -
-----------------------------------
Foreign exchange gain - - -
Interest (income) net (0.2) (0.6) (2.0)
-----------------------------------
(Loss) before income taxes and extraordinary item (141.3) (52.1) (9.9)
Provision (benefit) for income taxes (1.5) 4.4 -
-----------------------------------
(Loss) before extraordinary item (139.8) (56.5) (9.9)
Preferred stock deemed dividend and accretion - - (6.1)
-----------------------------------
(Loss) attributable to common stockholders before
extraordinary item (139.8) (56.5) (16.0)
Extraordinary item - 12.5 -
-----------------------------------
Net (loss) attributable to stockholders (139.8)% (44.0)% (16.0)%
===================================
RESULTS OF OPERATIONS IN THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
NET REVENUES. Our net revenues were $269.9 million, $348.1 million and
$56.2 million in the years ended December 31, 2001, 2000 and 1999, respectively.
These amounts represent a decrease of 22.5% from 2000 to 2001, and an increase
of 519.2% from 1999 to 2000. The decrease in net revenues and net product
revenues from 2000 to 2001 was primarily due to the overall slowdown in the
telecommunications equipment market. The increase in net revenues from 1999 to
2000 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.
GROSS PROFIT. Our gross profit was $77.4 million, $205.7 million and $34.2
million in the years ended December 31, 2001, 2000 and 1999, respectively. These
amounts represent a decrease of 62.4% from 2000 to 2001 and an increase of
501.0% from 1999 to 2000. Our gross profit as a percentage of revenues was
28.7%, 59.1% and 60.9% in the years ended December 31, 2001, 2000 and 1999,
respectively. The decrease in gross profit percentage and dollars from 2000 to
2001 is primarily attributed to the increase in cost of sales resulting from the
provision for excess and obsolete inventories, which we refer to as the
Provision, of $80.9 million, net of the positive effect of $15.4 million in
cancellation revenues with minimal associated costs and $5.4 million of product
previously reserved. Excluding the Provision, the cancellation revenues and
associated costs and revenue from the sale of product previously reserved, our
gross profit percentage was 55.3%. The decrease in gross profit percentage from
59.1% in 2000 was related to lower average selling prices. Our gross profit
dollars, excluding the Provision, cancellation revenues and associated costs and
revenue from the sale of product previously reserved, was $136.6 million, a
decrease of $69.1 million from 2000, which was the result of lower net product
revenues. We expect the gross profit percentage may decrease in the future due
to anticipated reductions in average selling prices, revenue and product mix,
and customer mix. The decrease in gross profit percentage from 1999 to 2000 was
related to lower average selling prices due to increased unit volume shipped.
The increase in gross profit dollars from 1999 to 2000 was the result of higher
net revenues.
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,
depreciation and amortization and other related equipment expenses. Our research
and development expenditures were $138.0 million, $115.4 million and $26.5
million, in the years ended December 31, 2001, 2000 and 1999, respectively.
Included in research and development expenditures for the years ended December
31, 2001 and December 31, 2000 is $22.9 million and $16.8 million of non-
34
cash compensation. During the years ended December 31, 2001 and 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 converted unvested options of acquired entities
into GlobespanVirata options to purchase common stock. 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
increased by 19.6% (16.7% excluding non-cash compensation) from 2000 to 2001 and
by 335.0% (272.2% excluding non-cash compensation) from 1999 to 2000. The
increase in research and development spending during 2001 and 2000 is
attributable primarily to the increase in the number of employees engaged in
research, design and development activities. Research and development
expenditures represented 51.1% (42.6% excluding non-cash compensation), 33.1%
(28.4% excluding non-cash compensation) and 47.2% of net revenues in the years
ended December 31, 2001, 2000 and 1999, respectively. The increase in research
and development expenditures as a percentage of revenues in 2001 was due to our
decreased revenue. The dollar amount of our research and development expense may
increase in the future due to the merger with Virata.
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.
Our selling, general and administrative expense was $44.0 million, $53.5 million
and $14.4 million in the years ended December 31, 2001, 2000 and 1999,
respectively. Included in selling, general and administrative expense for the
years ended December 31, 2001 and December 31, 2000 is $3.9 and $7.4 million of
non-cash compensation. During the year ended December 31, 2001 and 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, we converted unvested options of acquired entities into
options to purchase common stock 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
were recorded as an expense when they were issued as the performance required to
earn those options was complete. Our selling, general and administrative
expenses decreased by 17.8% (13.0% excluding non-cash compensation) from 2000 to
2001 and increased by 271.8% (220.7% excluding non-cash compensation) from 1999
to 2000. Selling, general and administrative expense represented 16.3% (14.9%
excluding non-cash compensation), 15.4% (13.3% excluding non-cash compensation)
and 25.6% of net revenues in the years ended December 31, 2001, 2000 and 1999,
respectively. The decrease in dollars from 2000 to 2001 resulted from the
decrease in sales commissions as a result of lower product revenues and
reductions in consulting and legal expenses. The increase in dollars from 1999
to 2000 resulted from the increase in sales, marketing and administrative
personnel and related expenses including expenses from our 2000 acquisitions.
The dollar amount of our selling, general and administrative expense may
increase in the future due to the merger with Virata.
IN PROCESS RESEARCH AND DEVELOPMENT. During the years ended December 31,
2001 and December 31, 2000, we completed the acquisition of several companies
that had development projects which were not yet complete at the date of the
acquisitions. The amounts allocated to in process research and development, or
IPR&D, of $21.0 million in 2001 and $44.9 million in 2000 were 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 acquisition:
o the present value of the forecasted cash flows and income that
were expected to result from the project;
o the status of the project;
o completion costs;
o project risks;
o the value of core technology; and
o 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.
35
AMORTIZATION OF INTANGIBLE ASSETS. During the years ended December 31, 2001
and 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. Our expense for amortization was $211.7 million, $131.8 million
and $0.0 million in the years ended December 31, 2001, 2000, and 1999,
respectively.
RESTRUCTURING AND OTHER CHARGES. Due to changes in its business
environment, we have taken steps to realign our operating cost structure, which
have resulted in restructuring and other charges of $44.8 million. These charges
primarily consist of costs related to facilities consolidation and the related
impact on our outstanding real estate leases and workforce reductions.
The workforce reductions resulted in the involuntary severance of
approximately 100 employees or approximately 12% of our overall workforce at the
time and included employees across all disciplines and geographic regions.
Substantially all of the affected employees ceased employment with us prior to
June 30, 2001. The workforce reduction charge of $3.7 million was based upon
estimates of the severance and fringe benefits for the affected employees. All
of the payments related to the workforce reduction are expected to be made
within one year. The non-cash workforce reduction charges pertain to
modifications to the terms of the stock options previously granted to terminated
employees and have been accounted for in accordance with the provisions of FASB
Interpretation No. 44.
As a result of the reduction in our workforce, we have consolidated our use
of facilities, which had been leased in anticipation of continued short-term
growth, and are actively pursuing subleases for vacant space. Due to the decline
in the real estate market in the geographic regions in which we are pursuing
subleases, we have estimated our losses on these non-cancelable lease
commitments, including the write-off of leasehold improvements and executory and
other administrative costs to complete subleases, to be $3.7 million. These
non-cancelable lease commitments range from eighteen months to sixteen years in
length. If we are unable to execute a sublease agreement within the estimated
time frame for each facility, we could incur additional charges or operating
expenses in the future.
Other charges consisted primarily of the write-off of certain investments,
which the Company deemed to have an other than temporary decline in fair value.
INTEREST EXPENSE NON-CASH. As part of the purchase price for the
Microelectronics Group of PairGain Technologies, in 2000, we issued a
subordinated redeemable convertible note, which we refer to as the PairGain
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 PairGain note. The increase in dollar
amount and percentage is the result of the amortization.
INTEREST INCOME, NET. Net interest income for the year ended December 31,
2001 was $0.4 million, which resulted from interest income of $6.8 million, net
of interest expense of $6.4 million. The decrease in net interest income from
2000 to 2001 was a result of an increase in interest expense on our $130.0
million subordinated redeemable convertible notes issued in May of 2001, offset
by higher interest income from the funds received as a result of the issuance of
the May 2001 convertible notes. 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. The increase in interest income, net of
$.8 million from 1999 to 2000, 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 PairGain note.
PROVISION FOR INCOME TAXES. Our effective tax rate for the year ended
December 31, 2001 was 1.5%. The 2001 effective rate is impacted by permanent
differences which resulted from our acquisitions and a change in the valuation
allowance, net of acquired valuation allowances and differences resulting from
acquisitions. 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 PairGain Note. The 2000 effective rate was
impacted by permanent differences which resulted from our acquisitions, and an
increase in the valuation allowance.
EXTRAORDINARY GAIN. In connection with the repayment of the PairGain note,
we recognized a gain of $43.4 million for the year ending December 31, 2000 on
the redemption of the beneficial conversion feature.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2000, the FASB issued Statement of Financial Accounting Standards,
or SFAS, No. 138, entitled "Accounting for Certain Hedging Activities", which
amended SFAS No. 133, entitled "Accounting for Derivative
36
Instruments and Hedging Activities". SFAS No. 138 must be adopted concurrently
with the adoption of SFAS No. 133. Other charges of $4.3 million, consist
primarily of the write-off of certain investments for which we believe a
permanent impairment of value has occurred. We adopted these statements
effective January 1, 2001. These statements 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 did not have a material impact on our
financial condition or results of operations.
In July 2001, the FASB issued SFAS No. 141, entitled "Business
Combinations" and SFAS No. 142, entitled "Goodwill and Other Intangible Assets".
SFAS No. 141 establishes accounting and reporting for business combinations
by requiring that all business combinations be accounted for under the purchase
method. Use of the pooling-of-interests method is no longer permitted. SFAS No.
141 requires that the purchase method be used for business combinations
initiated after June 30, 2001. The adoption of SFAS No. 141 did not have a
material impact on our financial condition or results of operations.
SFAS No. 142 requires that goodwill no longer be subject to amortization,
with related charges to earnings, but instead be reviewed for impairment. We
will adopt the statement and cease amortization of goodwill related to
acquisitions prior to June 30, 2001, effective January 1, 2002. The adoption of
SFAS No. 142 will result in a significant reduction to amortization expense in
future periods.
In August 2001, SFAS No. 144, entitled "Accounting for the Impairment or
Disposal of Long-Lived Assets," was issued, replacing FAS No. 121, entitled
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and portions of APB Opinion 30, entitled "Reporting the Results
of Operations." FAS No. 144 provides a single accounting model for long-lived
assets to be disposed of and changes the criteria that would have to be met to
classify an asset as held-for-sale. SFAS No. 144 retains the requirement of APB
Opinion 30, to report discontinued operations separately from continuing
operations and extends that reporting to a component of an entity that either
has been disposed of or is classified as held for sale. SFAS No. 144 is
effective January 1, 2002. The adoption of SFAS No. 144 did not have a material
impact on our financial condition or results of operations.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Total assets at December 31, 2001 were $1,451.0 million, an increase of
$545.9 million, or 60.3% from December 31, 2000 total assets of $905.1 million.
The increase from December 31, 2000 is primarily a result of an increase in cash
and investments as a result of our merger with Virata.
As of December 31, 2001, we had working capital of approximately $516.7
million, of which $269.6 million was in cash and cash equivalents and $297.6
million in short-term marketable securities. 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.
Net cash used in operating activities was $10.8 million for the year ended
December 31, 2001, compared to net cash provided by operating activities of $7.3
million for the year ended December 31, 2000. The decrease was primarily due to
lower revenues during the year ended December 31, 2001 compared to the year
ended December 31, 2000. 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 provided by investing activities amounted to $60.6 million for the
year ended December 31, 2001. Net cash received from the acquisition of Virata
of $73.9 million, was offset by purchases of property and equipment and net
purchases of marketable securities for the year ended December 31, 2001. Net
cash provided by 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 for the
year ended December 31, 1999. The net cash used primarily related to investments
in marketable securities and preferred stock during the year ended December 31,
1999.
37
Cash flows provided by financing activities of $130.7 million for the year
ended December 31, 2001 primarily consisted of borrowings under the subordinated
redeemable convertible note, net of offering costs, of $126.4 million, and net
proceeds from the issuances of common stock of $7.5 million offset by $3.3
million in repayments of capital lease obligations. 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 the PairGain Note and other miscellaneous items. Net cash
provided by financing activities was $54.2 million in the year ended December
1999 and was provided by the issuance of common and preferred stock, and other
debt and bank borrowings.
We lease certain facilities for office and research and development
activities under agreements that expire at various dates through 2021. In
addition, we lease certain computer and office equipment under agreements that
are classified as capital leases, the net book value of which was $1.6 million
and $4.7 million at December 31, 2001 and 2000, respectively. Minimum required
future lease payments under our capital and operating leases at December 31,
2001 are as follows:
(FOLLOWING TABLE IN THOUSANDS)
CAPITAL OPERATING
LEASES LEASES
YEARS ENDED DECEMBER 31, ------- ---------
2002 $3,689 $14,693
2003 1,552 14,305
2004 6 13,136
2005 4 11,774
2006 - 10,540
Thereafter - 35,112
------- -------
Total minimum lease payments $5,251 $99,560
Less: amount representing interest (386) -------
-------
Present value of net minimum lease payments 4,865
Less: current portion (3,209)
-------
$1,656
-------
Approximately $10.0 million of the operating lease commitments will be paid
beyond ten years.
On May 11, 2001, we sold $130.0 million of 5 1/4% Convertible Subordinated
Notes due 2006 in a private placement through an initial purchaser to qualified
institutional buyers in accordance with Rule 144A under the Securities Act.
These notes are unsecured obligations of our company and will mature on May 15,
2006. Interest on the notes is payable semi-annually.
Holders of these notes may convert the notes into shares of common stock at any
time prior to maturity at an initial conversion price of $26.67 per share,
subject to adjustment. We may redeem some or all of the notes at any time prior
to May 20, 2004 at a redemption price equal to 100% of the principal amount of
the notes to be redeemed, plus accrued and unpaid interest to the redemption
date, if (1) the closing price of our common stock has exceeded 130% of the
conversion price of the notes for at least 20 of the 30 trading days prior to
the mailing of the redemption notice, and (2) in accordance with the terms of
the registration rights agreement we executed at the time we issued the notes,
the shelf registration statement covering resales of the notes and the common
stock issuable upon conversion of the notes is effective and available for use
and expected to remain effective and available for use for the 30 days following
the provisional redemption date. In the event of a provisional redemption, we
will make an additional payment equal to the total value of the aggregate amount
of the interest that would have been payable on the notes from the redemption
date to May 20, 2004. On and after May 20, 2004, we may also redeem the notes at
any time at our option, in whole or in part, at the redemption price shown in
the note, plus accrued interest, if any.
In February of 2002 we purchased a 200,000 square foot building in Old
Bridge, New Jersey. We paid cash of approximately $35.0 million and expect to
incur approximately $4.0 million during 2002 to complete construction of the
interior of the building.
We believe that our sources of capital, including internally generated
funds and the cash and investments acquired as a result of our merger with
Virata, 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
38
acquisition of businesses and 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 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.
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, 2001, substantially all of our
short-term investments were in money market funds, certificates of deposit, or
high-quality commercial paper. Long term securities are primarily comprised of
AA or better corporate bonds and U.S. Government backed securities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the financial statements of our 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. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference to the sections of our proxy statement for the
2002 Annual Meeting of Stockholders entitled "Election of Directors."
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the sections of our proxy statement for the
2002 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 our proxy statement for the
2002 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 our proxy statement for the
2002 Annual Meeting of Stockholders entitled "Certain Transactions."
39
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............................. 41
Consolidated Balance Sheets................................... 42
Consolidated Statements of Operations......................... 43
Consolidated Statements of Changes in Stockholders' Equity.... 44
Consolidated Statements of Cash Flows......................... 45
Notes to Consolidated Financial Statements.................... 46
(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 three reports on Form 8-K
during the fourth quarter ended December 31, 2001. Information
regarding such report is as follows:
Date of Report Item Reported On
October 1, 2001 The announcement of the Company's agreement
to merge with Virata Corporation.
November 14, 2001 Early termination of the waiting period
under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 with respect to the
merger with Virata Corporation.
December 14, 2001 The consummation of the merger with Virata
Corporation.
40
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
GlobespanVirata, 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 GlobespanVirata, Inc. and its subsidiaries at December 31, 2001 and
2000, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001 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
March 29, 2002
41
GLOBESPANVIRATA, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31,
2001 2000
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 269,586 $ 88,489
Short-term investments 297,575 10,640
Accounts receivable, less allowance for doubtful
accounts of $5,761 and $5,403, respectively 23,239 59,922
Inventories 30,697 60,281
Deferred income taxes 49,532 14,838
Prepaid expenses and other current assets 8,776 5,168
---------- ---------
Total current assets 679,405 239,338
Property and equipment, net 36,334 24,394
Intangible assets, net 611,960 636,682
Investments 112,315 -
Other assets 11,000 4,715
---------- ---------
Total assets $1,451,014 $ 905,129
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 29,551 $ 36,502
Accounts payable to affiliates 1,196 2,313
Restructuring and reorganization liabilities 68,099 -
Accrued expenses and other liabilities 37,219 15,825
Payroll and benefit related liabilities 20,941 17,128
Deferred revenue 2,445 -
Current portion of capital lease obligations 3,209 3,414
---------- ---------
Total current liabilities 162,660 75,182
Other long-term liabilities 3,256 1,428
Subordinated redeemable convertible note 130,000 -
Deferred taxes 49,532 21,524
Capital lease obligations, less current portion 1,656 3,444
---------- ---------
Total liabilities 347,104 101,578
---------- ---------
Commitments and contingencies (Note 17)
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; 140,304,309 and 72,247,190 shares
issued and outstanding, respectively 140 72
Stock purchase warrant 1 1
Additional paid-in capital 1,713,904 1,043,519
Notes receivable from stock sales (5,037) (5,262)
Deferred stock compensation (61,227) (68,229)
Accumulated other comprehensive gain (loss) 101 (99)
Accumulated deficit (543,972) (166,451)
---------- ---------
Total stockholders' equity 1,103,910 803,551
---------- ---------
Total liabilities and stockholders' equity $1,451,014 $ 905,129
========== =========
The accompanying notes are an integral part of these financial statements.
42
GLOBESPANVIRATA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year Ended December 31,
-----------------------------------
2001 2000 1999
---- ---- ----
Net product revenues $ 254,545 $ 348,098 $ 56,220
Cancellation revenues 15,391 -- --
--------- --------- --------
Total net revenues 269,936 348,098 56,220
Cost of sales 110,614 142,430 20,879
Cost of sales related to cancellation revenues 1,075 -- --
Cost of sales - provision for excess and obsolete inventories 80,852 -- --
Cost of sales related to termination charge -- -- 1,119
--------- --------- --------
Gross profit 77,395 205,668 34,222
--------- --------- --------
Operating expenses:
Research and development (including non-cash
compensation of $22,920 and $16,761 for the years
ended December 31, 2001 and 2000, respectively) 138,037 115,411 26,531
Selling, general and administrative (including
non-cash compensation of $3,851 and $7,356 for
the years ended December 31, 2001 and 2000,
respectively) 43,983 53,504 14,389
Restructuring and other charges 44,752 -- --
In process research and development 21,000 44,854 --
Amortization of intangible assets 211,697 131,832 --
--------- --------- --------
Total operating expenses 459,469 345,601 40,920
--------- --------- --------
(Loss) from operations (382,074) (139,933) (6,698)
Interest expense non-cash 43,439 --
Interest (income) expense, net (442) (1,902) (1,133)
Foreign exchange (gain) -- (63) --
--------- --------- --------
(Loss) before income taxes and extraordinary item (381,632) (181,407) (5,565)
Provision (benefit) for income taxes (4,111) 15,131 --
--------- --------- --------
(Loss) before extraordinary item (377,521) (196,538) (5,565)
Preferred stock deemed dividend and accretion -- -- (3,466)
--------- --------- --------
Loss attributable to common stockholders before
extraordinary item (377,521) (196,538) (9,031)
Extraordinary item - gain on the redemption of the
beneficial conversion feature -- 43,439 --
--------- --------- --------
Net loss attributable to common stockholders (377,521) (153,099) (9,031)
========= ========= ========
Other comprehensive loss:
Unrealized (gain) loss on marketable securities (88) -- 22
Foreign currency translation (gain) loss (112) 77 --
--------- --------- --------
Comprehensive loss attributable to common stockholders $(377,321) $(153,176) $ (9,053)
========= ========= ========
Basic and diluted (loss) per share:
Loss before extraordinary item $ (4.98) $ (3.03) $ (0.19)
Extraordinary item -- 0.67 --
--------- --------- --------
Net loss $ (4.98) $ (2.36) $ (0.19)
========= ========= ========
Basic and diluted weighted average shares 75,796 64,924 46,613
========= ========= ========
The accompanying notes are an integral part of these financial statements.
43
GLOBESPANVIRATA, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except share data)
Notes Accumulated
Stock Additional Receivable Deferred Other Total
Common Stock Purchase Paid-in From Stock Comprehensive Accumulated Stockholders'
Shares Amount Warrant Capital Stock Sales Compensation (Loss) Deficit Equity
---------- ------ --------- --------- ----------- ------------ ------------- ----------- -------------
Balance-December 31, 1998 36,795,795 37 3,654 3,604 (725) (76) - (7,787) (1,293)
Net loss (5,565) (5,565)
Issuance of common stock
due to initial public
offering, net of costs 11,212,500 11 49,729 49,740
Net exercise of warrants 2,173,500 2 (3,653) 3,651 -
Forgiveness of
subordinated loan to
Communication Partners,
L.P. 100 100
Issuance of common stock
and exercise of stock
options 3,568,521 4 7,091 (6,775) 320
Issuance and conversion
of Series A preferred
stock, net of costs 4,384,362 4 14,601 14,605
Preferred dividend
attributable to
beneficial conversion
feature (2,616) (2,616)
Stock options issued at
less than fair market
value 1,218 (1,162) 56
Amortization of
non-employee stock
options 20 20
Repayment of notes
receivable 336 336
Interest earned on notes
receivable (248) (248)
Accumulated other
comprehensive loss (22) (22)
---------- ------ -------- ---------- ----------- ------------ ------------- ----------- -------------
Balance-December 31, 1999 58,134,678 58 1 77,378 (7,412) (1,218) (22) (13,352) 55,433
Net loss (153,099) (153,099)
Issuance of common stock
due to secondary public
offering, net of costs 1,406,250 1 132,970 - 132,971
Issuance of common stock
and exercise of stock
options 1,971,952 2 5,442 5,444
Acquisitions and
acquisition related
stock options issued at
less than fair value 10,734,310 11 843,418 (85,420) 758,009
Redemption of Beneficial
Conversion Feature (47,340) (47,340)
Tax benefit for deferred
stock compensation 30,116 30,116
Interest eaned on and
repayment of notes
receivable 2,150 2,150
Stock options issued at
less than fair market
value (563) (563)
Amortization of
compensatory stock
options 18,972 18,972
Options issued to
non-employees 1,535 1,535
Accumulated other
comprehensive loss (77) (77)
---------- ------ -------- ---------- ----------- ------------ ------------- ----------- -------------
Balance-December 31, 2000 72,247,190 72 1 1,043,519 (5,262) (68,229) (99) (166,451) 803,551
Net loss (377,521) (377,521)
Tax benefit for deferred
stock compensation 259 259
Options issued to
non-employees 2,383 2,383
Issuance of common stock
and exercise of stock
options 1,516,466 1 7,410 7,411
Acquisitions and
acquisition related
stock options issued at
less than fair value 66,540,653 67 660,333 (17,386) 643,014
Interest eaned on and
repayment of notes
receivable 225 225
Amortization of
compensatory stock
options 24,388 24,388
Accumulated other
comprehensive income 200 200
----------- ------ -------- ---------- ----------- ------------ ------------- ----------- -------------
Balance-December 31, 2001 140,304,309 $ 140 $ 1 $1,713,904 $ (5,037) $ (61,227) $ 101 $(543,972) $ 1,103,910
---------- ------ -------- ---------- ----------- ------------ ------------- ----------- -------------
---------- ------ -------- ---------- ----------- ------------ ------------- ----------- -------------
The accompanying notes are an integral part of these financial statements.
44
GLOBESPANVIRATA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended
December 31,
-----------------------------------
2001 2000 1999
---- ---- ----
Cash flow (used in) provided by operating
activities:
Net (loss) $(377,521) $(153,099) $ (5,565)
Adjustments to reconcile net (loss)
to cash (used in) provided by operating activities:
Deferred income taxes (6,385) (7,914) --
Tax benefits from the exercise of employee
stock options 257 21,997 --
Non-cash compensation 26,771 24,120 --
Provision for bad debts 458 5,066 276
Amortization of intangible assets 211,697 131,832 --
Provision for inventory obsolescence 80,852 167 --
Amortization and depreciation 15,403 10,368 3,513
In process research and development 21,000 44,854 --
Restructuring and other charges 39,667
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 46,817 (54,816) (5,686)
(Increase) in inventories (42,902) (49,221) (9,744)
(Increase) in prepaid expenses and other assets (3,526) (999) (3,278)
Increase (decrease) in accounts payable (19,384) 29,062 1,955
Increase (decrease) in accrued expenses
and other current liabilities (4,038) 5,843 5,736
--------- --------- --------
Net cash provided by (used in) operating activities (10,834) 7,260 (12,793)
--------- --------- --------
Cash flows used in investing activities:
Capital expenditures (8,612) (18,902) (1,229)
Sale of intangible asset 404 500
Net cash received from acquisition of
businesses (See note 9) 73,853 18,975 --
Purchases of marketable securities (74,161) (12,631) (111,087)
Proceeds from sale/maturities of
marketable securities 69,136 19,860 97,564
Investment in preferred stock -- -- (2,000)
--------- --------- --------
Net cash provided by (used in) investing activities 60,620 7,802 (16,752)
--------- --------- --------
Cash flows provided by financing activities:
Repayments of borrowings under subordinated note
payable -- (90,000) (4,900)
Borrowings under subordinated redeemable
convertible note, net of offering costs 126,425 -- --
Repayments of borrowings under line of credit -- (192) (2,466)
Proceeds from issuance of common and preferred
Stock 7,491 139,788 62,049
Proceeds from repayment of notes receivable 225 2,070 88
Repayments of capital lease borrowings (3,396) (3,161) (581)
--------- --------- --------
Net cash provided by financing activities 130,745 48,505 54,190
--------- --------- --------
Net increase in cash and cash Equivalents 180,531 63,567 24,645
Effect of exchange rates on cash and cash
equivalents 566 265 --
Cash and cash equivalents at beginning of period 88,489 24,657 12
--------- --------- --------
Cash and cash equivalents at end of period $ 269,586 $ 88,489 $ 24,657
========= ========= ========
Supplemental disclosure of cash flow Information:
Cash paid:
Interest................................. $ 5,421 $ 2,890 $ 442
========= ========= ========
Income taxes............................. $ -- $ 116 $ --
========= ========= ========
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
========= ========= ========
The accompanying notes are an integral part of these financial statements.
45
GLOBESPANVIRATA, INC.
NOTES TO FINANCIAL STATEMENTS
(In thousands, except share and per share data)
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
On December 14, 2001, GlobeSpan, Inc. ("GlobeSpan") completed a merger with
Virata Corporation ("Virata") under an Agreement and Plan of Merger dated as of
October 1, 2001 (the "Merger Agreement"). Under that agreement, a wholly-owned
subsidiary of our company merged with and into Virata and Virata became a
wholly-owned subsidiary of GlobeSpan. At the effective time of the merger,
GlobeSpan was renamed GlobespanVirata, Inc. ("GlobespanVirata" or the Company).
The merger with Virata was accounted for as purchase; accordingly, the operating
results for Virata have been included from the date of acquisition.
GlobespanVirata is a leading provider of integrated circuits, software and
system designs for broadband communication applications that enable high-speed
transmission of data, voice and video to homes and business enterprises
throughout the world. Currently, its integrated circuits, software and system
designs are primarily used in digital subscriber line, or DSL, applications,
which utilize the existing network of copper telephone wires, known as the local
loop, for high-speed transmission of data. The Company sells its products to
more than 300 telecommunications equipment manufacturers for incorporation into
their products for use in systems deployed by telecommunications service
providers and end users in more than 30 countries.
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
GlobespanVirata, Inc. and all of its wholly-owned subsidiaries. The financial
condition and results of operations for the year ended December 31, 2001 and
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.
46
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
during the years ended December 31, 2001, 2000 and 1999 were from product sales.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments purchased with an
original maturity of ninety days or less to be cash equivalents.
INVESTMENTS
Short-term investments consist of debt securities with original maturity
dates between ninety days and one year. Long-term investments consist of debt
securities with original maturity dates greater than one year. The Company's
investments are classified as available-for-sale, and are reported at fair value
at the balance sheet date. The unrealized gains and losses, net of related
taxes, are reported as a component of accumulated other comprehensive income.
Management determines the appropriate classification of debt securities at the
time of purchase and reassesses the classification at each reporting date. Gains
and losses on the sale of available-for-sale investments are determined using
the specific-identification method.
For all investment securities, unrealized losses that are other than
temporary are recognized in net income. The Company does not hold these
securities for speculative or trading purposes.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
on a first-in, first-out basis. We write down our inventory for estimated
obsolescence or unmarketable inventory equal to the difference between the cost
of inventory and the estimated realizable value based upon assumptions about
future demand and market conditions. If actual market conditions are less
favorable than those expected by management, additional inventory write-downs
may be required.
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, 2001 and 2000 consist of the excess of
the purchase price of acquired businesses over the fair value of net assets
acquired, as follows:
2001 2000
---- ----
Goodwill $779,689 $685,732
Core technology 148,800 82,800
Other identifiable intangibles 27,000 -
Accumulated amortization (343,529) (131,832)
--------- ---------
Net intangible assets $611,960 $636,700
======== ========
The intangible assets acquired in the years ended December 31, 2001 and
2000 are being amortized over periods ranging from six months to four years.
Amortization expense related to intangible assets for the years ended December
31, 2001 and 2000 was $211,697 and $131,832, respectively. As a result of the
implementation of Statement of Financial Accounting Standards, or SFAS, No. 142,
entitled "Goodwill and Other Intangible Assets", which is effective for fiscal
years beginning after December 15, 2001, goodwill will no longer be subject to
amortization, with a related charge to the income statement. 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
47
estimated future profitability and undiscounted cash flows are the primary
indicators used to assess the recoverability of intangible assets.
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 SFAS No. 109,
entitled "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 SFAS No. 130, entitled "Reporting Comprehensive
Income". 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 reported other comprehensive income gain of $200
and loss of $77 for the years ended December 31, 2001 and 2000, respectively.
LONG-LIVED ASSETS
The impairment of long-lived assets is assessed by management of the
Company using certain 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 SFAS No. 121, entitled "Accounting for the Impairment of
Long-Lived Assets."
STOCK SPLITS
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2000, the FASB issued SFAS No. 138, entitled "Accounting for
Certain Hedging Activities", which amended SFAS No. 133, entitled "Accounting
for Derivative Instruments and Hedging Activities". SFAS No. 138 must be adopted
concurrently with the adoption of SFAS No. 133. The Company adopted these
statements effective January 1, 2001. These statements establish methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. Because the Company
currently holds no derivative
48
financial instruments and does not currently engage in hedging activities,
adoption of these statements did not have a material impact on our financial
condition or results of operations.
In July 2001, the FASB issued SFAS No. 141, entitled "Business
Combinations" and SFAS No. 142, entitled "Goodwill and Other Intangible Assets".
SFAS No. 141 establishes accounting and reporting for business combinations
by requiring that all business combinations be accounted for under the purchase
method. Use of the pooling-of-interests method is no longer permitted. SFAS No.
141 requires that the purchase method be used for business combinations
initiated after June 30, 2001. The adoption of SFAS No. 141 did not have a
material impact on the Company's financial condition or results of operations.
SFAS No. 142 requires that goodwill no longer be amortized to earnings, but
instead be reviewed for impairment. The Company will adopt the Statement and
cease amortization of goodwill related to acquisitions prior to June 30, 2001,
effective January 1, 2002. The adoption of SFAS No. 142 will result in a
significant reduction in amortization expense in future periods.
In August 2001, SFAS No. 144, entitled "Accounting for the Impairment or
Disposal of Long-Lived Assets," was issued, replacing SFAS No. 121, entitled
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and portions of APB Opinion 30, entitled "Reporting the Results
of Operations." SFAS No. 144 provides a single accounting model for long-lived
assets to be disposed of and changes the criteria that would have to be met to
classify an asset as held-for-sale. SFAS No. 144 retains the requirement of APB
Opinion 30, to report discontinued operations separately from continuing
operations and extends that reporting to a component of an entity that either
has been disposed of or is classified as held for sale. SFAS No. 144 is
effective January 1, 2002 for the Company. The adoption of SFAS No. 144 did not
have a material impact on the Company's 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 Company acquired such
Ficon shares for $5,000 in cash and the right for Ficon shareholders to receive
up to a maximum of 1.9 million shares of the Company's common stock. A portion
of these shares may vest in the future based upon the continued employment of
certain Ficon shareholders. As of December 31, 2001, 681,000 shares have been
issued as a result of continued employment and 1.0 million shares have been
issued as a result of the completion of development milestones. Up to an
additional 279 thousand shares may be issued as a result of continued
employment.
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 Company
paid 3.2 million shares of its common stock and issued to PairGain a $90,000
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, and thereafter gave PairGain the option to convert the
Note into 2.9 million shares of the Company's common stock. The Company redeemed
the Note for a cash payment of $90,000 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
$47,300 and a gain on the associated redemption of $43,400. 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 non-cash interest expense over the period the beneficial conversion feature
was first available. For the year ended December 31, 2000, $43,400 was recorded
as non-cash interest expense.
On April 27, 2000, the Company 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 Company paid
for these shares by issuing 2.0 million shares of our own common stock and
assuming the outstanding T.sqware options for the equivalent of 178,000 options
to purchase our common stock.
49
On June 30, 2000, the Company 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 Company
paid for these shares by issuing 3.4 million shares of its common stock and
assuming the outstanding iCompression options for the equivalent of
approximately 530,000 options to purchase our common stock.
On September 21, 2000, the Company 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. The
Company paid for these shares by issuing 43,000 shares of our own common stock
and assuming the outstanding ATecoM options for the equivalent of 8,000 options
to purchase its common stock.
On December 14, 2001, the Company completed its merger with Virata
Corporation by issuing 65.9 million shares of its own common stock for the
outstanding shares of Virata. In addition, the Company assumed the outstanding
and unexercised options of Virata for the equivalent of 13.6 million options to
purchase its common stock. The Company valued the options at fair value, as
determined using the Black-Scholes option pricing model, and recorded such fair
value, less the intrinsic value of the unvested portion of the stock options, as
additional purchase price. The intrinsic value of the unvested stock options, of
$18,900, has been recorded as deferred compensation and will be amortized over
the remaining vesting periods of the stock options, or approximately 24 months.
In connection with the merger with Virata, the Company began to formulate a
reorganization and restructuring plan (the "Reorganization Plan"), which was
completed during the first quarter of 2002. As a result of the Reorganization
Plan, the Company expects to record restructuring and other charges related to
its operations of $15,000 to $20,000 during the first quarter of 2002.
Additionally, the Company recognized as liabilities assumed in the purchase
business combination and included in the allocation of the acquisition cost in
accordance with SFAS No. 141, entitled "Business Combinations" and EITF 95-3,
entitled "Recognition of Liabilities in Connection with a Purchase Business
Combination," the estimated costs related to Virata facilities consolidation and
the related impact on the Virata outstanding real estate leases and Virata
relocations and workforce reductions, as follows:
Total
Charges
-------
Workforce related $14,524
Facilities consolidation 17,843
Other charges 900
-------
Total $33,267
=======
As a result of the Reorganization Plan, approximately 175 employees of
Virata will either relocate or be part of an involuntarily work force reduction.
The Reorganization Plan relates primarily to employees located in the United
States and consists of relocating key research and development and other key
employees to existing facilities and eliminating redundant functions. The
effected employees will relocate or cease employment with the Company within one
year. The workforce related charge of $14,524 was based upon estimates of the
relocation costs or the severance and fringe benefits for the effected
employees. All of the payments related to the workforce reduction are expected
to be made within one year.
As a result of the elimination of redundant functions, the Company has
consolidated its use of facilities and is actively pursuing subleases for vacant
space. Additionally, there has been a decline in the real estate market in
certain geographic regions in which we acquired operating facility leases. The
Company has estimated its losses related to facilities it intends to sublease
and has made adjustments to fair market value for acquired non-cancelable
operating lease commitments in geographic regions where there has been a decline
in the real estate market, to be $17,843. Losses related to those facilities
affected by the consolidation include an estimate of the vacancy period, the
write-off of leasehold improvements and executory and other administrative costs
to complete subleases. These non-cancelable lease commitments range from fifteen
months to twenty years in length.
Other charges consist primarily of the write-off of certain investments
which the Company deems to have no future value.
50
The assets and liabilities recorded in connection with the purchase price
allocations for Virata are based on preliminary estimates of fair values. Actual
adjustments will be based on the ultimate costs incurred in connection with the
Reorganziation Plan.
The following is a summary of all consideration paid for the acquisitions
during the years ended December 31, 2001 and 2000:
2001 2000
---- ----
Fair value of common stock issued and
vested stock options converted $629,213 $717,436
Subordinated redeemable convertible note
issued - 90,000
Cash paid - 8,231
Transaction costs 21,864 5,104
-------- --------
Total purchase price $651,077 $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, short-term and long-term investments $490,454 $ 36,364
Accounts receivable 10,380 867
Inventory 7,116 -
Prepaid and other assets 7,271 2,297
Property and equipment 15,681 4,441
Identifiable intangible assets 80,000 82,787
Goodwill 94,262 680,713
-------- --------
705,164 807,469
In process research and development 21,000 44,854
Liabilities assumed (75,087) (31,552)
-------- --------
Total purchase price $651,077 $820,771
======== ========
Each of the acquisitions was accounted for as a purchase and has 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 during the
years ended December 31, 2000, reflected as identifiable intangible assets and
goodwill, is being amortized on a straight-line basis over periods ranging from
two to four years. As a result of the implementation of SFAS 142, Goodwill and
Other Intangible Assets, which is effective for fiscal years beginning after
December 15, 2001, goodwill will no longer be amortized to the statement of
operations. In accordance with SFAS 142, the excess of purchase price over the
fair value of net assets acquired after June 30, 2001, reflected as identifiable
intangible assets over periods ranging from six months to four years. As a
result of the implementation of SFAS 142, which is effective for the fiscal year
ending December 31, 2002, the Company will cease amortizing goodwill.
The amount allocated to in process research and development ("IPR&D") of
$21,000 and $44,900 in the years ended December 31, 2001 and 2000, respectively
were 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.
51
Some of the shares of common stock issued to the principals of Ficon, in
connection with such acquisition, are subject to forfeiture if their employment
ceases with the Company, and are recorded as deferred stock compensation. The
deferred stock compensation recorded was $28,800, which reflects the estimated
fair value of common stock issued at the date of acquisition. 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
acquired entities, at various discounts to fair market value as part of its
long-term employee retention strategy and has recorded deferred stock
compensation associated with such option grants amounting to $60,800 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 acquisitions occurred on January 1, 2000.
Year ended December 31,
2001 2000
--------- ----------
Revenue $ 366,449 $ 476,951
========= ==========
Net loss $(440,053) $ (297,783)
========= ==========
Net loss per common share $ (3.18) $ (2.23)
========= ==========
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, 2000.
4. INVENTORIES, NET
Inventories at December 31, 2001 and 2000 consisted of the following:
December 31, 2001 December 31, 2000
----------------- -----------------
Raw materials $ 1,959 $ -
Work in process 6,099 3,088
Finished Goods 97,083 57,455
Reserve for excess and
obsolete inventories (74,444) (262)
------- -------
Inventories, net $ 30,697 $ 60,281
======= =======
As a result of a slowdown in the global telecommunications equipment market
during the first quarter of 2001, and customer inventory balancing problems, we
received customer requests to reduce or cancel sales orders and/or delay
delivery dates. These conditions reflected a rapid change in our business
environment and in customer demand as compared to the fourth quarter of 2000.
Consequently, our backlog was reduced significantly and our ability to estimate
customer demand was negatively impacted.
We do not produce our own inventory, but subcontract the manufacturing to
foundries. We must order inventory from these foundries substantially in advance
of delivery, and in the fourth quarter of 2000, we ordered inventory for
delivery in the first quarter of 2001 based on our record level of demand in the
fourth quarter of 2000. Due to the reduction and cancellation of orders and
delay of delivery dates in the first quarter of 2001, as well as our decision to
accelerate customer transition to higher density and higher performance product,
we recorded a provision for excess and obsolete inventories during the first
quarter of approximately $49,000. Of the provision, $20,000 related to products
for which customer demand no longer existed and the remainder to product for
which we decided to migrate customers to more advanced products.
During the fourth quarter of 2001, the Company recorded an additional
$31,800 for excess and obsolete inventory. These charges were primarily a result
of the accelerated migration of our customers to next generation products, in
conjunction with our merger with Virata.
52
5. 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, 2001 and 2000, five of the Company's customers
accounted for $16,537 (71.2%), and $54,445 (90.9%), of net accounts receivable,
respectively.
Sales to customers who individually represented more than 10% of our net
revenues amounted to $104,671 (38.7%), $217,768 (62.6%), and $30,854 (54.9%) of
total revenues for the years ended December 31, 2001, 2000, and 1999,
respectively. Revenues from customers who represented more than 10% of net
revenues were as follows:
Years Ended
December 31,
-----------
2001 2000 1999
-------- -------- --------
Net revenues:
Customer A............. $32,774 $96,494 $ 23,185
Customer B............. 71,897 82,234 --
Customer C............. -- 39,040 --
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,
2001, 2000, and 1999 were as follows:
Years Ended
December 31,
-----------
2001 2000 1999
-------- -------- --------
Net revenues:
North America............ $146,273 $224,276 $ 29,760
Europe................... 16,116 10,291 5,091
Mexico/LatinAmerica...... 909 24,713 7,725
Asia..................... 106,538 88,766 13,061
Australia................ 100 52 583
-------- -------- --------
$269,936 $348,098 $ 56,220
======== ======== ========
A single vendor manufactured substantially all of the chip sets sold by the
Company. Purchases from this vendor approximated 87%, 90% and 75%, of total
inventory purchases for the years ended December 31, 2001, 2000, and 1999,
respectively. The Company has continued to enhance its relationships with other
vendors and expects the inventory purchases from this vendor, as a percentage of
our overall inventory purchases, to decline in 2002.
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31,
-----------
2001 2000
-------- --------
Computers and equipment $31,521 $21,591
Office furniture and fixtures 4,736 1,650
Software 15,920 8,393
Leasehold improvements 4,912 1,813
Property under capital leases,
primarily computers and equipment 3,510 6,557
Land and Building 1,640 -
Construction in progress - 656
------- -------
62,239 40,660
Less: accumulated depreciation and
amortization............... (25,905) (16,266)
------- -------
$36,334 $24,394
======= =======
53
Included in operating expenses is depreciation and amortization expense of
$9,639, $9,275, and $3,247 for the years ended December 31, 2001, 2000, and
1999, respectively. Accumulated amortization on assets accounted for as capital
leases, amounted to approximately $1,598, $1,420 and $484 as of December 31,
2001, 2000 and 1999, respectively.
7. MARKETABLE SECURITIES
Marketable securities are included in short-term investments and
investments, as appropriate. At December 31, 2001 and 2000, marketable
securities totaling $409,890 and $10,778 were available-for-sale and recorded at
fair value:
Gross Unrealized Unrealized
Cost Holding Gains (Losses) Market Value
--------------------------------------------------------
December 31, 2001 $409,802 $88 $409,890
December 31, 2000 $ 10,778 $- $ 10,778
Proceeds from the sale of available-for-sale securities during the years
ended December 31, 2001 and 2000 were approximately $69,136 and $19,860,
respectively, for which there was an immaterial associated gain or loss.
As of December 31, 2001, substantially all of the Company's short-term
investments were in money market funds, certificates of deposits, or
high-quality commercial paper. Long term securities are primarily comprised of
AA or better corporate bonds and U.S. Government backed securities.
The Company classifies its existing debt securities as available-for-sale
in accordance with the provisions of SFAS No. 115, entitled "Accounting for
Certain Investments in Debt and Equity Securities." These securities are carried
at fair market value, with unrealized gains and losses reported in stockholders'
equity as a component of other comprehensive income (loss). Gains or losses on
securities sold are based on the specific identification method.
8. DEFINED CONTRIBUTION PLAN
The Company participates in a 401(k) plan covering substantially all
employees. 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 by the Company amounted to approximately $2,006, $1,423 and $541 for the
years ended December 31, 2001, 2000 and 1999. In connection with the merger with
Virata, the Company assumed the former Virata 401(k) Plan. Under this plan, the
Company provides 50% matching contribution, up to $2,000 per calendar year, per
employee.
9. SUPPLEMENTAL CASH FLOW DATA
The Company acquired cash of $73,853 in connection with its merger with
Virata in 2001, as described below.
The Company acquired cash of approximately $31,900 in connection with the
acquisitions of T.sqware and iCompression completed during the second quarter of
2000 and used cash of approximately $12,900 in connection with the purchases of
Ficon, certain technology and employees of PairGain and ATecoM completed during
2000, resulting in net cash received from acquisitions of $18,975 during the
year ended December 31, 2000, as follows:
2001 2000
---- ----
Purchase price $651,077 $820,771
Common stock issued (629,213) (717,436)
Subordinated redeemable
convertible note payable - (90,000)
Accrued transaction costs (2,699) (434)
-------- --------
Cash paid $ 19,165 $ 12,901
Less: cash acquired (93,018) (31,876)
-------- --------
Net cash received from
acquisition of businesses $(73,853) $(18,975)
======== ========
54
10. RESTRUCTURING AND OTHER CHARGES
During the year ended December 31, 2001, the Company realigned its
operating cost structure, which resulted in recording restructuring and other
charges of $44,752. These charges primarily consist of costs related to
facilities consolidation and the related impact on our outstanding real estate
leases and workforce reductions.
The workforce reductions resulted in the involuntary severance of
approximately 100 employees or approximately 12% of the Company's overall
workforce at the time and included employees across all disciplines and
geographic regions. Substantially all of the effected employees ceased
employment with the Company prior to June 30, 2001. A workforce reduction charge
of $3,672 was recorded based upon estimates of the severance and fringe benefits
for the affected employees. All of the payments related to the workforce
reduction are expected to be made within one year. A non-cash workforce
reduction charge pertains to modifications to the terms of the stock options
previously granted to terminated employees and such modifications have been
accounted for in accordance with the provisions of FASB Interpretation No. 44.
As a result of changes in market conditions and the reduction in our
workforce, we consolidated our facilities, which had been leased in anticipation
of continued short-term growth, and are actively pursuing subleases for vacant
space we lease. Due to the decline in the real estate market in the geographic
regions in which we are pursuing subleases, we have estimated our losses on
these non-cancelable lease commitments, including the write-off of leasehold
improvements and executory and other administrative costs to complete subleases,
to be $36,750. These non-cancelable lease commitments range from eighteen months
to sixteen years in length. If we are unable to execute a sublease agreement
within the estimated time frame for each facility, we could incur additional
charges or operating expenses in the future.
Other charges consisted primarily of the write-off of certain investments,
which the Company deemed to have an other than temporary decline in fair value.
Total Non-cash Cash Restructuring
Charges Charges Payments Liability
Workforce reduction $ 3,672 $ (1,262) $ (583) $ 1,827
Facilities consolidation 36,750 (955) (3,564) 32,231
Other charges 4,330 (2,630) (926) 774
----------------------------------------------
Total $ 44,752 $ (4,847) $ (5,073) $ 34,832
==============================================
11. PRIVATE OFFERING OF CONVERTIBLE SUBORDINATED NOTES
On May 11, 2001, the Company sold $130,000 of 5 1/4% Convertible
Subordinated Notes due 2006 in a private placement through an initial purchaser
to qualified institutional buyers in accordance with Rule 144A under the
Securities Act. The Company received net proceeds from the sale of the notes of
$126,400. The Company expects to use the net proceeds of the offering for
general corporate purposes, including working capital, capital expenditures and
possible acquisitions. The notes are unsecured obligations of the Company and
will mature on May 15, 2006. The notes are contractually subordinated in right
of payment to all of the Company's existing and future senior indebtedness.
Holders of the notes may convert the notes into shares of common stock at
any time prior to maturity at an initial conversion price of $26.67 per share,
subject to adjustment. The Company may redeem some or all of the notes at any
time prior to May 20, 2004 at a redemption price equal to 100% of the principal
amount of the notes to be redeemed, plus accrued and unpaid interest to the
redemption date, if (1) the closing price of the Company's common stock has
exceeded 130% of the conversion price of the notes for at least 20 of the 30
trading days prior to the mailing of the redemption notice, and (2) in
accordance with the terms of the Registration Rights Agreement, the shelf
registration statement covering resales of the notes and the common stock
issuable upon conversion of the notes is effective and available for use and
expected to remain effective and available for use for the 30 days following the
provisional redemption date. In the event of a provisional redemption, the
Company will make an additional payment equal to the total value of the
aggregate amount of the interest that would have been payable on the notes from
the redemption date to May 20, 2004. On and after May 20, 2004, the Company may
also redeem the notes at any time at the Company's option, in whole or in part,
at the redemption price shown in the note, plus accrued interest, if any.
55
The Company subsequently registered the resale of the notes and common
stock issuable upon conversion of the notes on a Registration Statement on Form
S-3 (File No. 333-66478), which was declared effective on August 10, 2001.
12. STOCK PURCHASE WARRANT
In connection with the Company's inception (see Note 1), the Company issued
a warrant to acquire 3.9 million shares of its common stock at an exercise price
of $2.24 per share to Lucent Technologies, Inc. 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.
Upon the closing of the IPO, the outstanding warrant to purchase common
stock issued to Lucent Technologies was net exercised for 2.2 million shares of
common stock.
13. INCOME TAXES
Deferred tax assets (liabilities) are comprised of the following:
December 31,
-----------
2001 2000
---- ----
Net depreciable assets $12,603 $3,534
Accrued expenses 9,711 4,553
Inventory reserve and
capitalization 19,690 -
Deferred Compensation 65,731 9,655
Net operating loss carryforwards 88,830 20,398
Other 5,481 892
-------- -------
202,046 39,032
Less valuation allowance(1) (187,954) (35,325)
-------- -------
Net deferred tax assets 14,092 3,707
Net intangible assets (14,092) (10,393)
-------- -------
Net deferred tax liability $ - ($6,686)
======== =======
(1) The December 31, 2001 and 2000 valuation allowance includes $75,100
and $7,913, primarily from acquired companies.
The Company has acquired and generated federal and state net operating loss
carryforwards of approximately $356,731 and $68,809 as of December 31, 2001 and
2000, respectively, which are due to expire between 2002 and 2021. 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.
Due to the uncertainty of realization of its deferred tax assets, the
Company has provided a valuation allowance against its deferred tax assets. At
such time as it is determined that it is more likely than not that the deferred
tax assets are realizable, the valuation allowance will be reduced.
The Company's federal and state 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, related to non-qualified stock options or disqualifying
dispositions of incentive stock options. These benefits were credited directly
to shareholders' equity and amounted to $304 and $30,116 for the years ended
December 31, 2001 and 2000, respectively.
The components of the provision (benefit) for income taxes are as follows:
56
Years Ended
December 31,
-----------
2001 2000 1999
---- ---- ----
Current:
Federal $ -- $18,678 $ --
State 316 4,368 --
Foreign 1,959 -- --
------- ------- ------
2,275 23,046 --
------- ------- ------
Deferred:
Federal (73,117) (26,621) (1,595)
State (10,975) (3,780) (281)
Foreign 178 -- --
Change in valuation allowance 77,528 22,486 1,876
------- ------- ------
(6,386) (7,915) --
------- ------- ------
Income tax provision (benefit) $(4,111) $15,131 $ --
======= ======= ======
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,
-----------
2001 2000 1999
---- ---- ----
U.S. statutory rate (35.0)% (35.0)% (34.0)%
State taxes (2.7) 2.1 (5.9)
Amortization of intangible assets 10.0 13.1 --
In process research and development 1.9 11.4
Net operating loss utilized -- 2.9 --
Other (.3) .1 --
Change in valuation allowance 25.1 16.3 39.9
------- ------ ------
Effective tax rate (1.0)% 10.9% 0.0%
======= ====== ======
14. EARNINGS PER SHARE
The Company has adopted Statement of Financial Accounting Standards No.
128, entitled "Earnings per Share" ("SFAS 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, 2001, 2000 and 1999 the Company had outstanding
options, restricted stock and warrants to purchase an aggregate of 45.0 million,
17.4 million and 8.6 million 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. In addition, the Company has
$130,000 of convertible subordinated notes (the "Convertible Notes") which can
be converted into common stock of the Company at a conversion price of $26.67
per share. The Convertible Notes were anti-dilutive to earnings per share for
the year ended December 31, 2001 and therefore have been excluded from the
calculation.
The computations of Basic EPS and Diluted EPS for the years ended December
31, 2001, 2000, and 1999 are as follows:
57
2001 2000 1999
---- ---- ----
Numerator:
Loss before extraordinary item $(377,521) $(196,538) $(5,565)
Preferred stock dividend and accretion -- -- (3,466)
---------- ---------- --------
Loss attributable to common shareholders
before extraordinary item (377,521) (196,538) (9,031)
Extraordinary item -- 43,439 --
---------- ---------- --------
Net loss attributable to common $(377,521) $(153,099) $(9,031)
stockholders ========== ========== ========
Denominator:
Basic shares 75,796 64,924 46,613
Effect of dilutive stock options -- -- --
---------- ---------- --------
Diluted shares 75,796 64,924 46,613
========== ========== ========
Basic and diluted loss per share:
Loss attributable to common stockholders
before extraordinary item $(4.98) $(3.03) $ (0.19)
Extraordinary item -- $ 0.67 --
------- ------- --------
Net loss attributable to common stockholders $(4.98) $(2.36) $ (0.19)
======= ======= ========
15. STOCKHOLDERS' EQUITY
On June 23, 1999, the Company completed its initial public offering ("IPO")
of 11.2 million shares of common stock at $5 per share. Net proceeds received by
the Company, after deducting offering costs, totaled $49.7 million.
On August 2, 2000, the Company completed a follow-on public offering of 8.6
million shares of common stock at a price of $100 per share. Of the 8.6 million
shares of common stock, 1.4 million shares were sold by the Company, resulting
in proceeds from the offering of $133.0 million, net of related expenses, and
7.2 million shares were sold by selling shareholders (including 1.1 million
shares sold by selling shareholders upon exercise by the underwriters of their
over-allotment option). The Company did not receive any of the proceeds from the
sales of shares by the selling shareholders
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
400.0 million 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 10.0
million shares of preferred stock, $0.001 par value and 100.0 million 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 1.5 million 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 $8.21 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 1.5 million
shares of Series A Stock and warrants to purchase an aggregate 0.9 million
shares of common stock for gross proceeds of $12,000 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
58
equal to $5.00 per share for the first 0.2 million shares, $6.25 per share for
the second 0.2 million shares, $7.50 per share for the third 0.2 million shares
and $8.75 per share for the last 0.3 million 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 $2,600 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
1999. The accretion which totaled $900, 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 4.4 million
shares of common stock.
16. 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 10.2 million shares 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, 2001 and 2000, the Company repurchased 25,000 and
179,000 shares under such provision. No shares were repurchased during the year
ended December 31, 1999. At December 31, 2001, 2000, and 1999, there were 0.2
million, 0.7 million, and 2.3 million 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.
The 1996 Plan permits optionees to exercise their stock options by issuing
a promissory note. When stock options are exercised utilizing a promissory note,
the Company records a notes receivable from stock sales. 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. As of December 31, 2001 and 2000, notes receivable from stock
sales amounted to $5,037 and $5,262, respectively.
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 6.0 million shares
of its common stock, for issuance under the 1999 Supplemental Plan. During 2001
and 2000, the Company reserved an additional 10.0 million and 5.3 million 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 is
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 3.0 million shares of its
common stock, together with the
59
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 3.0 million 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 is administered by the Compensation Committee of the board of
directors in accordance with the terms of the 1999 Plan.
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 7,000 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.
On January 22, 2002, the Company's Board of Directors approved a one-year
extension to the exercise period of all outstanding and vested options held by
the Directors who resigned on December 14, 2001, in connection with the merger.
The Company will recognize approximately $2,500 as a result of this board
resolution.
The following table summarizes stock options granted, exercised and
forfeited (in thousands) since December 31, 1998:
Weighted
Average
Purchase
Options Price
------- --------
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
Granted........... 31,384 $10.62
Exercised......... (898) $ 2.29
Forfeited......... (2,585) $57.08
------ ------
Balance at
December 31, 2001. 44,285 $20.96
====== ======
The following table summarizes information about outstanding stock options
(in thousands) as of December 31, 2001:
60
Options Outstanding Options Exercisable
------------------- -------------------
Weighted-
Average Weighted Exercisable Weighted
Outstanding Remaining Average at Average
Actual Ranges of Exercise at December Contractual Exercise December Exercise
Prices 31, 2001 Life Price 31, 2001 Price
------------------------- ----------- ----------- -------- ----------- --------
$0.01 - 09.99 15,243 7.4 $5.96 7,361 $3.86
$10.00 - 19.83 19,232 9.1 $13.36 2,703 $15.12
$20.13 - 29.06 2,680 7.7 $23.07 2,123 $23.04
$30.19 - 39.61 1,632 7.9 $32.04 749 $32.07
$40.63 - 48.29 770 8.1 $44.79 451 $44.31
$50.13 - 59.00 75 8.0 $54.46 22 $54.91
$60.88 - 69.50 1,210 8.0 $63.53 522 $63.52
$72.06 - 79.75 692 8.2 $75.15 175 $75.87
$80.00 - 89.44 325 7.7 $83.45 111 $83.63
$90.00 - 98.06 338 8.3 $94.62 190 $95.25
$100.00 - 107.81 528 8.4 $102.43 167 $102.49
$110.00 - 119.56 1,303 8.4 $116.02 446 $116.13
$120.56 - 129.81 178 7.0 $125.99 94 $126.11
$130.38 - 139.130 67 7.6 $133.34 37 $133.10
$141.63 - 146.00 12 7.5 $143.97 3 $142.57
-----------------------------------------------------------------------------------------
$0.01 - 146.00 44,285 8.3 $20.92 15,154 $21.33
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, 2001 and 2000, a total of approximately 13.6 million and 0.7
million 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 ACCOUNTING
The Company accounts for stock options granted to employees in accordance
with Accounting Principles Board Opinion No. 25, entitled "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
($484,634), ($230,553), and ($14,368) and ($6.39), ($3.55), and ($.31) for the
years ended December 31, 2001, 2000, and 1999, respectively, calculated
utilizing the Black-Scholes option-pricing model. The following assumptions were
used for the years ended December 31, 2001, 2000, and 1999: (1) risk-free
interest rate of 4.0%, 6.3%, and 5.9% respectively; (2) dividend yield of 0.00%;
(3) expected life of four years for December 31, 2001, 2000 and 1999 and (4)
volatility of 105% and 100% for December 31, 2000 and 1999 respectively.
During 2001, 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 date of grant. In
connection with these issuances, the Company recorded $18,530, $89,552, and
$1,218 of deferred compensation, of which $24,388, $22,582 and $56 was
recognized during 2001, 2000 and 1999, respectively, as compensation expense.
The deferred compensation is being amortized over the vesting period, which
ranges from two to 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 2001 and 2000, the Company granted 122,000 and 32,000 stock
options, respectively, to non-employees. In accordance with the requirements of
EITF 96-18, the Company recorded $2,383 and $1,535, respectively, reflecting the
estimated fair value of these options utilizing the Black-Scholes option-pricing
model and the assumptions indicated above. 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 IPO on June 22, 1999. The Company reserved 1.2 million 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 1.2 million 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%
61
of his cash compensation. Purchases of common stock 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.
17. COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities for office and research and
development activities under agreements that expire at various dates through
2021. 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 $1,621 and $4,744 at December 31, 2001 and 2000, respectively. Minimum
required future lease payments under the Company's capital and operating leases
at December 31, 2001 are as follows:
Capital Operating
Leases Leases
------- ---------
Years Ended December 31,
2002 $3,689 $14,693
2003 1,552 14,305
2004 6 13,136
2005 4 11,774
2006 - 10,540
Thereafter - 35,112
------ -------
Total minimum lease payments $5,251 $99,560
Less: amount representing interest (386) =======
----
Present value of net minimum lease payments 4,865
Less: current portion (3,209)
------
$1,656
======
In February of 2002, the Company purchased a 200,000 square foot building
in Old Bridge, New Jersey for approximately $35.0 million in cash. The building
is currently under construction, with the interior expected to be completed by
the end of 2002. The company expects to incur approximately $4.0 million during
2002 to complete construction of the building.
Rent expense for the years ended December 31, 2001, 2000, and 1999
approximated $8,408, $2,850, and $1,049, 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.
In November 2001, a securities class action, Collegeware Asset Management,
LP v. Fleetboston Robertson Stephens, Inc., et al., Civil Action No.
01-CV-10741, was filed in United States District Court for the Southern District
of New York against certain investment bank underwriters for the Company's IPO
and secondary public offering, and various officers and directors of the
Company. The complaint alleges that the defendants violated federal securities
laws by issuing and selling the Company's common stock in those offerings
without disclosing to investors that some of the underwriters had solicited and
received undisclosed and excessive commissions. The complaint seeks unspecified
damages on behalf of persons who purchased the Company's stock during the period
from June 23, 1999 through December 6, 2000. Other actions have been filed
making similar allegations regarding the initial public offerings of hundreds of
other companies, including Virata, that launched such offerings during 1999 and
2000. All of these lawsuits including the suit against the Company have been
coordinated for pretrial purposes as In re Initial Public Offering Securities
Litigation, Civil Action No. 21-MC-92. The Company believes it has meritorious
defenses to the claims against it and intends to defend itself vigorously.
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. It is also involved in 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.
62
18. RELATED PARTY TRANSACTIONS
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 $146.0 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 (subsequently GlobespanVirata,
Inc.).
As of December 31, 2001 and 2000, Communication Partners, L.P. or other
entities affiliated with Texas Pacific Group owned 10.7% and 21.0%,
respectively, of the Company's outstanding stock.
During the years ended December 31, 2001, 2000, and 1999, the Company
recorded product sales of $1,027, $8,355, and $3,224, 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, 2001 and 2000, the Company
had a payable to Paradyne Networks in the amount of $1,196 and $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
which 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 net) 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, the Company 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, the Company 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 the Company
of products to Paradyne Networks. Under the terms of the Supply Agreement, the
Company is required to honor Paradyne Networks' orders for the Company'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 the Company affords its other similarly situated
customers. The Company also granted Paradyne Networks a standard customer
immunity under the Company's intellectual property rights with respect to any of
Paradyne Networks' products which incorporate the Company's products.
19. 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, 2001:
Allowance for doubtful accounts $5,403 458 (100) $5,761
Valuation allowance-deferred tax asset $35,325 152,628 - $187,953
Inventory obsolescence reserve $262 79,602 (5,420) $74,444
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
(a) Represents accounts written off as uncollectable and inventory previously
reserved, which was subsequently sold.
63
20. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Three Months Ended
------------------
Mar. 31, Jun. 30, Sep. 30, Dec. 31, Mar. 31, Jun. 30, Sep. 30, Dec. 31,
2001 2001 2001 2001 2000 2000 2000 2000
--------- --------- --------- --------- --------- --------- --------- ---------
(In thousands except per share data)
Statement of Operations:
Net revenues............... $108,213 $ 60,288 $ 46,014 $ 55,421 $ 31,060 $ 75,901 $110,353 $130,784
Gross profit............... 13,409 37,412 25,565 1,009 19,580 46,548 65,224 74,316
(Loss) income from operations (93,308) (103,212) (67,011) (118,543) (13,643) (64,850) (32,519) (28,921)
(Loss) income before taxes
and extraordinary item..... (92,210) (103,163) (67,372) (118,887) (22,899) (88,700) (42,147) (27,661)
(Loss) income before
extraordinary item......... (89,162) (102,820) (65,303) (120,236) (22,899) (88,700) (50,386) (34,553)
Net (loss) income attributed
to common shareholders..... (89,162) (102,820) (65,303) (120,236) (22,899) (88,700) (6,947) (34,553)
(Loss) income before
extraordinary item per
common share - basic (1.25) (1.42) (.89) (1.39) (.39) (1.42) (0.74) (.49)
========= ========= ========= ========= ========= ========= ========= =========
Net (loss) income per common
share - basic ............. (1.25) (1.42) (.89) (1.39) (.39) (1.42) (0.10) (.49)
========= ========= ========= ========= ========= ========= ========= =========
(Loss) income before
extraordinary item per
common share - fully diluted (1.25) (1.42) (.89) (1.39) (.39) (1.42) (0.74) (.49)
========= ========= ========= ========= ========= ========= ========= =========
Net (loss) income per common
share - fully diluted...... $ (1.25) $ (1.42) $ (.89) $ (1.39) $ (.39) $ (1.42) $ (0.10) $ (.49)
========= ========= ========= ========= ========= ========= ========= =========
64
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.
GLOBESPANVIRATA, INC.
March 29, 2002 By /s/ ARMANDO GEDAY
------------------------------
Armando Geday
President, Chief Executive Officer and Director
65
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 Officer March 29, 2002
Armando Geday and Director
/s/ ROBERT MCMULLAN
- ------------------------- Vice President and Chief Financial March 29, 2002
Robert McMullan Officer
/s/ CHARLES COTTON
- ------------------------- Director and Executive Chairman March 29, 2002
Charles Cotton
/s/ GARY BLOOM
- ------------------------- Director March 29, 2002
Gary Bloom
/s/ JAMES COULTER
- ------------------------- Director March 29, 2002
James Coulter
/s/ DIPANJAN DEB
- ------------------------- Director March 29, 2002
Dipanjan Deb
- ------------------------- Director March 29, 2002
Hermann Hauser
/s/ JOHN MARREN
- ------------------------- Director March 29, 2002
John Marren
/s/ GIUSEPPE ZOCCO
- ------------------------- Director March 29, 2002
Giuseppe Zocco
66
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)).
2.5 Agreement and Plan of Merger, dated October 1, 2001, by and among the
Company, Wine Acquisition Corp. and Virata Corporation (incorporated
herein by reference to Annex A to the joint proxy statement/
prospectus which constitutes a part of the Registration Statement on
Form S-4 (File No.: 333-72028)).
3.1# Restated Certificate of Incorporation of the Registrant.
3.2# Amended and Restated Bylaws of the Registrant.
4.1# Specimen Common Stock certificate.
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 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).
4.4 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).
4.5 Instrument Defining Rights of Stockholders of Registrant (incorporated
into this document by reference to the Company's Form 8-A (File No.
000-26401)).
4.6 Indenture dated as of May 11, 2001 between the Company and United
States Trust Company of New York (incorporated herein by reference to
Exhibit 4.1 to the Company's Current Report on Form 8-K filed on May
15, 2001).
4.7 Registration Rights Agreement dated as of May 11, 2001, by and among
the Company and Morgan Stanley & Co. Incorporated (incorporated herein
by reference to Exhibit 4.2 to the Company's Current Report on Form
8-K filed on May 15, 2001).
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)).
67
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(incorporated herein by reference to Exhibit 10.5 to the
Registrant's Annual Report on Form 10-K filed March 30, 2001).
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 as
of October 1, 2001.
10.8*# Employment Agreement between the Company and Charles Cotton, dated as
of October 1, 2001.
10.9*# Employment Agreement between the Company and Nicholas Aretakis, dated
as of January 17, 2002.
10.10+ 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)).
10.11 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)).
10.12 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)).
10.13+ 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)).
10.14 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)).
10.15 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)).
10.16 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)).
10.17 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)).
10.18 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)).
10.19 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)).
10.20 Internext Compression, Inc. 1997 Equity Incentive Plan (incorporated
by reference to Exhibit 4.9 to the
68
Company's Registration Statement on Form S-8 (File No. 333-40720)).
10.21 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)).
10.22 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)).
10.23 Amended and Restated Virata Corporation 1999 Stock Incentive Plan
(incorporated herein by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-8 (File No. 333-75324)).
10.24 Virata Corporation 1999 Non-Employee Director Compensation Plan
(incorporated herein by reference to Exhibit 4.3 to the Company's
Registration Statement on Form S-8 (File No. 333-75324)).
10.25 D2 Technologies, Inc. Tandem Stock Option Plan (incorporated herein by
reference to Exhibit 4.4 to the Company's Registration Statement on
Form S-8 (File No. 333-75324)).
10.26 Inverness Systems Ltd. Share Option Plan (incorporated herein by
reference to Exhibit 4.5 to the Company's Registration Statement on
Form S-8 (File No. 333-75324)).
10.27 Agranat Systems, Inc. 1996 Stock Option Plan (incorporated herein by
reference to Exhibit 4.6 to the Company's Registration Statement on
Form S-8 (File No. 333-75324)).
10.28 Excess Bandwidth 1998 Equity Incentive Plan (incorporated herein by
reference to Exhibit 4.6 to the Company's Registration Statement on
Form S-8 (File No. 333-75324)).
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.
69