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Form 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended June 30, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 000-26401
GlobespanVirata, Inc.
(Exact name of registrant as specified in its charter)
Delaware 75-2658218
(State of incorporation) (IRS Employer Identification No.)
100 Schulz Drive, Red Bank, New Jersey 07701
(Address of principal executive offices, including ZIP code)
(732) 345-7500
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
The number of shares outstanding of the Registrant's Common Stock as of August
7, 2002 was 141,983,498.
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GlobespanVirata, Inc.
INDEX
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of June 30, 2002 and
December 31, 2001.............................................2
Condensed Consolidated Statements of Operations for the Three and
Six Months Ended June 30, 2002 and 2001.......................3
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2002 and 2001..................................4
Notes to Condensed Consolidated Financial Statements..................5
Item 2. Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations..........................12
Item 3. Quantitative and Qualitative Disclosures About Market Risk......20
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders..........20
Item 6. Exhibits and Reports on Form 8-K.............................21
i
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
GlobespanVirata, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands)
June 30, 2002 December 31, 2001
------------- -----------------
ASSETS
Current Assets:
Cash and cash equivalents $ 233,995 $ 269,586
Short-term investments 209,917 297,575
Accounts receivable, less allowance for doubtful
accounts of $3,860 and $5,761, respectively 32,477 22,582
Note receivable from Conexant Systems, Inc. 21,000 --
Inventories, net 22,441 30,697
Deferred income taxes 27,187 49,532
Assets related to businesses held for sale 311 2,295
Prepaid expenses and other current assets 22,468 8,524
----------- -----------
Total current assets 569,796 680,791
Property and equipment, net 59,418 34,978
Intangible assets, net 57,000 611,960
Investments 166,381 112,315
Other assets 11,761 10,970
----------- -----------
Total assets $ 864,356 $ 1,451,014
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 39,770 $ 30,666
Restructuring and reorganization liabilities 64,637 68,099
Accrued expenses and other liabilities 37,200 38,443
Payroll and benefit related liabilities 19,238 20,941
Liabilities related to businesses held for sale 357 1,414
Current portion of capital lease obligations 2,073 3,209
----------- -----------
Total current liabilities 163,275 162,772
Other long-term liabilities 2,488 3,144
Convertible subordinated note 130,000 130,000
Deferred income taxes 27,187 49,532
Capital lease obligations, less current portion 122 1,656
----------- -----------
Total liabilities 323,072 347,104
----------- -----------
Stockholders' equity
Preferred stock -- --
Common stock 141 140
Treasury stock (6,716) --
Stock purchase warrants 1 1
Notes receivable from stock sales (5,123) (5,037)
Additional paid in capital 1,715,898 1,713,904
Deferred stock compensation (34,990) (61,227)
Accumulated deficit (1,128,917) (543,972)
Accumulated other comprehensive income 990 101
Total stockholders' equity 541,284 1,103,910
----------- -----------
Total liabilities and stockholders' equity $ 864,356 $ 1,451,014
=========== ===========
The accompanying notes are an integral part of these financial statements.
2
GlobespanVirata, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share data)
For The Three Months For The Six Months
Ended June 30, Ended June 30,
-------------- --------------
2002 2001 2002 2001
------------------------------------------------
Net product revenues $ 45,799 $ 43,104 $ 126,327 $ 150,049
Cancellation revenues -- 15,391 3,500 15,391
--------- --------- --------- ---------
Net revenues 45,799 58,495 129,827 165,440
Cost of sales related to net product revenues 22,895 20,916 60,162 66,128
Cost of sales - provision for excess and obsolete inventory -- -- -- 48,967
Cost of sales related to cancellation revenues -- 1,075 -- 1,075
--------- --------- --------- ---------
Total cost of sales 22,895 21,991 60,162 116,170
--------- --------- --------- ---------
Gross profit 22,904 36,504 69,665 49,270
--------- --------- --------- ---------
Operating expenses:
Research and development (including non-cash compensation
of $5,416 and $20,822 for the three and six months ended
June 30, 2002, respectively, and $5,091 and $11,665 for the
three and six months ended June 30, 2001, respectively.) 37,664 32,044 89,767 73,153
Selling, general and administrative (including non-cash
compensation of $602 and $1,425 for the three and six
months ended June 30, 2002, respectively, and $566 and
$1,761 for the three and six months ended June 30, 2001,
respectively.) 13,109 10,046 28,295 24,545
Amortization of intangible assets 9,563 52,041 21,673 101,646
Restructuring and other charges 15,750 44,752 15,750 44,752
Impairment of goodwill and other acquired intangible assets 493,620 -- 493,620 --
--------- -------- --------- ---------
Total operating expenses 569,706 138,883 649,105 244,096
--------- -------- --------- ---------
Loss from continuing operations (546,802) (102,379) (579,440) (194,826)
Interest income, net (1,809) (49) (3,716) (1,147)
Foreign exchange loss -- -- 38 --
--------- -------- --------- ---------
Loss from continuing operations before income taxes (544,993) (102,330) (575,762) (193,679)
Provision (benefit) for income taxes -- (343) 260 (3,391)
--------- --------- --------- ---------
Net loss from continuing operations (544,993) (101,987) (576,022) (190,288)
Discontinued Operations (Note 6)
Net loss from operations of discontinued businesses (including
net loss on the sale of the video compression business
of $3,887) (7,243) (833) (8,923) (1,694)
--------- --------- --------- ---------
Net Loss $(552,236) $(102,820) $(584,945) $(191,982)
========= ========= ========= =========
Other comprehensive (income) loss:
Unrealized gain on marketable securities (200) -- (34) --
Foreign currency translation (gain) loss (1,352) (25) (855) 132
--------- --------- --------- ---------
Comprehensive loss $(550,684) $(102,795) $(584,056) $(192,114)
========= ========= ========= =========
Basic and diluted loss per share:
Net loss from continuing operations $(3.87) $(1.41) $(4.10) $(2.65)
Net loss from discontinued operations (0.05) (0.01) (0.06) (0.02)
-------- --------- --------- ---------
Net Loss per share $(3.92) $(1.42) $(4.16) $(2.68)
======== ========= ========= =========
Weighted average shares of common stock outstanding
used in computing basic and diluted loss per share 140,889 72,410 140,508 71,763
======== ========= ========= =========
The accompanying notes are an integral part of these financial statements.
3
GlobespanVirata, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
Six Months
Ended June 30,
------------------------
2002 2001
------------------------
Cash flow used in operating activities:
Net loss $(584,945) $(191,982)
Adjustments to reconcile net loss to cash used in operating activities:
Provision for bad debts -- 458
Provision for excess and obsolete inventory -- 48,967
Restructuring and other charges 9,916 44,239
Tax benefits from employee stock option plans -- 1,546
Deferred income taxes -- (6,386)
Non-cash compensation expense 22,247 13,426
Depreciation and amortization 9,230 8,401
Amortization of intangible assets (including amortization of $1,261 related to
discontinued operations) 22,934 102,906
Impairment of Goodwill and other acquired intangible assets 493,620 --
Net loss on sale of video compression business 3,887 --
Changes in assets and liabilities, net of the effect of acquisitions and
divestitures:
(Increase) decrease in accounts receivable (9,895) 41,945
(Increase) decrease in inventory 8,256 (50,624)
Increase in prepaids and other assets (723) (3,272)
Increase (decrease) in accounts payable 9,104 (21,995)
Decrease in accrued expenses and other liabilities (13,041) (4,266)
---------- ---------
Net cash used in operating activities (29,410) (16,637)
---------- ---------
Cash flow used in investing activities:
Purchases of property and equipment (4,577) (7,269)
Purchase of facility (34,825) --
Cash paid for accrued acquisition related costs (4,808) --
Proceeds from sale of intangible asset -- 404
Proceeds from sale/maturity of marketable securities 260,963 1,516
Purchases of marketable securities (227,371) (13,816)
---------- ---------
Net cash used in investing activities (10,618) (19,165)
---------- ---------
Cash flow provided by financing activities:
Proceeds from issuance of convertible subordinated notes, net of offering costs -- 126,425
Proceeds received from exercise of stock options and employee stock purchase
plan 7,017 4,548
Proceeds from repayment of notes receivable -- 293
Repurchase of common stock (504) --
Repayments of capital lease obligations (2,670) (2,065)
---------- ---------
Net cash provided by financing activities 3,843 129,201
---------- ---------
Effect of exchange rates on cash and cash equivalents 594 (132)
---------- ---------
Net increase (decrease) in cash and cash equivalents (35,591) 93,267
Cash and cash equivalents at beginning of period 269,586 88,489
---------- ---------
Cash and cash equivalents at end of period $ 233,995 $181,756
========== =========
Supplemental non-cash disclosures - Refer to Note 10
The accompanying notes are an integral part of these financial statements.
4
GlobespanVirata, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except share and per share data
1. Nature of Business and Basis of Presentation
GlobespanVirata, Inc. ("GlobespanVirata" or the "Company") 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.
Unaudited Interim Financial Statements
The accompanying unaudited consolidated financial statements have been
prepared by GlobespanVirata and reflect all adjustments, consisting only of
normal recurring adjustments, which in the opinion of management are necessary
to present fairly the financial position and the results of operations for the
interim periods. The balance sheet at December 31, 2001 has been derived from
audited financial statements at that date. The financial statements have been
prepared in accordance with the regulations of the Securities and Exchange
Commission, but omit certain information and footnote disclosure necessary to
present the statements in accordance with generally accepted accounting
principles. Certain reclassifications have been made to conform prior year
financial statements to the current year presentation. For further information,
refer to the financial statements and notes thereto included in
GlobespanVirata's Annual Report on Form 10-K, filed with the Securities and
Exchange Commission on April 1, 2002. Results for the interim periods are not
necessarily indicative of results for the entire fiscal year.
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 and other fixed assets. Actual results could differ from
those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of
GlobespanVirata and all of its wholly-owned subsidiaries. All intercompany
transactions and balances are eliminated in consolidation.
Earnings Per Share
The Company has adopted Statement of Financial Accounting Standards, or
SFAS, No. 128, entitled "Earnings per Share", 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.
As of June 30, 2002 and 2001, the Company had outstanding options,
restricted stock and warrants to purchase an aggregate of 39.4 million and 23.9
million shares of common stock, respectively, which were not included in the
calculation
5
of earnings per share for such periods, due to the anti-dilutive nature of
these instruments. In addition, the Company has $130.0 million 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 all periods presented and
were therefore excluded from the calculation.
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.
Net revenues for the six months ended June 30, 2002 and 2001 include $3,500
and $15,391, respectively, of cancellation fees associated with the resolution
of previous customer purchase commitments.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
on a first-in, first-out basis. The Company regularly reviews inventory values
and quantities on hand and writes down its 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. The Company's estimates of future product demand may prove to
be inaccurate, in which case it 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 the Company's inventory is determined to be undervalued, it
may have over-reported its costs of goods sold in previous periods and would be
required to recognize such additional operating income at the time of sale.
Therefore, although the Company makes every effort to ensure the accuracy of its
estimates of future product demand, any significant unanticipated changes in
demand or technological developments could have a significant impact on the
value of its inventory and its reported operating results.
Concentration of Risk and Customer Information
The Company's top ten customers accounted for $28,576 (62.4%) and $46,242
(79.1%) of the Company's net revenues during the three months ended June 30,
2002 and 2001, respectively. The Company's top ten customers accounted for
$75,314 (58.0%) and $129,918 (78.5%) of the Company's net revenues during the
six months ended June 30, 2002 and 2001, respectively.
At June 30, 2002 and December 31, 2001, five of the Company's customers
accounted for $18,209 (56.0%) and $16,537 (71.2%) of net accounts receivable,
respectively.
Recent Accounting Pronouncements
In July 2002, SFAS No. 146, entitled "Accounting for Costs Associated with
Exit or Disposal Activities" was issued, replacing EITF 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. Examples of costs covered by the standard include lease
termination costs and certain employee severance costs that are associated with
a restructuring, discontinued operation, plant closing or other exit or disposal
activity. SFAS No. 146 is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002.
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 and has been applied to the Company's accounting for
discontinued operations (See Note 6) and the intangible asset impairment charge
(See Note 7).
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.
6
SFAS No. 142 requires that goodwill no longer be subject to amortization,
with related charges to earnings, but instead be reviewed for impairment. The
Company adopted the statement and ceased amortization of goodwill related to
acquisitions, effective January 1, 2002. The adoption of SFAS No. 142 has
resulted in a reduction to amortization expense in the three and six months
ended June 30, 2002, as shown in the table below.
During the second quarter of 2002, the Company performed an impairment test
in accordance with the provisions of SFAS No. 142 and has recorded an intangible
asset impairment charge of $493,620 (See Note 7). The following is a
reconciliation of net income, and basic and diluted loss per share between the
amounts reported by the Company in the three and six months ended June 30, 2001
and the twelve months ended December 31, 2001 and 2000 and the adjusted amounts
reflecting this new accounting standard. No goodwill amortization was recorded
during the twelve months ended December 31, 1999.
Three Months Six Months Twelve Months Twelve Months
Ended Ended Ended Ended
June 30, 2001 June 30, 2001 December 31, 2001 December 31, 2000
------------- ------------- ----------------- -----------------
Net loss:
Reported loss before extraordinary item $ (102,820) $ (191,982) $ (377,521) $ (196,538)
Extraordinary item - - - 43,439
----------- ----------- ----------- -----------
Reported net loss (102,820) (191,982) (377,521) (153,099)
Goodwill amortization 42,883 85,767 171,477 123,347
----------- ----------- ----------- -----------
Adjusted net loss $ (59,937) $ (106,215) $ (206,044) $ (29,752)
=========== =========== =========== ===========
Basic and diluted loss per share:
Reported basic and diluted loss per share before
extraordinary item $ (1.42) $ (2.68) $ (4.98) $ (3.03)
Extraordinary item - - - 0.67
----------- ----------- ----------- -----------
Reported basic and diluted net loss per share $ (1.42) $ (2.68) $ (4.98) $ (2.36)
Goodwill amortization 0.59 1.20 2.26 1.90
----------- ----------- ----------- -----------
Adjusted basic and diluted loss per share before
extraordinary item $ (0.83) $ (1.48) $ (2.72) $ (1.13)
=========== =========== =========== ==========
Adjusted basic and diluted net loss per share $ (0.83) $ (1.48) $ (2,72) $ (0.46)
=========== =========== =========== ==========
2. Inventories, net
Inventories are stated at the lower of cost or market. Cost is determined
on a first-in, first-out basis. Inventories at June 30, 2002 and December 31,
2001 consisted of the following:
June 30, 2002 December 31, 2001
------------- -----------------
Raw Materials $ - $ 1,959
Work in process 9,692 6,099
Finished Goods 82,357 97,083
Reserve for excess and obsolete inventories (69,608) (74,444)
-------- --------
Inventories $22,441 $30,697
======= =======
The decrease in the Company's reserve for excess and obsolete inventories from
December 31, 2001 is attributed to the sale of previously reserved inventory,
net of the reclassification of a reserve for non-cancelable purchase commitments
for inventory.
7
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 1,959,999 shares of the Company's common stock. A portion of
the shares of common stock issued to the principals of Ficon were subject to
forfeiture if their employment ceased with the Company. The estimated fair value
of those shares, of $28,800, was recorded to deferred stock compensation as a
result of the guidance in EITF 95-8, entitled "Accounting for Contingent
Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase
Business Combination", and was being amortized over the three year vesting
period on a straight line basis. As of March 31, 2002, 710,000 shares had been
issued as a result of continued employment and 999,999 shares had been issued as
a result of the completion of development milestones. On March 31, 2002 the
Company agreed to accelerate vesting of the remaining 250,000 unvested shares
and as a result the Company recorded a non-cash charge during the first quarter
of 2002 of approximately $8,000, representing the unamortized deferred stock
compensation at the time the Company agreed to the acceleration. No incremental
charge was recorded as the fair market value of the Company's stock on March 31,
2002 was below the fair market value on the date the deferred stock compensation
was recorded.
4. Income Taxes
The Company recorded a current provision for income taxes of $0 and $260
for the three and six months ended June 30, 2002. The provision reflects an
effective tax rate of 0.0% for the three and six months ended June 30, 2002. The
difference between the effective rate and the statutory rate of 35.0% relates
primarily to permanent differences resulting from the Company's prior
acquisitions and changes in the valuation allowance. The Company has provided a
valuation allowance on certain of its deferred tax assets because of uncertainty
regarding their realizability. As of June 30, 2002, deferred tax assets are
offset either by deferred tax liabilities or a valuation allowance.
The Company recorded a benefit for income taxes of $343 and $3,391 for the
three and six months ended June 30, 2001. For the three months ended June 30,
2001, this benefit is comprised of a deferred expense of $4,335, net of a
current benefit of $4,678. For the six months ended June 30, 2001, this benefit
is comprised of a deferred benefit of $6,421, net of a current provision of
$3,030. The benefit reflects an effective tax rate of 0.3% and 1.7% for the
three and six months ended June 30, 2001. The differences between the effective
rate and the statutory rate of 35.0% relates primarily to permanent differences
resulting from non-deductible goodwill, and changes in the valuation allowance.
The benefit for income taxes excludes current tax benefits related to the
exercise of stock options credited directly to stockholders' equity of $1,546
during the six months ended June 30, 2001.
5. Restructuring and Reorganization Liabilities
In connection with the merger with Virata Corporation ("Virata"), the
Company began to formulate a reorganization and restructuring plan (the
"Reorganization Plan"), which consisted primarily of eliminating redundant
positions and consolidating its worldwide facilities. 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 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. 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
Reorganization Plan.
The estimated costs related to the Reorganization Plan, which consists of
Virata facilities consolidation and the related impact on the Virata outstanding
real estate leases and Virata relocations and workforce reductions, is as
follows:
December 31, 2001 June 30, 2002
Reorganization 2002 Reorganization
Liability Payments Liability
---------------------------------------------
Workforce related $14,524 ($3,528) $10,996
Facilities charges 16,318 (814) 15,504
Other charges 900 (466) 434
---------- -------- -------
Total $31,742 ($4,808) $26,934
========== ======== =======
8
As a result of the Reorganization Plan, approximately 200 employees of
Virata will either relocate or be part of an involuntary 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
affected 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 $16,318. 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.
During the second quarter of 2001, the Company realigned its operating cost
structure, which resulted in restructuring and other charges of $44,752 (the
"2001 Restructuring Plan"). These charges primarily consisted of costs related
to facilities consolidation and the related impact on outstanding real estate
leases and workforce reductions.
The workforce reductions resulted in the involuntary reduction of
approximately 100 employees or approximately 12% of the Company's overall
workforce and included employees across all disciplines and geographic regions.
Substantially all of the affected employees ceased employment with the Company
prior to June 30, 2001. The workforce reduction charge, of $3,672, was based
upon estimates of the severance and fringe benefits for the affected employees.
All of the payments related to the workforce reduction have been made as of June
30, 2002.
As a result of the reduction in the Company's workforce, it consolidated
its use of facilities, which had been leased in anticipation of continued
short-term growth, and is 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, the Company has estimated its 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 ten years
in length.
The remaining $4,330 consisted primarily of the write-off of certain
investments which the Company deemed to have no future value.
The table below presents the liabilities associated with the 2001
Restructuring Plan as of December 31, 2001 and June 30, 2002, including payments
and adjustments made during the six months ended June 30, 2002, and additional
restructuring charges recorded during the six months ended June 30, 2002 (the
"Second Quarter 2002 Restructuring Plan"):
December 31, 2001 Second Quarter June 30, 2002
Restructuring Cash 2002 Restructuring Restructuring
Liability Reclassification Payments Charge Liability
----------------- ---------------- -------- ------------------ -------------
Workforce reduction $ 1,827 $ -- $(3,217) $ 1,950 $ 560
Facilities consolidation 32,231 (7,044) (2,617) 13,800 36,370
Other charges 774 -- -- -- 774
------- ------- ------- ------- -------
Total $34,832 $(7,044) $(5,834) $15,750 $37,704
======= ======= ======= ======= =======
During the first quarter of 2002, the Company reversed a portion of a
previously recorded facilities charge in the amount of approximately $1,500.
Additionally, the Company recorded $1,500 related to a facility closure which
was communicated during the quarter.
9
As a result of the Reorganization Plan, the Company recorded an additional
restructuring charge of $15,750 during the second quarter of 2002. These charges
primarily consisted of costs related to a facility closure and the related
impact on outstanding real estate leases and, to a lesser extent, workforce
reductions.
In July 2002, as a result of the Company's continued implementation of the
Reorganization Plan and efforts to realign its operating cost structure, the
Company announced additional involuntary workforce reductions. (See Note 11)
6. Discontinued Operations
During the second quarter of 2002, management of the Company committed to a
plan to dispose of its video compression, voice algorithm and EmWeb businesses
(the "Discontinued Businesses"). The Discontinued Businesses meet the component
of an entity criteria, as defined in SFAS No. 144. As prescribed by SFAS No.
144, the results of the Discontinued Businesses, including the loss on sale of
the video compression business, have been presented separately in the Company's
Statements of Operations and the assets and liabilities of the Discontinued
Businesses have been presented separately on the Company's Balance Sheets, for
all periods presented.
The results of discontinued operations, for the periods presented, are as
follows:
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
------------- ------------- ------------- -------------
Net loss from operations of
businesses
discontinued/held for sale:
Video Compression $ (2,366) $ (833) $ (3,168) $ (1,694)
EmWeb (443) - (871) -
Voice Algorithm (547) - (997) -
------------- ------------- ------------- -------------
Net loss from operations
businesses
discontinued/held for
sale (3,356) (833) (5,036) (1,694)
Net Loss on sale of Video
Compression business (3,887) - (3,887) -
------------- ------------- ------------- -------------
Net loss from
discontinued
operations $ (7,243) $ (833) $ (8,923) $ (1,694)
============= ============= ============= =============
Revenues related to the Discontinued Businesses, for the periods presented,
are as follows:
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
------------- ------------- ------------- -------------
Revenues:
Video Compression $2,033 $1,793 $4,002 $3,061
EmWeb 165 - 443 -
Voice Algorithm 144 - 520 -
------------- ------------- ------------- -------------
Total Revenues $2,342 $1,793 $4,965 $3,061
============= ============= ============= =============
On June 25, 2002, the Company completed the sale of its video compression
business to Conexant Systems, Inc. ("Conexant") for $21,000 in notes receivable
and 1.25 million shares of Conexant common stock, valued for purposes of the
sale transaction at $12 per share. If Conexant's common stock does not reach
such minimum stock price by September 30, 2003, then Conexant is required to pay
the Company the difference in cash. Additional contingent cash payments may be
10
made by Conexant to the Company based upon the future performance of the video
compression business. As of June 30, 2002, the Company has a $21,000 note
receivable from Conexant and a $15,000 equity investment in Conexant, which has
been included in other current assets on the Company's Balance Sheet. The note
receivable has been collected by the Company subsequent to June 30, 2002.
Pursuant to SFAS No. 142, $32,100 of goodwill was allocated to the video
compression business and included in the loss on sale of $3,887. The allocation
of goodwill was based on the relative fair values of the video compression
business and the Company.
7. Intangible Asset Impairment Charge
As a result of the sale of its video compression business and due to the
significant negative industry and economic trends affecting both the Company's
current operations and expected future sales as well as the general decline in
valuation of technology company stocks, including the valuation of the Company's
stock, the Company performed an assessment of the carrying value of the
Company's long-lived assets to be held and used, including significant amounts
of goodwill and other intangible assets recorded in connection with its various
acquisitions. The assessment was performed pursuant to SFAS No. 144 and SFAS No.
142. As a result, the Company recorded a charge of $493,620 to reduce goodwill
and other intangible assets during the three months ended June 30, 2002, based
upon the amount by which the carrying amount of these assets exceeded their fair
value. Of the total charge, $458,300 relates to goodwill and $35,320 relates to
other identifiable intangible assets. The charge is included within the caption
"Impairment of goodwill and other acquired intangible assets" on the Company's
Statements of Operations. Fair value was determined based on market value,
including a review of the discounted future cash flows.
8. Treasury Stock
On June 19, 2002, the Company's Board of Directors authorized the
repurchase of up to $100 million of its common stock. Purchases may be made from
time to time on the open market or in privately negotiated transactions. The
timing and amount of any shares repurchased will be determined by the Company,
based on its evaluation of market conditions, applicable legal requirements and
other factors. The stock repurchase program is expected to be funded using the
Company's available working capital. As of June 30, 2002, the Company
repurchased 1.9 million shares at an average price per share of $3.53, or
$6,716. As of August 9, 2002, the Company repurchased 9.5 million shares at an
average price per share of $3.36 or $31,922.
The Company records its repurchases of stock based on the trade date and
has funded $504 through June 30, 2002. The remaining $6,213 recorded in treasury
stock as of June 30, 2002 was paid by the Company in July of 2002.
9. Stockholder's Rights Agreement
The Company adopted a Stockholder Rights Plan on July 2, 2002 and declared
a nontaxable dividend of one "right" on each outstanding share of the Company's
common stock to stockholders of record as of July 15, 2002. The rights plan is
designed to enable stockholders to receive fair and equal treatment in any
proposed takeover of the Company and to safeguard against two-tiered tender
offers, open market accumulations and other abusive tactics to gain control of
the Company. The rights plan was not adopted in response to any effort to
acquire control of the Company. Generally, should any person or entity become
the beneficial owner of 15% or more of the Company's outstanding common stock
(with the exception of those persons who hold 15% or more of the Company's
common stock, or securities convertible into 15% or more of the Company's common
stock, on July 15, 2002), each right (other than those held by that new 15%
stockholder) would be exercisable to purchase that number of shares of the
Company's common stock having at that time a market value equal to two times the
then current exercise price (initially $35.00). These provisions, among others,
are intended to encourage any potential acquirer of 15% or more of the Company's
outstanding common stock to negotiate with the Company's Board of Directors.
Until the rights become exercisable, they will trade as a unit with the
Company's common stock and are redeemable at a price of $.001 per right at the
Board of Directors' discretion. The Board of Directors may amend the terms of
the rights at any time without the consent of the holders, with certain
exceptions. Unless otherwise extended by the Board of Directors or previously
triggered, the rights will expire on July 5, 2012.
11
10. Supplemental non-cash disclosures
During the six months ended June 30, 2002, the Company sold the assets and
liabilities of its video compression business, the loss on sale of $3,887 was
determined as follows:
Purchase price:
Note receivable from Conexant. $21,000
Conexant common stock and minimum price guarantee 15,000
--------
Total purchase price $36,000
Net book value of assets and liabilities sold (5,537)
Allocation of goodwill to Video (32,100)
Accrued transaction costs (2,250)
--------
Net loss on sale ($3,887)
========
11. Subsequent Event
In July 2002, as a result of the Company's continued implementation of the
Reorganization Plan and efforts to realign its operating cost structure, the
Company announced additional involuntary workforce reductions. The initiative
consists of the involuntary reductions of approximately 200 employees or
approximately 20% of the Company's worldwide workforce. The involuntary
workforce reduction included employees across all disciplines and geographic
regions. The Company expects to record a restructuring charge in the second half
of 2002 in the range of $5,000 to $10,000. The Reorganization Plan is expected
to be fully implemented by the end of the Company's fourth quarter ending
December 31, 2002.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 difference include,
but are not limited to, the general slowdown in spending in the
telecommunications industry, customer implementation plans, risks of price
competition among DSL chip set suppliers, risks of customer loss or decreases in
purchases by significant customers, risks of dependence upon third-party
suppliers, risks of integrating acquisitions (including the Virata merger),
risks due to rapid changes in the market for DSL chip sets, market acceptance of
new products, ability of leading equipment manufacturers to incorporate our
products into their own, ability of telecommunications service providers to
market and sell DSL services, uncertainties concerning the impact of competitive
products, risks due to limited protection of our intellectual property,
uncertainties concerning continued service of our key employees, risk of
operating in international markets and general market, economic, regulatory and
business conditions and other risk factors described herein or included in other
reports and filings made with the Securities and Exchange Commission. 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.
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.
The following table presents our unaudited results as a percentage of net
revenues for the three months and six months ended June 30, 2002 and 2001. Our
results of operations are reported as a single business segment.
12
For the Three Months For the Six Months
Ended June 30 Ended June 30
2002 2001 2002 2001
------------------ -------------------
Net product revenues 100.0% 73.7% 97.3% 90.7%
Cancellation revenues - 26.3% 2.7% 9.3%
----- ----- ----- -----
Total net revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales related to net product
revenues 50.0% 35.8% 46.3% 40.0%
Cost of sales related to
cancellation revenues - 1.8% - 0.6%
Cost of sales - provision for excess
and obsolete inventories - - - 29.6%
----- ----- ----- -----
Gross profit 50.0% 62.4% 53.7% 29.8%
----- ----- ----- -----
Operating expenses:
Research and development, including
non-cash compensation of 11.8% and
16.0% for the three and six months
ended June 2002, respectively, and 8.7%
and 7.0% for the three and six months
ended June 30, 2001, respectively 82.2% 54.8% 69.1% 44.2%
Selling, general and administrative,
including non-cash compensation of 1.3%
and 1.1%, for the three months and six
months ended June 30, 2002, respectively,
and 1.0% and 1.1% for the three and six
months ended June 30, 2001, respectively 28.6% 17.1% 21.9% 14.8%
Restructuring and other charges 34.4% 76.5% 12.1% 27.1%
Amortization of intangible assets 20.9% 89.0% 16.7% 61.4%
Impairment of goodwill and other
acquired intangible assets 1,077.8% - 380.2% -
-------- ------ ------ ------
Total operating expenses 1,243.9% 237.4% 500.0% 147.5%
-------- ------ ------ ------
Loss from continuing operations (1,193.9%) (175.0%) (446.3%) (117.7%)
Interest income, net (3.9%) (0.1%) (2.9%) (0.7%)
Foreign exchange loss - - - -
--------- ------- ------- -------
Loss from continuing operations
before provision (benefit) for
income taxes (1,190.0%) (174.9%) (443.4%) (117.0%)
Provision (benefit) for income taxes - (0.6%) 0.2% (2.0%)
--------- ------- ------- -------
Loss from continuing operations (1,190.0%) (174.3%) (443.6%) (115.0%)
========= ======= ======= =======
13
Results of Operations for the three months ended June 30, 2002 and 2001
Net Revenues. Our net product revenues increased by 6.3% to $45.8 million
in the three months ended June 30, 2002 from $43.1 million in the three months
ended June 30, 2001. Net revenues decreased 21.7% to $45.8 million in the three
months ended June 30, 2002 from $58.5 million in the three months ended June 30,
2001, primarily as a result of the $15.4 million of cancellation revenues in the
previous years' quarter.
Cost of Sales and Gross Profit. Our gross profit decreased 37.3% to $22.9
million in the three months ended June 30 2002, from $36.5 million for the three
months ended June 30, 2001. Our gross profit percentage was 50.0% and 62.4% in
the three months ended June 30, 2002 and 2001, respectively. The decrease in
gross profit in the second quarter of 2002 as compared to the second quarter of
2001, is primarily related to the impact of the cancellation revenues recorded
during the second quarter of 2001. Gross profit as a percentage of net product
revenues decreased to 50.0% in the three months ended June 30, 2002 from 51.5%
in the three months ended June 30, 2001. This decrease reflects higher average
units costs for products sold from inventory and lower average selling prices,
offset by the sale of inventory which was previously reserved during the three
months ended June 30, 2002. Excluding $6.5 million of revenue from the sale of
products previously reserved, our gross profit percentage related to net product
revenues was 41.6% for the three months ended June 30, 2002. 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.
Research and Development. Research and development expenditures are
comprised primarily of salaries and related expenses of employees engaged in
research, design and development activities. They also include related supplies,
license fees for acquired technologies used in research and development,
equipment expenses and depreciation and amortization. Our research and
development expenses increased 17.5% to $37.7 million in the three months ended
June 30, 2002 from $32.0 million in the three months ended June 30, 2001. The
increase in dollars is primarily attributable to our merger with Virata.
Research and development expenditures for the three months ended June 30, 2002
and 2001 includes $5.4 million and $5.1 million, respectively, of non-cash
compensation, as we exchanged our common stock for common stock held by employee
principals of an acquired entity which was considered compensation. We also
granted certain employees stock options at less than fair market value. The
deferred stock compensation recorded is being amortized over periods ranging
from six months to four years. Excluding the non-cash compensation, research and
development expenditures increased 19.6%. Research and development expenses
represented 82.2% (70.4 % excluding non-cash compensation) and 54.8% (46.1 %
excluding non-cash compensation) of total net revenues for the three months
ended June 30, 2002 and 2001,
14
respectively. The increase in research and development expense as a
percentage of total net revenues was due to the lower net revenues in the second
quarter of 2002. We expect our research and development expenses will decrease
from the second quarter of 2002 as a result of the effects of our reorganization
and restructuring plan.
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 increased 30.5% to $13.1 million
in the three months ended June 30, 2002 from $10.0 million in the three months
ended June 30, 2001. The increase in dollars is primarily attributable to our
merger with Virata. Selling, general and administrative expenses for the three
months ended June 30, 2002 and 2001 includes $0.6 million and $0.6 million,
respectively, of non-cash compensation, as we exchanged our common stock for
common stock held by employee principals of an acquired entity which was
considered compensation. We also granted certain employees stock options at less
than fair market value. Deferred stock compensation recorded is being amortized
over periods ranging from six months to four years. Excluding non-cash
compensation, selling, general and administrative expenses increased 31.9%.
Selling, general and administrative expense represented 28.6% (27.3% excluding
non-cash compensation) and 17.1% (16.2% excluding non-cash compensation) of
total net revenues for the three months ended June 30, 2002 and 2001,
respectively. The increase in the percentage of selling, general and
administrative expense as a percentage of total net revenues was due to the
lower net revenues in the second quarter of 2002. We expect our selling, general
and administrative expenses will decrease from the second quarter of 2002 as a
result of the effects of our reorganization and restructuring plan.
Amortization of Intangible Assets. As a result of our acquisitions, we have
recorded intangible assets that are being amortized on a straight-line basis
over their estimated useful lives. The decrease in dollar amount and percentage
of amortization expense is the result of the implementation of SFAS 142,
entitled "Goodwill and Other Intangible Assets". Pursuant to SFAS 142, goodwill
is no longer subject to amortization.
Restructuring and other charges. During the second quarter of 2002, we
recorded restructuring and other charges of $15.8 million. These charges
primarily consisted of costs related to a facility closure and the related
impact on outstanding real estate leases and to a lesser extent workforce
reductions. During the second quarter of 2001, we realigned our operating cost
structure, which resulted in restructuring and other charges of $44.8 million.
These charges primarily consisted of costs related to facilities consolidation
and the related impact on outstanding real estate leases and workforce
reductions. In July 2002, we announced additional involuntary workforce
reductions as part of our overall reorganization plan and our continued efforts
to realign our operating cost structure resulting from the merger with Virata
Corporation. We expect to record a restructuring charge in the second half of
2002 in the range of $5.0 million to $10.0 million.
Impairment of goodwill and other acquired intangible assets. As a result of
the sale of our video compression business and due to the significant negative
industry and economic trends affecting both our current operations and expected
future sales as well as the general decline in the valuations of technology
company stocks, including our own stock, we performed an assessment of the
carrying value of our long-lived assets to be held and used, including
significant amounts of goodwill and other intangible assets recorded in
connection with our various acquisitions. The assessment was performed pursuant
to SFAS No. 144 and SFAS No. 142. As a result, we recorded a charge of $493.6
million to reduce goodwill and other intangible assets during the three months
ended June 30, 2002, based upon the amount by which the carrying amount of these
assets exceeded their fair value. Of the total charge, $458.3 million relates to
goodwill and $35.3 million relates to other identifiable intangible assets. The
charge is included within the caption "Impairment of goodwill and other acquired
intangible assets" on our Statements of Operations. Fair value was determined
based on discounted future cash flows.
Interest Income, net. Interest income for the three months ended June 30
2002 was $3.9 million, offset by interest expense of $2.1 million, resulting in
net interest income of $1.8 million. Net interest income for the three months
ended June 30, 2001 was $0.1 million, consisting of interest income of $1.7
million, offset by interest expense of $1.6 million. The increase in net
interest income is attributable to the cash and investments acquired as a result
of our merger with Virata.
Provision (Benefit) for Income Taxes. No provision or benefit for income
taxes was recorded during the three months ended June 30, 2002. The income tax
benefit of $0.3 million recorded during the second quarter of 2001, represents a
benefit of 0.0%. The difference between the effective rate and the statutory
rate of 35% relates primarily to permanent differences resulting from
non-deductible goodwill, and changes in the valuation allowance.
Discontinued Operations. During the second quarter of 2002, we committed to
a plan to dispose of our video compression, voice algorithm and EmWeb businesses
(the "Discontinued Businesses"). The Discontinued Businesses meet the component
of an entity criteria, as defined in SFAS No. 144. As prescribed by SFAS No.
144, the results of the Discontinued Businesses, including the loss on sale of
the video compression business, have been presented separately in our Statements
of Operations and the assets and liabilities of the Discontinued Businesses have
been presented separately on our Balance Sheets, for all periods presented.
15
The results of discontinued operations, for the periods presented, are as
follows:
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
------------- -------------- ------------- -------------
Net loss from
operations of
businesses
discontinued/held
for sale:
Video Compression ($2,366) ($833) ($3,168) ($1,694)
EmWeb (443) - (871) -
Voice Algorithm (547) - (997) -
------------- -------------- ------------ -----------
Net loss from
operations of
businesses
discontinued/held
for sale ($3,356) ($833) ($5,036) ($1,694)
Net Loss on sale
of Video Compression
business (3,887) - (3,887) -
------------- ------------ ------------ -----------
Net loss from
discontinued
operations ($7,243) ($833) ($8,923) ($1,694)
============= ============ ============ ===========
Revenues related to the Discontinued Businesses, for the periods presented, are
as follows:
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2002 June 30, 2002 June 30, 2002 June 30, 2001
------------- ------------- ------------- -------------
Revenues:
Video Compression $2,033 $1,793 $4,002 $3,061
EmWeb 165 - 443 -
Voice Algorithm 144 - 520 -
------------- ------------- ------------- -------------
Total Revenues $2,342 $1,793 $4,965 $3,061
============= ============= ============= =============
On June 25, 2002, we completed the sale of our video compression business
to Conexant Systems, Inc. ("Conexant") for $21.0 million in notes receivable and
1.25 million shares of Conexant common stock, valued for purposes of the sale
transaction at $12 per share. If Conexant's common stock does not reach such
minimum stock price by September 30, 2003, then Conexant is required to pay us
the difference in cash. Additional contingent cash payments may be made by
Conexant to us based upon the future performance of the video compression
business. As of June 30, 2002, we have a $21.0 million note receivable from
Conexant and a $15.0 million equity investment in Conexant, which has been
included in other current assets on our Balance Sheet. The note receivable was
collected by us subsequent to June 30, 2002.
Pursuant to SFAS No. 142, $32.1 million of goodwill was allocated to the
video compression business and included in the loss on sale of $3.9 million. The
allocation of goodwill was based on the relative fair values of the video
compression business and our company.
Results of Operations for the six months ended June 30, 2002 and 2001
Net Revenues. Our net product revenues decreased 15.8% to $126.3 million in
the six months ended June 30, 2002 from $150.0 million in the six months ended
June 30, 2001. Net revenues decreased 21.5% to $129.8 million in the six months
ended June 30, 2002 from $165.4 million in the six months ended June 30, 2001,
primarily as a result of the $15.4 million of cancellation revenues in the
previous year and lower product revenues in the six months ended June 30, 2002.
16
Cost of Sales and Gross Profit. Our gross profit increased 41.4% to $69.7
million in the six months ended June 30, 2002 from $49.3 million in the six
months ended June 30 2001. Our gross profit percentage was 53.7% and 29.8% in
the six months ended June 30, 2002 and 2001, respectively. The increase in gross
profit from the six months ended June 30, 2001 is primarily related to the
impact of the provision for excess and obsolete inventory recorded during the
six months ended June 30, 2001, offset by cancellation revenues recorded. Gross
profit as a percentage of net product revenues, excluding the provision for
excess and obsolete inventory, decreased to 52.4% in the six months ended June
30, 2002 from 55.9% in the six months ended June 30, 2001. This decrease
reflects higher average units costs for products sold from inventory and lower
average selling prices, offset by the sale of inventory that was previously
reserved during the six months ended June 30, 2002. Excluding $8.1 million of
revenue from the sale of product previously reserved, our gross profit
percentage related to net product revenues was 49.1% for the six months ended
June 30, 2002. 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.
Research and Development. Research and development expenditures are
comprised primarily of salaries and related expenses of employees engaged in
research, design and development activities. They also include related supplies,
license fees for acquired technologies used in research and development,
equipment expenses and depreciation and amortization. Our research and
development expenses increased 22.7% to $89.8 million in the six months ended
June 30, 2002 from $73.2 million in the six months ended June 30, 2001. The
increase in dollars is primarily attributable to the $8.0 million non-cash
charge described below and our merger with Virata. Research and development
expenditures for the six months ended June 30, 2002 and 2001 includes $20.8
million and $11.7 million, respectively, of non-cash compensation, as we
exchanged our common stock for common stock held by employee principals of an
acquired entity which was considered compensation. We also granted certain
employees stock options at less than fair market value. The deferred stock
compensation recorded is being amortized over periods ranging from six months to
four years. The increase in non-cash compensation resulted from an agreement to
accelerate vesting of the remaining unvested shares issued to certain principals
of Ficon Technologies, which resulted in a non-cash charge during the first
quarter of 2002 of approximately $8.0 million, representing the unamortized
deferred stock compensation at the time we agreed to the acceleration. Excluding
the non-cash compensation, research and development expenditures increased
12.1%. Research and development expenses represented 69.1% (53.1 % excluding
non-cash compensation) and 44.2% (37.2 % excluding non-cash compensation) of
total net revenues for the six months ended June 30, 2002 and 2001,
respectively. The increase in research and development expense as a percentage
of total net revenues was due to the $8.0 million non-cash charge described
above and lower net revenues in the six months ended June 30, 2002.
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 increased 15.3% to $28.3 in the
six months ended June 30, 2002 from $24.6 million for the six months ended June
30, 2001. The increase in dollars is primarily attributable to our merger with
Virata. Selling, general and administrative expenses for the six months ended
June 30, 2002 and 2001 includes $1.4 million and $1.8 million, respectively, of
non-cash compensation, as we exchanged our common stock for common stock held by
employee principals of an acquired entity which was considered compensation. We
also granted certain employees stock options at less than fair market value.
Deferred stock compensation recorded is being amortized over periods ranging
from six months to four years. Excluding non-cash compensation, selling, general
and administrative expenses increased 17.9%. Selling, general and administrative
expense represented 21.9% (20.7% excluding non-cash compensation) and 14.8%
(13.7% excluding non-cash compensation) of total net revenues for the six months
ended June 30, 2002 and 2001, respectively. The increase in the percentage of
selling, general and administrative expense as a percentage of total net
revenues was due to the lower net revenues in the six months ended June 30,
2002. We expect our selling, general and administrative expenses will decrease
as a result of the effects of our reorganization and restructuring plan.
Amortization of Intangible Assets. As a result of our acquisitions, we have
recorded intangible assets that are being amortized on a straight-line basis
over their estimated useful lives. The decrease in dollar amount and percentage
of amortization expense is the result of the implementation of SFAS 142,
entitled "Goodwill and Other Intangible Assets". Pursuant to SFAS 142, goodwill
is no longer subject to amortization.
Restructuring and other charges. During the second quarter of 2002, we
recorded restructuring and other charges of $15.8 million. These charges
primarily consisted of costs related to a facility closure and the related
impact on outstanding real estate leases and to a lesser extent workforce
reductions. During the second quarter of 2001, we realigned our operating cost
structure, which resulted in restructuring and other charges of $44.8 million.
These charges primarily consisted of costs related to facilities consolidation
and the related impact on outstanding real estate leases and workforce
reductions. In July 2002, we announced additional involuntary workforce
reductions as part of our continued efforts to realign our operating cost
structure resulting from the merger with Virata Corporation. We expect to record
a restructuring charge in the second half of 2002 in the range of $5.0 million
to $10.0 million.
17
Impairment of goodwill and other acquired intangible assets. As a result of
the sale of the video compression business and due to the significant negative
industry and economic trends affecting both our current operations and expected
future sales as well as the general decline in valuation of technology company
stocks, including our own, we performed an assessment of the carrying value of
our long-lived assets to be held and used, including significant amounts of
goodwill and other intangible assets recorded in connection with its various
acquisitions. The assessment was performed pursuant to SFAS No. 144 and SFAS No.
142. As a result, we recorded a charge of $493.6 million to reduce goodwill and
other intangible assets during the three months ended June 30, 2002, based upon
the amount by which the carrying amount of these assets exceeded their fair
value. Of the total charge, $458.3 million relates to goodwill and $35.3 million
relates to other identifiable intangible assets. The charge is included within
the caption "Impairment of goodwill and other acquired intangible assets" on our
Statements of Operations. Fair value was determined based on discounted future
cash flows.
Interest Income, net. Interest income for the six months ended June 30 2002
was $7.8 million, offset by interest expense of $4.1 million, resulting in net
interest income of $3.7 million. Net interest income for the six months ended
June 30, 2001 was $1.1 million, consisting of interest income of $3.0 million,
offset by interest expense of $1.9 million. The increase in net interest income
is attributable to the cash and investments acquired as a result of our merger
with Virata.
Provision (Benefit) for Income Taxes. The income tax provision of $0.3
million recognized during the six months ended June 30, 2002, represents a
provision of 0.0% of the loss from continuing operations before provision for
income taxes. The effective rate is effected by permanent differences, which
resulted from our prior acquisitions, and changes in the valuation allowance.
The income tax benefit of $3.4 million recorded during the six months ended June
30, 2001, represents a benefit of 2.0%. The difference between the effective
rate and the statutory rate of 35% relates primarily to permanent differences
resulting from non-deductible goodwill, and changes in the valuation allowance.
Discontinued Operations. During the second quarter of 2002, we committed to
a plan to dispose of the Discontinued Businesses. The Discontinued Businesses
meet the component of an entity criteria, as defined in SFAS No. 144. As
prescribed by SFAS No. 144, the results of the Discontinued Businesses,
including the loss on sale of our video compression business, have been
presented separately in our Statements of Operations. Our discontinued
operations were $8.9 million and $1.7 million for the six months ended June 30,
2002 and 2001, respectively. The loss on sale of our video compression business
was $3.9 million.
Liquidity and Capital Resources
Total assets at June 30, 2002 were $864.4 million, a decrease of $586.6
million, or 40.4% from December 31, 2001 total assets of $1,451.0 million. The
decrease from December 31, 2001 is primarily a result of the loss incurred for
the six months ended June 30, 2002, including the impairment of goodwill and
other intangible assets of $493.6 million.
As of June 30, 2002, we had $610.3 million in cash and cash equivalents and
investments, including investments with original maturity dates in excess of 12
months, and working capital of $406.5 million. At December 31, 2001, we had
$679.5 million in cash and cash equivalents and investments, including
investments with original maturity dates in excess of 12 months, and working
capital of $518.0 million.
Net cash used in operating activities was $29.4 million in the six months
ended June 30, 2002, compared to net cash used in operating activities of $16.6
million in the six months ended June 30, 2001. The increase was primarily due to
an increase in our loss from operations during the six months ended June 30,
2002.
Net cash used in investing activities was $10.6 million during the six
months ended June 30, 2002. The net cash used was related to purchases of
property and equipment of $39.4 million, which included $34.8 million related to
the purchase of the Old Bridge, New Jersey facility, payments of $4.8 million
related to our merger with Virata, net of proceeds from marketable securities of
$33.6 million. Net cash used in investing activities during the six months ended
June 30, 2001 was $19.2 million, consisting primarily of net cash used in
purchasing marketable securities and property and equipment.
Cash flows provided by financing activities were $3.8 million and $129.2
million during the six months ended June 30, 2002 and 2001, respectively. The
significant decrease from the six months ended June 30, 2002 relates to the
impact of the proceeds from issuance of convertible subordinated notes, net of
offering costs. The impact of our treasury stock program through June 30, 2002
was approximately $0.5 million. This amount has been reflected as an outflow of
cash in the six months ended June 30, 2002. In aggregate, we have repurchased
9.5 million shares or $31.9 million through August 9, 2002.
18
We believe that our current cash and investments together with internally
generated funds, will be adequate to satisfy our anticipated working capital and
capital expenditure needs for at least one year. While we do not currently
anticipate the need to raise additional funds in the foreseeable future, we may
seek to acquire or invest in additional businesses, products or technologies
which may require us to use our cash and investments. If, as a result of
acquisitions or investments in additional businesses, products or technologies,
we are required to raise additional funds, we cannot be certain that we will be
able to obtain additional financing on favorable terms, if at all.
Recent Accounting Pronouncements
In July 2002, SFAS No. 146, entitled "Accounting for Costs Associated with
Exit or Disposal Activities" was issued, replacing EITF 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. Examples of costs covered by the standard include lease
termination costs and certain employee severance costs that are associated with
a restructuring, discontinued operation, plant closing or other exit or disposal
activity. SFAS No. 146 is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002.
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 and has been applied to our accounting for
discontinued operations (See Note 6) and the intangible asset impairment charge
(See Note 7).
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
have adopted the statement and ceased amortization of goodwill related to
acquisitions, effective January 1, 2002. The adoption of SFAS No. 142 has
resulted in a reduction to amortization expense in the three and six months
ended June 30, 2002 of approximately $50.0 million and $100.0 million.
During the second quarter of 2002, we performed an impairment test in
accordance with the provisions of SFAS 142 and have recorded an intangible asset
impairment charge of $493.6 million (See Note 7). The following is a
reconciliation of net income, and basic and diluted loss per share between the
amounts reported by us in the three months ended March 31, 2002 and the adjusted
amounts reflecting this new accounting standard.
Three Months Six Months
Ended Ended
------------- -----------------
June 30, 2001 June 30, 2001
------------- -----------------
Net loss:
Reported net loss $(102,820) $(191,982)
Goodwill amortization 42,883 85,767
---------- ----------
Adjusted net loss $ (59,937) $(106,215)
========== ==========
Basic and diluted loss per share:
Reported basic and diluted loss per share $(1.42) $(2.68)
Goodwill amortization 0.59 1.20
--------- ---------
Adjusted basic and diluted loss per share $(0.83) $(1.48)
========= =========
19
Item 3. 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 June 30, 2002, 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.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
On June 12, 2002, GlobespanVirata held its Annual Meeting of Stockholders.
At that meeting, the stockholders approved (i) the election of all eight (8)
members of the board of directors and (ii) the ratification of the appointment
of PricewaterhouseCoopers LLP as the company's independent public accountants
for the fiscal year ending December 31, 2002. At the date of record, April 25,
2002, there were 140,955,122 shares outstanding and entitled to vote at the
meeting. The vote on such matters was as follows:
1. Election of Directors:
Total Vote for Total Vote Withheld Each Nominee
From Each Nominee
Armando Geday 110,577,901 17,300,553
Charles Cotton 124,444,922 3,433,532
Gary Bloom 127,067,113 811,341
James Coulter 126,365,090 1,513,364
Dipanjan Deb 127,046,027 832,425
Hermann Hauser 127,067,113 811,341
John Marren 126,351,087 1,527,367
Giuseppe Zocco 127,067,113 811,341
2. Appointment of PricewaterhouseCoopers LLP as the Company's independent public
accountants:
For 119,850,491
Against 6,109,930
Abstaining 548,032
20
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Number Description
- ------ -----------
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended June 30, 2002.
21
GLOBESPANVIRATA, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GLOBESPANVIRATA, INC.
Date: August 14, 2002 By: /s/ Robert McMullan
------------------------
Robert McMullan
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)