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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 September 29, 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 October
30, 2002 was 130,548,823.
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GlobespanVirata, Inc.
INDEX
Page No.
-------
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 29, 2002
and December 31, 2001...............................................2
Condensed Consolidated Statements of Operations for the Three
and Nine Months Ended September 29, 2002 and September 30, 2001.....3
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 29, 2002 and September 30, 2001.....................4
Notes to Condensed Consolidated Financial Statements...................5
Item 2. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations.................13
Item 3. Quantitative and Qualitative Disclosures About Market Risk......22
Item 4. Controls and Procedures.........................................22
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K.................................23
i
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
GlobespanVirata, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands)
September 29, December 31,
2002 2001
------------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 184,367 $ 269,586
Investments - marketable securities 174,161 297,575
Accounts receivable, less allowance for doubtful
accounts of $1,979 and $5,761, respectively 29,795 22,582
Inventories, net 24,102 30,697
Deferred income taxes 21,766 49,532
Assets related to businesses held for sale - 2,295
Prepaid expenses and other current assets 25,221 8,524
---------- ----------
Total current assets 459,412 680,791
Property and equipment, net 25,734 32,894
Facility held for sale 24,987 -
Intangible assets, net 48,306 611,960
Investments - marketable securities 195,647 112,315
Other assets 12,045 10,970
---------- ----------
Total assets $ 766,131 $1,448,930
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 27,317 $ 30,666
Restructuring and reorganization liabilities 52,642 66,015
Accrued expenses and other liabilities 29,441 38,443
Payroll and benefit related liabilities 17,140 20,941
Liabilities related to businesses held for sale - 1,414
Current portion of capital lease obligations 1,629 3,209
---------- ----------
Total current liabilities 128,169 160,688
Other long-term liabilities 2,846 3,144
Convertible subordinated note 130,000 130,000
Deferred income taxes 21,766 49,532
Capital lease obligations, less current portion 19 1,656
---------- ----------
Total liabilities 282,800 345,020
---------- ----------
Stockholders' equity
Preferred stock - -
Common stock 142 140
Treasury stock (39,711) -
Stock purchase warrants 1 1
Notes receivable from stock sales (5,177) (5,037)
Additional paid in capital 1,708,879 1,713,904
Deferred stock compensation (23,043) (61,227)
Accumulated deficit (1,160,133) (543,972)
Accumulated other comprehensive income 2,373 101
----------- ----------
Total stockholders' equity 483,331 1,103,910
----------- ----------
Total liabilities and stockholders' equity $ 766,131 $1,448,930
=========== ==========
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 Ended For The Nine Months Ended
September 29, September 30, September 29, September 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Net product revenues $ 47,391 $ 44,560 $ 174,238 $ 194,609
Cancellation revenues - - 3,500 15,391
------------ ------------ ------------ ------------
Net Revenues 47,391 44,560 177,738 210,000
Cost of sales 25,638 19,495 85,800 85,623
Cost of sales - Provision for excess and obsolete inventory - - - 48,967
Cost of sales related to cancellation revenues - - - 1,075
------------ ------------ ------------ ------------
Total cost of sales 25,638 19,495 85,800 135,665
------------ ------------ ------------ ------------
Gross profit 21,753 25,065 91,938 74,335
------------ ------------ ------------ ------------
Operating expenses:
Research and development (including non-cash compensation
of $3,796 and $24,618 for the three and nine months ended
September 29, 2002, respectively, and $5,427 and $17,092
for the three and nine months ended September 30, 2001,
respectively.) 32,858 28,542 124,142 101,695
Selling, general and administrative (including non-cash
compensation of $422 and $1,847 for the three and nine
months ended September 29, 2002, respectively, and $603
and $2,364 for the three and nine months ended September
30, 2001, respectively.) 11,382 8,901 39,677 33,446
Amortization of intangible assets 5,616 53,234 27,289 154,880
Restructuring and other charges 4,450 - 20,200 44,752
Impairment of goodwill and other acquired intangible assets - - 493,620 -
------------ ------------ ------------ ------------
Total operating expenses 54,306 90,677 704,928 334,773
------------ ------------ ------------ ------------
Loss from continuing operations (32,553) (65,612) (612,990) (260,438)
Interest income, net (1,337) 361 (5,053) (786)
Foreign exchange loss - - 38 -
------------ ------------ ------------ ------------
Loss from continuing operations before income taxes (31,216) (65,973) (607,975) (259,652)
Provision (benefit) for income taxes - (2,069) 260 (5,460)
------------ ------------ ------------ ------------
Net Loss from continuing operations (31,216) (63,904) (608,235) (254,192)
Discontinued Operations
Net loss from operations of discontinued businesses
(including net loss on the sale of the video compression - (1,399) (7,926) (3,093)
business of $3,887) ------------ ------------ ------------ ------------
Net Loss $ (31,216) $ (65,303) $ (616,161) $ (257,285)
============ ============ ============ ============
Other comprehensive (gain) loss:
Unrealized (gain) loss on marketable securities (747) - (1,522) -
Foreign currency translation (gain) loss (636) (167) (750) 157
------------ ------------ ------------ ------------
Comprehensive loss $ (29,833) $ (65,136) $ (613,889) $ (257,442)
============ ============ ============ ============
Basic and diluted loss per share:
Net loss from continuing operations $ (0.23) $ (0.87) $ (4.40) $ (3.52)
Net loss from discontinued operations - (0.02) (0.06) (0.04)
------------ ------------ ------------ ------------
Net Loss $ (0.23) $ (0.89) $ (4.46) $ (3.56)
============ ============ ============ ============
Weighted average shares of common stock outstanding
used in computing basic and diluted loss per share 133,701 73,066 138,134 72,215
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
3
GlobespanVirata, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
Nine Months Ended
Ended September
-------------------------------------
September 29, September 30,
2002 2001
-------------------------------------
Cash flow used in operating activities:
Net loss $ (616,161) $ (257,284)
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 11,404 41,503
Tax benefits from employee stock option plans - 367
Deferred income taxes - (6,385)
Non-cash compensation expense 26,465 19,382
Depreciation and amortization 12,982 11,843
Amortization of intangible assets (including amortization of $1,260 and
$1,890 related to discontinued operations for the nine months
ended September 29, 2002 and September 30, 2001, respectively) 28,550 156,770
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 (7,213) 33,730
(Increase) decrease in inventory 6,595 (46,568)
Increase in prepaids and other assets (1,927) (2,812)
Decrease in accounts payable (3,349) (13,867)
Decrease in accrued expenses and other liabilities (17,423) (4,661)
-------------- -------------
Net cash used in operating activities (62,570) (18,557)
-------------- -------------
Cash flow provided by (used in) investing activities:
Purchases of property and equipment (4,866) (8,054)
Purchase of facility (See Note 11) (34,902) -
Cash paid for accrued acquisition related costs (8,705) -
Proceeds from sale of intangible asset - 404
Cash received from the sale of the video compression business 21,000 -
Proceeds from sale/maturity of marketable securities 434,102 11,972
Purchases of marketable securities (394,020) (25,798)
------------ -------------
Net cash provided by (used in) investing activities 12,609 (21,476)
------------ -------------
Cash flow provided by (used in) 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 7,708 5,667
Proceeds from repayment of notes receivable - 238
Repurchase of common stock (39,711) -
Repayments of capital lease obligations (3,217) (2,768)
------------- -------------
Net cash provided by (used in) financing activities (35,220) 129,562
------------- -------------
Effect of exchange rates on cash and cash equivalents (38) 24
------------- -------------
Net increase (decrease) in cash and cash equivalents (85,219) 89,553
Cash and cash equivalents at beginning of period 269,586 88,489
------------- -------------
Cash and cash equivalents at end of period $ 184,367 $ 178,042
============= =============
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. Effective January 1,
2002, the Company ends its quarterly reporting periods on the last Sunday of the
third month of each quarter.
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.
5
As of September 29, 2002 and September 30, 2001, the Company had
outstanding options, restricted stock and warrants to purchase an aggregate of
44.8 million and 23.5 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
$130.0 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 nine months ended September 29, 2002 and
September 30, 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 $30,342 (64.0%) and
$33,503 (75.2%) of the Company's net revenues during the three months ended
September 29, 2002 and September 30, 2001, respectively. The Company's top ten
customers accounted for $99,399 (55.9%) and $152,958 (72.8%) of the Company's
net revenues during the nine months ended September 29, 2002 and September 30,
2001, respectively.
At September 29, 2002 and December 31, 2001, five of the Company's
customers accounted for $17,826 (59.8%) and $16,537 (71.2%) of net accounts
receivable, respectively. Approximately 50% of the $17,826 outstanding at
September 29, 2002 is due from customers from whom the Company has
collateralized payment through a letter of credit with a bank.
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
6
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.
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 nine months ended September 29, 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 nine months ended September 30,
2001, and the adjusted amounts reflecting this new accounting standard.
Three Months Nine Months
Ended Ended
September 30, September 30,
2001 2001
------------- -------------
Net loss:
Reported net loss (65,303) $(257,285)
Goodwill amortization 42,855 128,622
--------- ----------
Adjusted net loss $(22,448) $(128,663)
========= ==========
Basic and diluted loss per share:
Reported basic and diluted net loss per share $(.89) $(3.56)
Goodwill amortization $.58 $1.78
------ -------
Adjusted basic and diluted net loss per share $(.31) $(1.78)
====== =======
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 September 29, 2002 and
December 31, 2001 consisted of the following:
September 29, December 31,
2002 2001
------------- ------------
Raw Materials $ - $ 1,959
Work in process 6,316 6,099
Finished Goods 78,069 97,083
Reserve for excess and obsolete inventories (60,283) (74,444)
--------- --------
Inventories $24,102 $30,697
========= ========
The decrease in the Company's reserve for excess and obsolete inventories from
December 31, 2001 is primarily attributed to the sale of previously reserved
inventory of $16,283 during the nine months ended September 29, 2002, net of the
7
reclassification of a reserve for non-cancelable purchase commitments for
inventory of which the Company was required to take receipt.
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 accelerated the 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 compensation 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 nine months ended September 29, 2002. The provision
reflects an effective tax rate of 0.0% for the three and nine months ended
September 29, 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 September 29, 2002, deferred
tax assets are offset either by deferred tax liabilities or a valuation
allowance.
The Company recorded a benefit for income taxes of $2,100 and $5,500
for the three and nine months ended September 30, 2001. For the three months
ended September 30, 2001, this benefit is comprised of a deferred benefit of
$2,100. For the nine months ended September 30, 2001, this benefit is comprised
of a deferred benefit of $6,421, net of a current provision of $1,000. The
benefit reflects an effective tax rate of 3.1% and 2.1% for the three and nine
months ended September 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 $1,200 during the
three and nine months ended September 30, 2001.
5. Restructuring and Reorganization Liabilities
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:
8
December 31, 2001 September 29, 2002
Reorganization 2002 Reorganization
Liability Payments Adjustments Liability
-------------------------------------------------------------------------
Workforce related $ 14,524 ($6,503) $(2,750) $5,271
Facilities charges 16,318 (1,736) - 14,582
Other charges 900 (466) - 434
--------- -------- ------- -------
$ 31,742 ($8,705) $(2,750) $20,287
========= ======== ======== =======
As a result of the Reorganization Plan, approximately 200 employees of
Virata will either relocate or be part of an involuntary workforce 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 affected
employees. As of September 29, 2002, the Company paid $6,503 of these workforce
related charges. During the third quarter of 2002, the Company reduced its
estimated liability for workforce reduction related charges by $2,750 due to
lower than expected relocation costs. The adjustment was recorded as a reduction
to acquired intangible assets. Substantially all of the remaining liability of
$5,271 is expected to be paid by December 31, 2002.
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. There has been a decline in the real estate market in certain geographic
regions in which we acquired operating facility leases. The Company recorded a
liability of $16,318 for losses related to facilities it intends to sublease and
for 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. 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.
Restructuring Liabilities
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 were 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 long-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.
There was no net impact on the statement of operations for the
restructuring and other charges during the first quarter of 2002. However, the
Company recorded $1,500 related to an involuntary workforce reduction, which was
offset by the reversal of $1,500 of facility charges. In February of 2002, the
Company purchased a 200,000 square foot facility located in Old Bridge, NJ for
approximately $30,000. Prior to the acquisition of the facility, the Company had
an operating lease related to this facility. In conjunction with the purchase of
the facility the Company paid the landlord approximately $5,000 to terminate the
lease commitment. The Company had recorded a $14,500 charge in the 2001
Restructuring Plan related to the expected losses from this non-cancelable lease
commitment. At the time of the purchase, the Company intended to move its
headquarters from Red Bank, New Jersey to Old Bridge, New Jersey when the
construction related to the interior
9
of the facility was completed. During the first quarter of 2002, the
Company reversed the unused portion of the previously recorded reserve related
to the Old Bridge facility of $9,500 and recorded a reserve for losses related
to the non-cancelable lease commitment for the Company's facility in Red Bank of
$8,000.
During the second quarter of 2002, the Company recorded restructuring
and other charges of $15,750. These charges primarily related to a facility
closure and the related impact on outstanding real estate leases and leasehold
improvements, of $13,800 and workforce reductions of $1,950.
During the third quarter of 2002, the Company decided to maintain its
headquarters in Red Bank and sell the previously purchased Old Bridge facility.
The Company has classified the facility as an asset held for sale on its balance
sheet as of September 29, 2002 and recorded the asset at its fair value less
estimated costs of disposal. Total restructuring and other charges recorded in
the third quarter of 2002 was $4,450. These charges consisted of employee
severance related costs of $1,500, a net benefit resulting from the reversal of
previously recorded facility related charges of $1,500 and a $4,450 charge
related to the write-down of the Old Bridge facility to its estimated fair
value. The write-down of $4,450 during the third quarter of 2002 was included
within the restructuring and other charges on the Company's statements of
operations for the three and nine months ended September 29, 2002 (See Note 11).
The net benefit of $1,500 related to facilities consisted of the reversal of the
previously recorded reserve of approximately $8,000 related to the
non-cancelable lease on the Company's Red Bank facility. In addition, due to a
continued decline in the real estate markets in certain regions in which the
Company is pursuing subleases, the Company increased its estimated losses on
other non-cancelable lease commitments by $6,500, including $2,000 of leasehold
and other asset impairments.
The Reorganization Plan is expected to be fully implemented by
December 31, 2002 and the Company expects to record an additional restructuring
charge during the fourth quarter in the range of $3,000 to $5,000.
The table below presents the liabilities associated with the 2001
Restructuring Plan as of December 31, 2001 and September 29, 2002, including
payments and adjustments made during the nine months ended September 29, 2002,
and additional restructuring charges recorded during the nine months ended
September 29, 2002 (the "2002 Restructuring Charge"):
December 31, 2001 September 29, 2002
Restructuring 2002 Restructuring Non-Cash Cash Restructuring
Liability Charges Charges Payments Liability
-------------------------------------------------------------------------------------
Workforce reduction $ 1,827 $ 3,758 $ (650) $ (4,647) $ 288
Facilities consolidation 31,672 11,992 (2,992) (9,379) 31,293
Other charges 774 4,450 (4,450) - 774
-------- -------- -------- --------- ---------
Total charges $ 34,273 $ 20,200 $(8,092) $(14,026) $ 32,355
======== ======== ======== ========= =========
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 Company has determined that the voice algorithm business no longer
meets the probability criteria of SFAS No. 144 and therefore, in accordance with
SFAS No. 144, has included its results in operating expenses for all periods
presented. The Company will cease operations of this business during the fourth
quarter of 2002.
The results of discontinued operations, for the periods presented, are
as follows:
10
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 29, 2002 September 30, 2001 September 29, 2002 September 30, 2001
------------------ ------------------ ------------------ ------------------
Net loss from operations of
businesses discontinued/held
for sale:
Video $ - $ (1,399) $ (3,168) $ (3,093)
EmWeb - - (871) -
Voice Algorithm - - - -
------------ ------------ ------------ -----------
Net loss from operations of
businesses discontinued/held
for sale $ - $ (1,399) $ (4,039) $ (3,093)
- - (3,887) -
Net Loss on Sale ------------ ------------ ------------ -----------
Net loss from discontinued operations $ - $ (1,399) $ (7,926) $ (3,093)
============ ============ ============ ===========
Revenues related to the Discontinued Businesses, for the periods
presented, are as follows:
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended
September 29, 2002 September 30, 2001 September 29, 2002 September 30, 2001
------------------ ------------------ ------------------ ------------------
Revenues:
Video Compression $ - $ 1,454 $ 4,002 $ 4,515
EmWeb - - 443 -
---------- ---------- ---------- ----------
Total Revenues $ - $ 1,454 $ 4,445 $ 4,515
========== ========== ========== ==========
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 made by Conexant to the Company based upon the future performance of the
video compression business. As of September 29, 2002, the Company has an equity
investment in Conexant and a guarantee of the value of Conexant's stock price,
with a combined fair value of $15,000. This asset has been included in other
current assets on the Company's Balance Sheet. The note receivable of $21,000
was collected by the Company during the third quarter of 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"
11
on the Company's Statements of Operations. Fair value was determined based on
market value, including a review of the discounted future cash flows.
A reconciliation of the Company's intangible assets from December 31,
2001 to September 29, 2002 is as follows:
Intangible assets, net at December 31, 2001 $611,960
Amortization for the nine months period
ended September 29, 2002 ($28,550)
Intangible asset impairment charge, including
$37,152 recorded as part of the net loss on
sale of the video compression business ($530,772)
Other adjustments ($ 4,332)
---------
Intangible assets, net at September 29, 2002 $ 48,306
========
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 September 29, 2002, the Company
repurchased 11.7 million shares at an average price per share of $3.40, for an
aggregate purchase price of $39,711.
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.
10. Supplemental non-cash disclosures
During the nine months ended September 29, 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 estimated transaction costs (2,250)
--------
12
Net loss on sale ($3,887)
========
11. Asset held for sale
During the third quarter of 2002, the Company decided to maintain its
headquarters in Red Bank, NJ and sell the Old Bridge, NJ facility. The Company
has presented the Old Bridge facility as an asset held for sale on its Balance
Sheet as of September 29, 2002 and recorded the asset at its fair value less
estimated costs of disposal. The additional write-down of $4,450 during the
third quarter of 2002 was included within the restructuring and other charges on
the Company's Statements of Operations for the three and nine months ended
September 29, 2002. Depending on market conditions, the Company may lease all or
a portion of the facility prior to sale.
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.
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.
In connection with the merger with Virata, we formulated a
reorganization and restructuring plan. As a result of the plan, we have recorded
restructuring and other charges of $20.2 million during the nine months ended
September 29, 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. As a result of the reorganization and restructuring plan,
we have reduced our number of employees from 1,155 as of December 31, 2001 to
approximately 800 as of September 29, 2002 and reduced our operating locations
from 13 as of December 31, 2001 to 7 as September 29, 2002. At December 31, 2002
we expect to have approximately 700 employees and 5 operating locations.
13
The following table presents our unaudited results as a percentage of
net revenues for the three months and nine months ended September 29, 2002 and
September 30, 2001. Our results of operations are reported as a single business
segment.
September 29, September 30, September 30, September 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Net product revenues 100.0% 100.0% 98.0% 92.7%
Cancellation revenues - 0.0% 2.0% 7.3%
-------------- ------------- ------------- -------------
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales 54.1% 43.8% 48.3% 40.8%
Cost of sales - Provision for excess and
obsolete inventory 0.0% - - 23.3%
Cost of sales related to cancellation revenues 0.0% - - 0.5%
------------- ------------- ------------- -------------
Total cost of sales 54.1% 43.8% 48.3% 64.6%
------------- ------------- ------------- -------------
Gross profit 45.9% 56.2% 51.7% 35.4%
------------- ------------- ------------- -------------
Operating expenses:
Research and development (including non-cash
compensation of 8.0% and 13.9% for the three
and nine months ended September 29, 2002,
respectively, and 12.2% and 8.1% for the
three and nine months ended September 30,
2001, respectively.) 69.3% 64.1% 69.8% 48.4%
Selling, general and administrative
(including non-cash compensation of 0.9% and
1.0% for the three and nine months ended
September 29, 2002, respectively, and 1.4%
and 1.1% for the three and nine months ended
September 30, 2001, respectively.) 24.0% 20.0% 22.3% 15.9%
Amortization of intangible assets 11.9% 119.5% 15.4% 73.8%
Restructuring and other charges 9.4% 0.0% 11.4% 21.3%
Impairment of goodwill and other acquired
intangible assets 0.0% - 277.7% -
------------- ------------- ------------- -------------
Total operating expenses 114.6% 203.6% 396.6% 159.4%
------------- ------------- ------------- -------------
Loss from continuing operations (68.7%) (147.4%) (344.9%) (124.0%)
Interest income, net (2.8%) 0.8% (2.8%) (0.4%)
Foreign exchange loss - - - -
------------- ------------- ------------- -------------
Loss from continuing operations before income (65.9%) (148.2%) (342.1%) (123.6%)
taxes
Provision (benefit) for income taxes - (4.6%) 0.1% (2.6%)
------------- ------------- ------------- -------------
Net Loss from continuing operations (65.9%) (143.6%) (342.2%) (121.0%)
============= ============- ============- =============
Results of Operations for the three months ended September 29, 2002 and
September 30, 2001
Net Revenues. Our net product revenues and net revenues increased 6.3%
to $47.4 million in the three months ended September 29, 2002 from $44.6 million
in the three months ended September 30, 2001.
Cost of Sales and Gross Profit. Our gross profit decreased 13.2% to
$21.8 million in the three months ended September 29, 2002 from $25.1 million
for the three months ended September 30, 2001. Our gross profit percentage was
45.9% and 56.3% in the three months ended September 29, 2002 and September 30,
2001, respectively. The decrease in gross profit, as compared to the third
quarter of 2001, is primarily related to lower average selling prices and higher
unit costs as a result of product mix and the effect of lower contractor
manufacturing yields on new products, as compared to our standard cost of those
products. The effect of lower contractor manufacturing yields on the 45.9% was
approximately 3.0%. Gross profit for the three months ended September 29, 2002
includes the sale of $10.6 million of inventory which was previously reserved.
Excluding the $10.6 million of revenue from the sale of products previously
reserved, our gross profit percentage
14
related to net product revenues was 30.3% for the three months ended
September 29, 2002. The effect of lower contractor manufacturing yields on the
30.3% was approximately 4.0%. 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. We have approximately $10.0 million in our
sales backlog for the fourth quarter of 2002 related to products which are
currently included in our excess inventory reserve. The sale of these products
will benefit our gross profit percentage when sold.
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 15.1% to $32.9 million in the three months ended
September 29, 2002 from $28.5 million in the three months ended September 30,
2001. The increase in dollars is primarily attributable to our merger with
Virata. Research and development expenditures for the three months ended
September 29, 2002 and September 30, 2001 includes $3.8 million and $5.4
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 25.7%.
Research and development expenses represented 69.3% (61.3 % excluding non-cash
compensation) and 64.1% (51.9% excluding non-cash compensation) of total net
revenues for the three months ended September 29, 2002 and September 30, 2001,
respectively. The increase in research and development expense as a percentage
of total net revenues was due to the higher research and development
expenditures in the three months ended September 29, 2002. We expect our
research and development expenses will decrease from the third 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
27.9% to $11.4 million in the three months ended September 29, 2002 from $8.9
million in the three months ended September 30, 2001. The increase in dollars is
primarily attributable to our merger with Virata. Selling, general and
administrative expenses for the three months ended September 29, 2002 and
September 30, 2001 includes $0.4 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 32.1%. Selling, general and administrative
expense represented 24.0% (23.1% excluding non-cash compensation) and 20.0%
(18.6% excluding non-cash compensation) of total net revenues for the three
months ended September 29, 2002 and September 30, 2001, respectively. The
increase in the percentage of selling, general and administrative expense as a
percentage of total net revenues was due to higher selling, general and
administrative expenses during the three months ended September 29, 2002.
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 third quarter of 2002, we
recorded restructuring and other charges of $4.5 million. These charges
consisted of employee severance related costs of $1.5 million, a benefit
resulting from the reversal of previously recorded facility related charges of
$1.5 million and the write-down of an asset held for sale of $4.5 million.
During the third quarter of 2002, we decided to maintain our headquarters in Red
Bank and sell the previously purchased Old Bridge facility. We have classified
the facility as an asset held for sale on our balance sheet as of September 29,
2002 and recorded the asset at its fair value less estimated costs of disposal.
The write-down of $4.5 million during the third quarter of 2002 was included
within the restructuring and other charges on our statements of operations for
the three and nine months ended September 29, 2002. In addition, we reversed the
previously recorded reserve of approximately $8.0 million related to the
non-cancelable lease on our Red Bank facility. We increased our estimated losses
on other non-cancelable lease commitments by $6.5 million, including $2.0
million of leasehold and other asset impairments.
The Reorganization Plan is expected to be fully implemented by
December 31, 2002 and we expect to record an additional restructuring charge
during the fourth quarter in the range of $3.0 million to $5.0 million.
15
Interest Income, net. Interest income for the three months ended
September 29, 2002 was $3.4 million, offset by interest expense of $2.1 million,
resulting in net interest income of $1.3 million. Net interest expense for the
three months ended September 30, 2001 was $0.4 million, consisting of interest
income of $1.9 million, offset by interest expense of $2.3 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 September 29, 2002. The
income tax benefit of $2.1 million recorded during the three months ended
September 30, 2001 represents a benefit of 3.1% of the loss from continuing
operations before income tax. 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 our video compression business, have been
presented separately in our Statements of Operations. Losses from our
discontinued operations were $0.0 million and $1.4 million for the three months
ended September 29, 2002 and September 30, 2001, respectively.
We have determined that the voice algorithm business no longer meets
the probability criteria of SFAS No. 144 and therefore, in accordance with SFAS
No. 144, have included its results in operating expenses for all periods
presented. We will cease operations of this business during the fourth quarter
of 2002.
Results of Operations for the nine months ended September 29, 2002 and September
30, 2001
Net Revenues. Our net product revenues decreased 10.5% to $174.2
million in the nine months ended September 29, 2002 from $194.6 million in the
nine months ended September 30, 2001. Net revenues decreased 15.4% to $177.7
million in the nine months ended September 29, 2002 from $210.0 million in the
nine months ended September 30, 2001, primarily as a result of the $15.4 million
of cancellation revenues in the previous year and lower product revenues in the
nine months ended September 29, 2002.
Cost of Sales and Gross Profit. Our gross profit increased 23.7% to
$91.9 million in the nine months ended September 29, 2002 from $74.3 million in
the nine months ended September 30, 2001. Our gross profit percentage was 51.7%
and 35.4% in the nine months ended September 29, 2002 and September 30, 2001,
respectively. The increase in gross profit from the nine months ended September
30, 2001 is primarily related to the impact of the provision for excess and
obsolete inventory recorded during the nine months ended September 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 50.7% in the nine months ended September 29, 2002 from 56.0% in the
nine months ended September 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 nine
months ended September 29, 2002. The higher average unit costs are attributed to
product mix and the effect of lower contractor manufacturing yields on new
products as compared to our standard cost of those products. Excluding $18.7
million of revenue from the sale of product previously reserved, our gross
profit percentage related to net product revenues was 44.8% for the nine months
ended September 29, 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. We have approximately $10.0 million in our sales
backlog for the fourth quarter of 2002 related to products which are currently
included in our excess inventory reserve. The sale of these products will
benefit our gross profit percentage when sold.
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 22.1% to $124.1 million in the nine months ended
September 29, 2002 from $101.7 million in the nine months ended September 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 nine months ended September 29, 2002 and
September 30, 2001 includes $24.6 million and $17.1 million, respectively, of
non-cash compensation, as we exchanged our common stock for common stock held by
employee principals of an acquired
16
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 17.6%. Research
and development expenses represented 69.8% (55.9% excluding non-cash
compensation) and 48.4% (40.3% excluding non-cash compensation) of total net
revenues for the nine months ended September 29, 2002 and September 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 nine months ended September 29, 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
18.6% to $39.7 million in the nine months ended September 29, 2002 from $33.5
million for the nine months ended September 30, 2001. The increase in dollars is
primarily attributable to our merger with Virata. Selling, general and
administrative expenses for the nine months ended September 29, 2002 and
September 30, 2001 includes $1.8 million and $2.4 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 21.7%. Selling, general and administrative
expense represented 22.3% (20.9% excluding non-cash compensation) and 15.9%
(14.8% excluding non-cash compensation) of total net revenues for the nine
months ended September 29, 2002 and September 30, 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 nine
months ended September 29, 2002.
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
No. 142, entitled "Goodwill and Other Intangible Assets". Pursuant to SFAS No.
142, goodwill is no longer subject to amortization.
Restructuring and Other Charges. During the second quarter of 2001, we
realigned our operating cost structure, which resulted in restructuring and
other charges of $44.8 million (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 our overall workforce 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 were made as of June 30, 2002.
As a result of the reduction in our workforce, we consolidated our use
of facilities, which had been leased in anticipation of continued long-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 $36.8 million. These
non-cancelable lease commitments range from eighteen months to ten years in
length.
The remaining $4.3 million consisted primarily of the write-off of
certain investments which we deemed to have no future value.
There was no net statement of operations impact to the restructuring
and other charges during the first quarter of 2002. However, we recorded $1.5
million related to an involuntary workforce reduction, which was offset by the
reversal of $1.5 million of facility charges. In February of 2002, we purchased
a 200,000 square foot facility located in Old Bridge, NJ for approximately $30.0
million. Prior to the acquisition of the facility, we were obligated to lease
this facility. In conjunction with the purchase of the facility we paid the
landlord approximately $5.0 million to terminate the lease commitment. We had
recorded a $14.5 million charge in the 2001 Restructuring Plan related to the
expected losses from this non-cancelable
17
lease commitment. At the time of the purchase we intended to move its
headquarters from Red Bank, New Jersey to Old Bridge, New Jersey when the
construction related to the interior of the facility was completed. During the
first quarter of 2002, we reversed the unused portion of the previously recorded
reserve related to the Old Bridge facility of $9.5 million and recorded a
reserve for losses related to the non-cancelable lease commitment for our
facility in Red Bank of $8.0 million.
During the second quarter of 2002, we recorded restructuring and other
charges of $15.8 million. These charges primarily related to a facility closure
and the related impact on outstanding real estate leases and leasehold
improvements, of $13.8 million, and workforce reductions, of $2.0 million.
During the third quarter of 2002, we decided to maintain our
headquarters in Red Bank and sell the previously purchased Old Bridge facility.
We have classified the facility as an asset held for sale on our balance sheet
as of September 29, 2002 and recorded the asset at its fair value less costs of
disposal. Total restructuring and other charges recorded in the third quarter of
2002 was $4.5 million. These charges consisted of employee severance related
costs of $1.5 million, a net benefit resulting from the reversal of previously
recorded facility related charges of $1.5 million and a $4.5 million charge
related to the write-down of the Old Bridge facility to its estimated fair
value. The write-down of $4.5 million during the third quarter of 2002 was
included within the restructuring and other charges on our statements of
operations for the three and nine months ended September 29, 2002. The net
benefit of $1.5 million related to facilities consisted of the reversal of the
previously recorded reserve of approximately $8.0 million related to the
non-cancelable lease on our Red Bank facility. In addition, due to a continued
decline in the real estate market in certain geographic regions in which we are
pursuing subleases, we increased our estimated losses on other non-cancelable
lease commitments by $6.5 million, including $2.0 million of leasehold and other
asset impairments related to vacated facilities.
The Reorganization Plan is expected to be fully implemented by
December 31, 2002 and we expect to record an additional restructuring charge
during the fourth quarter in the range of $3.0 million to $5.0 million.
The table below presents the liabilities associated with the 2001
Restructuring Plan as of December 31, 2001 and September 29, 2002, including
payments and adjustments made during the nine months ended September 29, 2002,
and additional restructuring charges recorded during the nine months ended
September 29, 2002 (the "2002 Restructuring Charge"):
(in thousands) December 31, 2001 September 29, 2002
Restructuring 2002 Restructuring Non-Cash Cash Restructuring
Liability Charges Charges Payments Liability
Workforce reduction .... $ 1,827 $ 3,758 $ (650) $ (4,647) $ 288
Facilities consolidation 31,672 11,992 (2,992) (9,379) 31,293
Other charges .......... 774 4,450 (4,450) -- 774
-------- -------- --------- --------- --------
Total charges .......... $ 34,273 $ 20,200 $ (8,092) ($14,026) $ 32,355
======== ======== ========= ========= ========
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 nine months ended September 29,
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 market value, including a review of discounted future cash flows.
Interest Income, net. Interest income for the nine months ended
September 29, 2002 was $11.2 million, offset by interest expense of $6.2
million, resulting in net interest income of $5.0 million. Net interest income
for the nine months ended September 30, 2001 was $.8 million, consisting of
interest income of $4.9 million, offset by interest expense of $4.1 million. The
increase in net interest income is attributable to the cash and investments
acquired as a result of our merger with Virata.
18
Provision (Benefit) for Income Taxes. The income tax provision of $0.3
million recognized during the nine months ended September 29, 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 $5.5 million recorded during the nine months ended
September 30, 2001, represents a benefit of 2.1%. 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
met 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.
We have determined that the voice algorithm business no longer meets
the probability criteria of SFAS No. 144 and therefore, in accordance with SFAS
No. 144, have included its results in operating expenses for all periods
presented. We will cease operations of this business during the fourth quarter
of 2002.
The results of discontinued operations, for the periods presented, are
as follows (in thousands):
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 29, 2002 September 30, 2001 September 29, 2002 September 30, 2001
---------------------- --------------------- -------------------- ---------------------
Net loss from operations of businesses
discontinued/held for sale:
Video $ - ($1,399) ($3,168) ($3,093)
EmWeb - - (871) -
Voice Algorithm - - - -
------------- ------------------ ------------------- -----------------
Net loss from operations of businesses
discontinued/held for sale $ - ($1,399) ($4,039) ($3,093)
Net Loss on Sale - - (3,887) -
-------------- ------------------ ------------------- -----------------
Net loss from discontinued operations $ - ($1,399) ($7,926) ($3,093)
============== ================== =================== =================
Revenues related to the Discontinued Businesses, for the periods presented,
are as follows (in thousands):
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended
September 29, 2002 September 30, 2001 September 29, 2002 September 30, 2001
------------------ ------------------ ------------------ ------------------
Revenues:
Video Compression $- $1,454 $4,002 $4,515
EmWeb - - 443 -
-------------- ------------ ----------------- ----------------
Total Revenues $- $1,454 $4,445 $4,515
============== ============ ================= ================
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
19
Conexant to us based upon the future performance of the video compression
business. As of September 29, 2002, we have an equity investment in Conexant
and a guarantee of the value of Conexant's common stock price, with a combined
fair value of $15.0 million. This asset has been included in other current
assets on our Balance Sheet. The note receivable of $21.0 million was collected
by the Company during the third quarter of 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.
Liquidity and Capital Resources
Total assets at September 29, 2002 were $766.1 million, a decrease of
$682.8 million, or 47.1% from December 31, 2001 total assets of $1,448.9
million. The decrease from December 31, 2001 is primarily a result of the loss
incurred for the nine months ended September 29, 2002, including the impairment
of goodwill and other intangible assets of $493.6 million and cash payments for
treasury stock purchases of $39.7 million.
As of September 29, 2002, we had $554.2 million in cash and cash
equivalents and investments, including investments with original maturity dates
in excess of 12 months, and working capital of $331.2 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 $62.6 million during the
nine months ended September 29, 2002, compared to net cash used in operating
activities of $18.6 million in the nine months ended September 30, 2001. The
increase in cash used was primarily due to an increase in our operating expenses
and a decrease in our net revenues during the nine months ended September 29,
2002.
Net cash provided by investing activities was $12.6 million during the
nine months ended September 29, 2002. This consisted of $40.1 million of
proceeds from marketable securities and $21.0 million of proceeds from the sale
of video compression business, net of cash used to purchases property and
equipment of $39.8 million, which included $34.9 million related to the purchase
of the Old Bridge, New Jersey facility and payments of $8.7 million for accrued
acquisition related costs, incurred in connection with the reorganization plan,
which resulted from our merger with Virata. Net cash used in investing
activities during the nine months ended September 30, 2001 was $21.5 million,
consisting primarily of net cash used in purchasing marketable securities and
property and equipment.
Net cash used in financing activities were $35.2 million during the
nine months ended September 29, 2002, primarily related to our repurchase of
common stock pursuant to our treasury stock program in the amount of $39.7
million. Net cash provided by financing activities during the nine months ended
September 30, 2001 of $129.6 million primarily relate to the proceeds received
from the issuance of the convertible subordinated notes.
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.
20
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 Nine Months
Ended Ended
-------------- -------------
September 30, September 30,
2001 2001
------------ -------------
Net loss:
Reported net loss (65,303) $(257,285)
Goodwill amortization 42,855 128,622
------------ ------------
Adjusted net loss $(22,448) $(128,663)
============ ============
Basic and diluted loss per share:
Reported basic and diluted net loss per share $(.89) $(3.56)
Goodwill amortization $.58 $1.78
------------ -------------
Adjusted basic and diluted net loss per share $(.31) $(1.78)
============ =============
21
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.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Within the 90 days prior to the filing of this report, we carried out
an evaluation, under the supervision and with the participation of our
management, including our chief executive officer and chief financial officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934 (the
"Exchange Act"). Based upon that evaluation, the chief executive officer and
chief financial officer concluded that our disclosure controls and procedures
are effective in timely alerting them to material information relating to our
company (including its consolidated subsidiaries) required to be included in our
Exchange Act filings.
(b) Changes in internal controls.
There have been no significant changes in our internal controls or in
other factors which could significantly affect internal controls subsequent to
the date we carried out our evaluation.
PART II. OTHER INFORMATION
22
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Number Description
4.1 Rights Agreement, dated as of July 5, 2002, between GlobespanVirata,
Inc. and American Stock Transfer & Trust Company, as Rights Agent
(incorporated by reference to Exhibit 1 to the Form 8-A filed by
GlobespanVirata, Inc. on July 11, 2002).
4.2 Certificate of Designations of Series A Preferred Stock (incorporated
by reference to Exhibit 2 to the Form 8-A filed by GlobespanVirata,
Inc. on July 11, 2002).
10.1 Employment Agreement between the Company and Robert McMullan, dated
as of January 17, 2002, executed and amended on August 13, 2002.
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.
The following reports on Form 8-K were filed during the quarter ended
September 30, 2002:
Form 8-K filed July 11, 2002 reporting the Company's adoption of a
stockholder's rights plan (Item 5).
23
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: November 11, 2002 By: /s/ Robert McMullan
------------------------
Robert McMullan
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
24
I, Armando Geday, certify that:
1. I have reviewed this quarterly report on Form 10-Q of GlobespanVirata, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 11, 2002
/s/ Armando Geday
--------------------
Armando Geday
Chief Executive Officer
25
I, Robert McMullan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of GlobespanVirata, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 11, 2002
/s/ Robert McMullan
--------------------
Robert McMullan
Chief Financial Officer
26
Index to Exhibits
Number Description
- ------ -----------
4.1 Rights Agreement, dated as of July 5, 2002, between GlobespanVirata,
Inc. and American Stock Transfer & Trust Company, as Rights Agent
(incorporated by reference to Exhibit 1 to the Form 8-A filed by
GlobespanVirata, Inc. on July 11, 2002).
4.2 Certificate of Designations of Series A Preferred Stock (incorporated
by reference to Exhibit 2 to the Form 8-A filed by GlobespanVirata,
Inc. on July 11, 2002).
10.1 Employment Agreement between the Company and Robert McMullan, dated as
of January 17, 2002, executed and amended August 13, 2002.
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.
27