UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission file number 000-26401
----------------------
GLOBESPANVIRATA, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2658218
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
100 Schulz Drive, Red Bank, New Jersey 07701
(Address of principal executive offices) (Zip Code)
(732) 345-7500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
----------------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. X Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
The aggregate market value of voting stock held by non-affiliates of
the registrant as of February 24, 2003 (based on the closing price for the
common stock on the Nasdaq National Market on such date) was approximately
$533,377,000. As of February 24, 2003, 129,989,144 shares of common stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the Proxy Statement to be filed in connection with
the 2003 Annual Meeting of Stockholders are incorporated by reference into Part
III of this Form 10-K report where indicated.
GLOBESPANVIRATA, INC.
FORM 10-K
DECEMBER 31, 2002
TABLE OF CONTENTS
Item Page No.
- ---- --------
PART I
1. Business................................................................................. 1
2. Properties............................................................................... 25
3. Legal Proceedings........................................................................ 26
4. Submission of Matters to a Vote of Security Holders...................................... 26
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters.................... 27
6. Selected Historical Financial Data....................................................... 28
7. Management's Discussion and Analysis of Financial Condition and Results of Operations.... 29
7A. Quantitative and Qualitative Disclosures About Market Risk............................... 42
8. Financial Statements and Supplementary Data.............................................. 42
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..... 42
PART III
10. Directors and Executive Officers of the Registrant....................................... 43
11. Executive Compensation................................................................... 43
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder 43
Matters..................................................................................
13. Certain Relationships and Related Transactions........................................... 43
14. Controls and Procedures.................................................................. 43
PART IV
15. Exhibits, Financial Statement Schedule, and Reports on Form 8-K.......................... 44
Signatures............................................................................... 73
i
PART I
ITEM 1. BUSINESS
GENERAL
GlobespanVirata is a leading provider of integrated circuits, software and
system designs for broadband communication applications that enable high-speed
transmission of data, voice and video to homes and business enterprises
throughout the world. Currently, our integrated circuits, software and system
designs are primarily used in digital subscriber line, or DSL, applications,
which utilize the existing network of copper telephone wires, known as the local
loop, for high-speed transmission of data. We have sold our products to more
than 400 telecommunications equipment manufacturers for incorporation into their
products, which have been used in systems deployed by more than 50
telecommunications service providers and end users in more than 30 countries.
Consumers and business users demand reliable and fast ways to connect to the
Internet and to each other through networks. One approach available to them for
achieving this goal is DSL technology. Our products target the rapidly growing
market for high-speed data transmission applications such as Internet access,
telecommuting and networking among branch offices. DSL applications are
expanding to also include voice and video transmissions over the same copper
wire.
It is our objective to help DSL service providers and equipment makers meet
the challenges that face them in deploying DSL technology within the existing
communications infrastructure. In this regard, we have developed integrated
solutions that combine the functionality of entire systems, including multiple
discrete components, memory, microprocessors and software. We further enhance
our customers' time to market by designing production ready reference boards
utilizing our chip sets, optimized for system cost and performance. These chip
set solutions are known as "System-On-Chip" solutions and achieve system-level
functionality through silicon and software. These system-level products allow
our customers to reduce the time it takes for their products to reach the market
and to focus their resources on adding features and functions to differentiate
their product offerings from those of their competitors.
In our on-going effort to increase our ability to offer System-On-Chip
solutions to our customers, we have completed a number of acquisitions and
mergers that have expanded our intellectual property, design and product
development resources and system-level expertise. We have and continue to
utilize the acquired technologies to add greater networking functionality to our
chip sets and to capture more of the system functions and value used in DSL
system solutions in our products.
COMPLETION OF MERGER WITH VIRATA CORPORATION
On December 14, 2001, we completed a merger with Virata Corporation
("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.
Unless otherwise indicated, any financial information prior to the date of
acquisition excludes Virata's results of operations.
INDUSTRY OVERVIEW
THE LAST MILE IS THE BOTTLENECK TO HIGH-SPEED NETWORK ACCESS
In recent years, consumers worldwide have increasingly demanded instantaneous
access to the vast amount of information available on the Internet. Demand from
consumers is driven by five primary factors:
o the amount and variety of information and entertainment
sources, including video and audio files, available on the
Internet continue to increase and expand;
o the number and quality of services offered through the
Internet, such as video communication and lower cost
telephone services, is growing rapidly;
o a growing number of small business owners and telecommuters
require the same access speeds from their home offices and
small networks as those achieved by participants in large
corporate networks;
1
o the performance and affordability of the products, such as
personal computers, integrated access devices and set top
boxes, used to connect to today's communication networks
enables more people to connect than ever before; and
o the growth of wireless local area networks, also called
WLAN, and public wireless access points in coffee shops,
hotels and other gathering places, which allow multiple
users to gain wireless access to the Internet while away
from their homes and offices.
Simultaneous with the growth in consumer demand is the improvement in the
quality and complexity of the data available on, and through, the Internet. In
order to access the types of complex files now available over the Internet, an
end user must have higher speeds to connect to the network. Increasingly,
consumers are turning to broadband access services in order to achieve their
network connection goals reliably and to transfer information within practical
time periods.
When a consumer connects to the Internet and wishes to receive or download
information, the information must travel to the user's computer, or other
networking device, through the main transmission channels, also known as the
network backbone, to the central office of the service provider, and then to the
local lines, also known as the "local loop" or "last mile", which connect the
end user to the network. While the network backbone is capable of delivering
data at very high speeds, an access bottleneck continues to exist in the local
loop because the copper wire telephone lines that make the last mile connection
were originally designed for voice traffic rather than high-speed data
transmission. As a result, access to the Internet and private communications
networks over the last mile infrastructure has typically been limited to
transmission rates of up to 56 Kbps using standard dial-up analog modems, or 128
Kbps using integrated services digital network, or ISDN, modems. At these rates,
several minutes may be required to access a media rich website, and several
hours may be required to download large files.
COMPETITION TO DELIVER HIGH-SPEED NETWORK ACCESS
This communications bottleneck has created opportunities for network service
providers and equipment manufacturers who must continually develop and improve
solutions for overcoming the last mile bandwidth challenges in order to keep
pace with consumer demand. High-speed data, voice and video transmission
services have become a key competitive service offering for these providers. In
an effort to provide greater bandwidth in the local loop, network service
providers have deployed higher speed access services, such as T1 or E1 lines.
These services, however, are typically too costly for the average consumer.
Some service providers have developed other alternatives for overcoming the
bottleneck problem, that do not rely on the local loop, including cable,
wireless and direct broadcast satellite systems. Cable competes effectively with
DSL high-speed data transmission technologies, primarily in the residential
market, because it enables fast data transmission speeds at competitive prices
over the existing infrastructure of coaxial cable. Cable services are deployed
over the cable television infrastructure at transmission rates of up to 10
megabits per second or Mbps. Wireless and direct broadcast satellite systems
transmit digital data without terrestrial lines at speeds of more than 10 Mbps.
Many of these services are at an early stage of development, but they are
expected to provide cost-effective high-speed data transmission.
In addition, some telecommunications service providers are delivering
high-speed data transmission services to large businesses in major metropolitan
areas over locally installed fiber networks. These systems use fiber optic cable
and very high frequency laser light transmission technology to provide the last
mile connection. Fiber optic systems offer highly reliable transmission data
rates that can exceed 1 gigabit per second. Although local fiber networks have
not generally been cost-effective to deploy for small business and home users,
fiber networks will compete effectively in the future market for high-speed data
transmission services, particularly for large businesses.
DSL TECHNOLOGY ENABLES HIGH-SPEED DATA TRANSMISSION OVER COPPER TELEPHONE WIRE
Another alternative available to overcome the bottleneck of the last mile is
DSL. DSL technology uses sophisticated digital signal processing techniques to
achieve high-speed data transmission over the copper telephone wires of the
existing local loop. DSL utilizes more of the bandwidth on copper telephone
lines than is currently used for plain old telephone service, also referred to
as POTS, thereby allowing for greater bandwidth with which to send and receive
information. By utilizing frequencies between 26KHz and 1MHz, DSL can encode
more data to achieve higher data rates than would otherwise be possible in the
restricted frequency range of POTS. Specifically, DSL currently provides
2
downstream transmission rates up to 12 Mbps based on established standards and
higher speeds of up to 20 Mbps or more based upon not yet formalized standards,
using the existing local loop copper wire infrastructure. It is expected that
transmission speeds of DSL will continue to increase and improve as the
technology evolves.
DSL technology has several important distinguishing characteristics when
compared to other high-speed technologies, including:
DEDICATED BANDWIDTH. DSL is a point-to-point technology that connects
the end user to the service provider's central office over a copper
telephone wire. Because DSL connections are dedicated to one user, DSL
does not suffer from service degradation or slower speeds as other
users are added in the same vicinity, and allows a higher level of
security;
LOW COST INFRASTRUCTURE. Because DSL uses the same local loop copper
telephone lines that are used for standard telephone voice service, DSL
can be significantly less expensive to deploy to businesses and homes
than other high-speed data transmission technologies that require new
or upgraded infrastructure;
USER INSTALLED. DSL equipment can readily be installed by the end user
without requiring on-site support from the service provider, a critical
cost saving factor for the consumer and the service provider over other
last mile technology solutions; and
BROAD COVERAGE. Since virtually all businesses and homes worldwide have
installed copper telephone wire connections for standard telephone
service, representing more than one billion telephone lines, DSL access
services can be made immediately available using the same copper wire
for a large percentage of potential end users.
In order to utilize the frequencies above the voice audio spectrum, DSL
equipment must be installed on both ends of the local loop. In a typical
deployment of DSL service, DSL customer premises equipment, or CPE, is connected
to a personal computer in a residence or to a router in a business where
multiple personal computers may be connected. The end user is connected to the
service provider's central office, or CO, over a copper telephone wire that is
terminated by a digital subscriber line access multiplexer, or DSLAM, unit
located at the CO. One DSLAM typically provides DSL connections for many users.
CHALLENGES TO DSL SERVICE PROVIDERS
Telephone companies recognize that the satellite, wireless, fiber and cable
service providers are serious threats to win consumer and business end users
that have traditionally been served by them. As a result, to protect the
business relationship with their existing customers and preserve the opportunity
to increase revenue from additional services (such as Internet access and
additional voice services), telephone companies worldwide have invested and
continue to actively invest resources in the rapid deployment of DSL. As of
December 31, 2002, worldwide DSL subscriptions totaled more than 35.0 million,
growing from 19.0 million at the end of 2001.
DSL service providers are currently in various stages of worldwide
deployment. To continue to be a compelling alternative to other broadband data
and transmission alternatives, DSL service providers must:
o Meet data transmission rate requirements to satisfy end user
bandwidth needs;
o Meet central office DSLAM equipment constraints for size,
power, performance and reliability;
o Meet customer premises equipment constraints for feature
sets and ease of installation and use;
o Reach a large potential end user base;
o Make it trouble-free for customers to obtain and install the
service;
o Provide low equipment, installation, service and maintenance
costs; and
o Be tested and proven through field deployment.
3
CHALLENGES TO DSL EQUIPMENT MANUFACTURERS
The projected growth of DSL subscribers worldwide will drive demand from
service providers for innovative broadband products and services at attractive
prices. To take advantage of this demand opportunity, DSL equipment
manufacturers must design next generation products that overcome the challenges
presented by the stringent and varying feature, function, performance and cost
demands of the worldwide service providers. Equipment manufacturers must meet
challenges in each of the following areas:
o STANDARDS COMPLIANCE AND INTEROPERABILITY. Equipment
manufacturers must ensure that their products are compatible
with industry standards and interoperate with DSLAM and
customer premises equipment made by other manufacturers;
o PROGRAMMABILITY AND UPGRADABILITY. Evolving industry
standards, consumer demands for new features and continuous
improvements in DSL product performance and function have
challenged equipment manufacturers to develop flexible
solutions that can be enhanced or reconfigured without
replacement of the equipment;
o POWER CONSTRAINTS. Low power consumption is critical for the
addition of equipment within existing communication
facilities. Equipment manufacturers must design DSLAMs that
use minimum power dissipation to operate within the service
provider's specification;
o SIZE CONSTRAINTS. DSL systems must physically fit within the
local telephone company's existing infrastructure. This
constraint has challenged equipment manufacturers to develop
DSLAMs that support hundreds of DSL local loop lines in the
smallest amount of physical space;
o INTEGRATION. Equipment manufacturers must integrate the
maximum possible system functions into a product to minimize
both system management costs and the number of different
components required to implement the system solution;
o PRODUCT CAPABILITIES. Equipment manufacturers must design
products that provide both symmetric and asymmetric DSL
solutions with a suite of data interfaces, protocol
processing, and system management functions to efficiently
offer a broad range of services to businesses and consumers;
o PRODUCT COSTS AND USE. Equipment manufacturers must provide
cost-effective products for homes and businesses that can be
easily installed and operated by non-technical users; and
o PRODUCT PERFORMANCE. Equipment manufacturers must create
solutions that overcome the real-world impairments of the
local loop, such as line noise, to reach as many consumers
as possible at the greatest speeds.
THE OPPORTUNITY FOR DEVELOPERS OF INTEGRATED CIRCUITS
We believe that equipment manufacturers can best meet the challenges
described above by designing their system-level products with System-On-Chip
integrated circuit and software solutions. Using a System-On-Chip solution will
enable equipment manufacturers to achieve increased programmability while
meeting the service providers' increasing demand for products that use less
power and space. System-On-Chip solutions also help satisfy the goals of lower
cost and higher performance.
While equipment manufacturers have in-depth system knowledge, they often lack
the core technology expertise in signal processing, signal conversion,
communications algorithms and communication protocols that are required to
develop System-On-Chip solutions. In addition, these solutions must overcome
real-world impairments of the local loop, such as line noise, which could
otherwise degrade transmission performance.
Realizing the benefits of System-On-Chip solutions as well as their
limitations in creating such solutions, DSL equipment manufacturers are turning
to integrated circuit developers, like GlobespanVirata, to bring
high-performance, cost-effective solutions to market.
4
THE GLOBESPANVIRATA SOLUTION
We are a leading worldwide provider of DSL highly integrated circuits,
software and system designs that enable high-speed data, voice and video
transmission over the local loop. As such, we are well positioned to deliver
to equipment manufacturers and service providers, products to meet the
challenge of the last mile bottleneck. We have over eight years of field
experience in implementing DSL technology. We have sold our products to more
than 400 telecommunications equipment manufacturers for incorporation into
their products, which have been used in systems deployed by more than 50
worldwide telephone service providers in more than 30 countries.
Approximately 525 of our employees are involved in product development and
customer support. The breadth of our employee base combined with our
extensive understanding of DSL in the field has resulted in GlobespanVirata
having one of the most comprehensive knowledge bases in the industry. Our
expertise has also been enhanced through the acquisition of technology
companies with knowledge in voice processing, application specific network
processing, communication protocols, and data switching, routing and
security. As a result, we understand the requirements for DSL system
solutions in all communication network architectures, including asynchronous
transfer mode, or ATM, and Internet protocol, or IP, as well as packet and
cell aggregation, switching and traffic management, voice and video
transmission, voice gateways and auto-configuration for plug and play
installations.
We believe that the depth and breadth of our experience and expertise in
the broadband field and the broad range of our technological solutions
distinguish us from our competitors. Among our key areas of expertise are:
BREADTH OF DSL EXPERTISE. We have expertise in both asymmetric DSL,
or ADSL, and symmetric DSL, or SDSL, applications. DSL configurations
that we offer include ADSL, HDSL, HDSL2, HDSL4, SHDSL and VDSL.
ADVANCED SYSTEM-LEVEL EXPERTISE. Our system-level expertise enables
us to offer multiple system functions that can be incorporated
cost-effectively into complete System-On-Chip solutions. These
solutions allow for the optimization of the performance, cost and time
to market of system products used to deliver network services using DSL
access. Additionally, our system-level expertise allows us to provide
comprehensive step-by-step reference design guides to our customers in
order to enable them to rapidly bring innovative DSL systems products
to market. The local loop environment is characterized by various
impairments that affect DSL operations and make reliable high-speed
data, voice and video transmission difficult to achieve. To minimize
the effects of these impairments on the reliability and quality of
services provided by DSL access, we will continue to incorporate our
system-level understanding of these factors into our DSL chip set
system solutions.
SOFTWARE EXPERTISE. Our chip sets are highly programmable. With our
chips, our customers are able to enhance or reconfigure their products
through downloads of our software rather than through costly
replacement or modification of their installed DSL system products.
This flexibility enables telecommunications service providers to add
features and optimize performance to keep current with changing
industry requirements, including features and standards compliance. It
also allows us to deliver a common chip set platform that delivers ADSL
and SDSL services with a wide range of feature options through software
control.
ALGORITHM EXPERTISE. A key component of our continued success is the
expertise that we have developed in the areas of processes and
techniques used to transform data, voice and video content from analog
to digital format. We have also developed essential processes and
techniques that are used to remove echo voice signals that would
otherwise interfere with network transmissions. Specific elements of
our algorithm expertise are:
COMMUNICATIONS ALGORITHMS. Communications algorithms are the
processes and techniques used to transform a digital data stream
into a specially conditioned analog signal suitable for
transmission across copper telephone wires. Our broad theoretical
knowledge base, coupled with our extensive DSL field experience,
has enabled our technology team to generate comprehensive DSL
system models utilizing computer-aided design tools. The knowledge
gained from these simulations, combined with the advantages of our
programmable platform, enables us to optimize algorithm designs
for specific DSL applications across a broad range of local loop
conditions.
VOICE PROCESSING ALGORITHMS. Voice processing algorithms are
the processes and techniques used to convert analog voice signals
into digital data that can then be compressed and formatted into
data packets for transmission over digital networks. We use these
algorithms with our proprietary digital signal
5
processing technology to design voice transmission features into
our chip sets for use in voice gateway and integrated access
device products.
ECHO CANCELLATION ALGORITHMS. Echo cancellation algorithms are
techniques and processes used to detect the signal power and time
period of the echo signal, and then perform an operation to
attenuate the echo so that it is not heard by the original
speaker. Without these techniques it would be difficult to conduct
a conversation, since transmission signal delays through a wide
area network system sometimes cause echo signals of speech to be
reflected back to the speaker. Echo compression algorithms are
complex functions that are most efficiently implemented with
digital signal processing techniques. We incorporate these
algorithms with our proprietary digital signal processing
technology into our integrated circuit chip sets for use in
network echo cancellation products.
ATM AND IP PROTOCOL EXPERTISE. ATM and IP protocol are being used to
build the next generation of communication infrastructure. Our network
processing platforms and software solutions are used to build a
packet-based converged switching and routing network with guaranteed
quality of service for voice, data and video applications. These
technologies represent critical components of broadband access systems
and application specific network devices.
APPLICATION SPECIFIC NETWORK PROCESSING EXPERTISE. Network processing
in DSL network systems solutions provides a means for managing data
traffic flow between network core switching equipment, DSLAMs, and DSL
products in homes and businesses. The network processor platforms in
central office applications manage the data traffic flow to each local
loop and aggregates this traffic into a single high-speed data stream
to core switching equipment. The network processor platforms in the
customer premise application manage protocol processing, data routing
and security functions, control functions for a wide range of physical
interfaces, and auto configuration for plug and play installations. Our
expertise and experience in developing proprietary reduced instruction
set computers, or RISC, and the lower layers of the open systems
interconnection, or OSI, protocol stack enable us to integrate network
processing functions into our System-On-Chip integrated circuits used
in DSL network system solutions. Our hardware and software architecture
enables us to implement a cost-effective, programmable and scalable
design to meet performance demands for a broad range of bandwidth
requirements and to add product features and functions over time.
SIGNAL CONVERSION EXPERTISE. Signal conversion is an area of
expertise that allows us to transform digital signals into analog
signals that are suitable for transmission over copper telephone wires.
Our analog front-end includes a custom integrated circuit that performs
the signal conversion function, as well as a combination of discrete
components such as resistors, capacitors, linear amplifiers and
transformers. Our analog front-end provides several programmable analog
functions critical to achieving high-speed and long-reach performance
and is capable of operating over a wide array of signal amplitudes and
frequency ranges associated with different line codes.
DIGITAL SIGNAL PROCESSING EXPERTISE. We are a leader in the design
of high-performance, low-power, silicon-efficient, digital
communications processors that optimize digital signal processing for
DSL, voice, echo cancellation and video applications. Digital signal
processing, as it relates to DSL applications, is a means of encoding
digital data for transmission over bandwidth-limited media, such as
copper telephone wires, and recovering the encoded data at the
receiving end. This process requires very high-speed, high-precision
silicon engines to meet the performance specifications of
telecommunications service providers. Digital signal processors are
also used as a means to implement voice, echo cancellation, and video
processing algorithms. Our digital communications processors are based
on a proprietary architecture that incorporates concurrent
multi-tasking, multi-processor digital signal processing engines. Our
digital communications processor architecture provides system design
flexibility without the inherent power consumption and costs normally
associated with conventional, general purpose digital signal
processors. The performance and flexibility of our digital
communications processor enables our customers to implement multiple
DSL configurations using different line codes through a simple software
download.
THE TECHNOLOGICAL ADVANTAGES OF OUR SOLUTIONS
Using the areas of expertise highlighted above, we are able to create
broad-based solutions with the following advantages:
COMPLETE SYSTEM-ON-CHIP. Our System-On-Chip solutions integrate the
functionality of multiple discrete
6
components, memory and microprocessors and software that provide DSL
transmission, framing, communication protocol handling, voice
processing, data security, data switching and routing, and multiple
data interfaces onto a single chip. Our System-On-Chip solutions for
DSLAM products offer asymmetric and/or symmetric DSL functions to
support multiple local loop lines in a single chip, which enables our
DSLAM equipment manufacturers to design products to meet the size and
power constraints requirements of the service providers. Our
System-On-Chip solutions for home and business DSL products offer
asymmetric or symmetric DSL functions with universal serial bus, or
USB, peripheral component interconnect, or PCI, ATM, or Ethernet data
interfaces and ATM and IP protocols on a single chip. We also offer
application software enabling our customers to design products to meet
the easy-to-install and use requirements of the end user.
HIGH-PERFORMANCE. Our chip sets are capable of performing billions of
operations per second. We believe the high-performance capability of
our chip sets enables us to deliver one of the industry's longest loop
reach per data transmission rates which allows telecommunications
service providers to offer services to a larger customer base.
COMPETITIVE TOTAL SYSTEM COST. The high levels of integration in our
System-On-Chip solutions for central office equipment and customer
premise products minimize total system cost. Highly integrated
solutions lead to low power consumption and density advantages, thereby
maximizing the number of local loop lines that can be incorporated into
a single broadband DSLAM system product. Higher system density enables
service providers to connect a larger number of end users with their
central office DSLAM equipment thereby reducing total cost per end
user. The high level of integration in our System-On-Chip solutions
used in home and business products offer multiple system functions in a
single chip, thereby minimizing equipment manufacturers' materials cost
and the manufacturing time required to produce the product.
STANDARDS COMPLIANCE AND INTEROPERABILITY. We actively participate in
the formulation of industry standards, which enables us to monitor
industry trends and refine our product development efforts to bring
standards-compliant solutions to market. We also actively participate
in interoperability testing to make sure that our products are
compatible with products being offered by other companies.
We believe that these attributes make us a preferred design partner and
supplier of integrated circuits for DSL network system products.
STRATEGY
Our objective is to be the leading provider of System-On-Chip solutions and
system designs for the DSL market and other complementary high-growth broadband
communications markets. To achieve this objective, we are pursuing the following
strategies:
MAXIMIZE DESIGN WIN MARKET SHARE. Our strategy is to maximize the number of
design wins with both new and existing customers. A design win represents a
customer's initial commitment to develop a product incorporating our chip sets.
We believe design wins are strategically important because once a customer has
designed our chip sets into its product, that customer is more likely to
continue to choose our solutions for additional products. Furthermore, achieving
the broadest number of design wins creates an opportunity to capitalize on the
success of any one of our customers' products, a particularly important factor
in the rapidly developing broadband market. We maximize our ability to compete
for design wins by using our experienced sales and marketing organizations to
both access the greatest number of customers and further penetrate our existing
customer base.
TARGET ALL APPLICATIONS WITHIN THE DSL SEGMENT. Our strategy is to provide
the necessary technologies to enable all applications within the DSL segment. We
are currently shipping chip sets based upon ADSL, HDSL, HDSL2, HDSL4, VDSL, SDSL
and SHDSL technologies. Our chip sets are used in both central office and home
and business locations to enable high-speed data, voice and video applications
such as Internet access, voice and video over DSL, telecommuting and networking
among branch offices. We have introduced multi-mode asymmetric and symmetric
chip sets that interoperate with all applicable coding techniques, or line
codes, and we will continue to monitor industry trends and refine our product
development efforts to target emerging DSL data, voice and video applications.
LEVERAGE ADVANCED SYSTEM-LEVEL EXPERTISE. Our strategy is to leverage our
advanced system-level expertise in order to provide increasing amounts of
silicon content on both the central office and customer premise ends of the DSL
connection. We also intend to use our system-level knowledge to develop and
market chip sets that can be cost-
7
effectively and rapidly incorporated into complete DSL network system solutions
designed and manufactured by our customers. This strategy is intended to enable
our customers to optimize time-to-market, performance and system cost. By
working closely with our customers throughout the design and deployment process,
we gain valuable insights and are often able to anticipate their needs and
incorporate value-added functionality onto our chip sets. We gain additional
insights by continually testing our solutions against real-world models of DSL
networks to verify their performance in harsh and unpredictable deployment
environments. We have also used our system-level expertise to create
state-of-the-art system test facilities to verify the performance and operation
of new chip sets. We have invested significant resources in automating our test
facility to maximize the efficiency and reliability of our tests. We will
continue to make our test facility readily available to our customers to verify
the performance of their DSL network system products. Furthermore, we will
continue to provide comprehensive reference design guides that enable our
customers to apply our system-level expertise to their products.
EXPAND OUR RESOURCES AND CAPABILITIES. Our strategy is to maintain and
expand upon our position as one of the largest organizations dedicated to DSL
system solutions and to leverage our core competencies and capabilities to
comprehensively support our growing customer base and the continued deployment
of DSL. We will continue to seek acquisition opportunities that meet our strict
financial and technical requirements and that also allow us to enhance our core
competencies, better support our customers through increased offerings and
enhance shareholder value. We are currently investing substantial development
resources in system-level knowledge, communications algorithms, signal
processing and signal conversion, voice compression, echo cancellation, data
switching, routing and security, application specific network processing, and
communication protocols. We are devoting resources to enhance our
high-performance algorithms and to increase system integration by embedding more
system functions on a single integrated circuit. We will continue to work
closely with our customers to develop new and enhanced solutions that address
next-generation DSL network market opportunities.
DRIVE INDUSTRY STANDARDS. We actively participate in the formulation of
world-wide industry standards for broadband network access markets. We believe
such participation accelerates and expands the development of markets for our
products and provides valuable insights and relationships, which assist us in
directing our product development efforts to target emerging market
opportunities.
PRODUCTS
We offer a broad suite of chip set solutions for DSL, and network
processing. Our product offerings include various combinations of digital signal
processors, network or communication processors, integrated software on silicon,
and analog front-end chips, line drivers and reference design guides. Many of
our chip sets utilize common circuit blocks that leverage our overall product
development resources and expedite our overall time to market.
DSL PRODUCTS
We have designed a family of System-On-Chip integrated circuits for use in
home and business DSL products that incorporate a combination of multiple system
functions. We offer solutions for both the equipment that resides in a service
provider's central office as well as for the equipment that resides in the
customer's premise. Solutions can optionally include a DSL asymmetric or
symmetric modem, an application specific network processor, and Ethernet, PCI or
USB data interface.
ASYMMETRIC CENTRAL OFFICE CHIP SETS: TITANIUM FAMILY
Our asymmetric digital subscriber line, commonly referred to as ADSL, chip
sets, marketed as Titanium, provide cost-effective, high-speed local loop access
for Internet and other applications where downstream transmission rates to end
users are faster than upstream transmission rates from end users. This
asymmetric transmission is provided over one pair of copper telephone wires with
downstream data transmission rates ranging from 32 Kbps to 16 Mbps or faster.
ADSL also allows the telephone line to be used simultaneously for standard
telephone voice service and data transmission. Our Titanium family of chip sets
are multi-port in density, ranging from 4 to 24 ports per digital signal
processor chip and from 4 to 8 ports per analog front-end chip.
Our ADSL chip sets are designed to meet the American National Standards
Institute, or ANSI standard specification T1.413, and International
Telecommunications Union, or ITU, standard G.992.1 for 8 Mbps configuration
(known also as G.dmt), including Annex A, B and C options to these standards.
Our chip sets also meet ITU standard G.992.2 (known as G.Lite), exceeding the
standard's 1.5 Mbps specification with speeds up to 4 Mbps. Additionally, our
chip sets offer enhanced data rates of up to 16Mbps and faster, compliant with
newer standards that are being established.
8
SYMMETRIC CENTRAL OFFICE CHIP SET: ORION FAMILY
Our symmetric digital subscriber line, also known as SDSL, chip sets,
marketed as Orion, provide cost-effective network access where downstream
transmission rates to end users are the same as upstream transmission rates from
end users. Our SDSL chip sets are available in different DSL configurations,
including IDSL, HDSL, HDSL2, HDSL4 and G.SHDSL. The most popular symmetric
configuration is G.SHDSL, which delivers symmetric data rates from 192 Kbps to
2.3 Mbps over one standard copper wire pair and up to 4.6 Mbps over two copper
wire pairs at distances much greater than traditionally deployed SDSL solutions.
Additionally, the extended reach of G.SHDSL allows service providers to increase
their customer service area by 30%. Our Orion family of chip sets are also
multi-port in density, ranging from 2 to 8 ports per chip.
CONVERGENCE PLATFORM FOR THE CENTRAL OFFICE: TITANIUM G24
Our Titanium G24 solution supports both ADSL and G.SHDSL standards on a
single platform. The Titanium G24 convergence platform is a high-density
solution with 24 channels capable of supporting asymmetric data rates of up to
16 Mbps and higher and symmetric rates of up to 4.6 Mpbs on a single chip.
CUSTOMER PREMISE EQUIPMENT CHIP SETS: TITANIUM USB, TITANIUM PCI, TITANIUM
PLUS E'NET AND ARGON
We offer both asymmetric and symmetric DSL CPE chip sets used in the
equipment that resides in the end user's home or office. Our Titanium USB chip
set provides ADSL network access through a personal computer USB connection. Our
Titanium PCI chip set provides ADSL network access through a PCI interface. ADSL
network access with router and bridge capabilities through Ethernet connections
are provided by our Titanium Plus E'Net and Argon chip sets. Our asymmetric DSL
CPE products support Annex A, B and C standards to meet all international DSL
market needs.
COMMUNICATIONS AND NETWORK PROCESSORS
We have three families of communications and network processor products:
Helium, Nitrogen and Columbia. Our Helium family of communications processors is
a range of programmable single chip devices that are used primarily in CPE
products to provide network communication functions and added value features for
the end user. These chips are highly integrated solutions that include PCI, USB,
and Ethernet controllers as well as flexible expansion interfaces to enable
customers to add capabilities such as home wireless networking. The Nitrogen
family of communications products is optimized for IP/Ethernet applications only
and are targeted for use in residential gateway and home networking products. We
are currently sampling a programmable network communications processor,
Columbia, which combines both hardware and software implementations to yield
high performance and flexible processing of communication protocols used in DSL
network access systems. This product performs ATM and IP processing, traffic
management and aggregation of multiple symmetric or asymmetric DSL access line
into a single high-speed connection into the wide area network. We expect that
this product will be primarily used in DSLAMs and equipment designed for use in
digital loop carriers and multi-dwelling or business multi-tenant unit
applications. Our network communications processor also has applications in
voice gateway cards, multi-service wide area network switches and edge routers.
The product's flexible hardware and software implementation will also permit a
seamless migration from today's predominantly ATM networks to tomorrow's
converged IP networks.
Our ISOS TM software works in combination with the Helium and Nitrogen chips
to manage data, routing, bridging, switching and protocol conversions needed to
encapsulate and route information packets. Additional features of these products
include system management, firewall security, embedded web server,
auto-configuration of DSL services and Universal Plug-and-Play, also called
UPNP. We also offer customers a full set of software development tools including
compilers, linkers and other special-purpose tools to enable the customer to
design additional applications.
VOICE PROCESSING PRODUCTS
Voice over Packet, or VoP, solutions enable telecom carriers to move their
voice services away from traditional circuit-switched networks to packet-based
networks, thereby reducing operational costs and providing a lower cost
alternative to traditional telephone services. Our products meet the
requirements of both competing protocols for this emerging standard, IP and ATM.
We offer complete and scaleable voice over DSL and voice over IP solutions for
CPE applications. Additionally, our software offers solutions for a wide variety
of voice and telephone applications.
9
SALES, MARKETING AND TECHNICAL SUPPORT
Our sales and marketing strategy is to expand the breadth of our customer
base by using our extensive worldwide sales organization. As of December 31,
2002, we employed approximately 100 sales, marketing and technical support
professionals. Our sales managers are dedicated to principal customers to
promote close cooperation and communication. In addition, our design and
applications engineering staff is actively involved with customers during all
phases of design and production and provides customer support through our
worldwide sales offices, which are generally in close proximity to customers'
facilities. To complement our direct sales and customer support efforts, we also
utilize independent manufacturers' representatives to support the sales managers
by providing leads, nurturing customer relationships, closing design wins and
securing customer orders.
Providing comprehensive DSL reference design guides to our customers is
integral to our sales strategy. Our design materials are intended to enable our
customers to effectively incorporate our chip sets into their DSL systems and to
achieve a faster time-to-market, which reduces the necessary level of customer
support and allows for a greater allocation of our sales effort to target future
design wins. Our comprehensive, step-by-step reference design guides include
schematics, bills of materials, circuit board layouts, application interface
programs, debug guides and software. Our reference design guides enable
equipment manufacturers to bring innovative products to market quickly and
cost-effectively. Our advanced technical support and comprehensive field support
also ensures that our customers' products perform optimally in real world
deployment environments.
CUSTOMERS
We have sold our products worldwide to over 400 telecommunications equipment
manufacturers. Our chip sets are incorporated by our customers into the
following products:
o DSLAMs, which are used to terminate hundreds of lines in a
central office and aggregate them onto high-speed lines for
transmission to the communications backbone;
o DSL network interface units, which are customer premise
products that enable high-speed data transmission over the
local loop;
o DSL-compatible routers, which are used to connect one or more
personal computers to the local loop; and
o USB Ethernet (standalone) and PCI (internal) network interface
cards, which are used to connect a personal computer to the
local loop.
Our customers market their products to public and private telecommunications
service providers. These service providers include traditional telephone
companies, CLECs, Internet service providers, businesses and government
entities.
We depend on a relatively small group of customers, the composition of which
has varied over time, for a large percentage of our revenues. In the years ended
December 31, 2002, 2001 and 2000, our top customers, defined as those customers
who individually represented at least ten percent of our net revenues accounted
for 14.0%, 39.5%, and 63.0%, respectively, of our total net revenues. In 2002,
our top customer was Ambit Microsystems, which accounted for 14.0% of our net
revenues. In 2001, our top customers were Lucent Technologies and Cisco Systems,
which accounted for 27.0% and 12.5% of our net revenues. In 2000, our top
customers were Cisco Systems, Lucent Technologies and Nortel Networks, which
accounted for 28.0%, 23.7% and 11.3% of our net revenues, respectively. We do
not have long-term contracts with any of our customers that obligate them to
continue to purchase our products and these customers could cease purchasing our
products at any time. Many of our customers purchase our products indirectly
through contract manufacturers. These third party manufacturers are typically
responsible for ordering and paying for our products.
PRODUCT DEVELOPMENT
Our core engineering team has substantial expertise in DSL system solution
technology including DSL modems, network processors, voice compression, very
large scale integration, or VLSI, algorithms and network communications
software. Since our founding in August 1996, we have invested significant
resources to expand our product development group. As of December 31, 2002,
approximately 525 employees were engaged in product development activities.
These engineers are
10
involved in advancing our technology core competencies and our product
development activities. Recently, we have been devoting a significant portion of
our research and development expenditures to products incorporating network
processors, voice processing, and data switching, routing, and security
technologies into our integrated circuits and software solutions for the DSL
market.
We believe that we must continually enhance the performance and flexibility
of our current products, and successfully introduce new products to maintain our
leadership position. Our research and development expenditures in the years
ended December 31, 2002, 2001 and 2000 were $155.9 million (including $28.6
million of non-cash compensation), $132.8 million (including $22.9 million of
non-cash compensation), and $113.4 million (including $16.8 million of non-cash
compensation).
MANUFACTURING
We do not own or operate a semiconductor fabrication, packaging or test
facility. Currently, we depend primarily on Agere Systems, United
Microelectronics Corporation, or UMC, and Taiwan Semiconductor Manufacturing
Company, Ltd., or TSMC, to deliver to us sufficient quantities of semiconductor
wafers. Agere Systems delivers to us assembled and fully-tested devices. UMC and
TSMC deliver to us semiconductor devices in wafer form that we, in turn, have
assembled and tested at various subcontract assembly and test companies located
primarily in Asia. We have also relied on Zilog, Inc. and LSI Logic Corporation
to manufacture certain of our products.
We have had a series of manufacturing arrangements with Agere Systems, the
latest of which became effective in March 1999. Under this agreement, Agere
Systems will fill orders for chip sets in accordance with agreed-upon quantity,
price, lead-time and other terms. This agreement, however, does not guarantee
that Agere Systems will adequately fill our orders for current chip sets (either
in quantity or timing), or that we will be able to negotiate mutually
satisfactory terms for manufacturing our future chip sets. Further, Agere
Systems has the right to discontinue the supply of any chip set upon 12 months'
notice (as long as Agere Systems fills our orders for commercially reasonable
quantities of that chip set during the notice period). In addition, Agere
Systems' ability to manufacture our chip sets is limited by its available
capacity, and under some circumstances, Agere Systems may allocate its available
capacity to its other customers.
In October 1999, we entered into an agreement with TSMC, which also provides
for a five-year term and is terminable by the supplier upon 12 months' advance
notice to us. TSMC will still fill our orders for commercially reasonable
quantities of product during the 12-month notice period.
We have an agreement with UMC that became effective in December 1999 which
provides us with the ability to obtain delivery of specified chip sets in
accordance with the agreement's terms. Although the UMC agreement provides for a
term of five years, with subsequent one-year renewals, the supplier may cancel
the agreement upon 12 months' advance notice to us. Although UMC would still be
required to fill our orders for commercially reasonable quantities of product
during the twelve-month notice period, the termination of this agreement by UMC
could cause a disruption to our business.
On some occasions we have experienced delays and may in the future
experience delays in receiving products from Agere Systems, UMC, TSMC or other
manufacturing partners. Any problems associated with the delivery, quality or
cost of wafer fabrication, assembly or testing of our products could adversely
affect our business, financial condition and results of operations. If we are
required for any reason to seek a new manufacturer of the chips or chip sets
presently manufactured by our current manufacturing partners, we could
experience a serious adverse impact on our business. Such a new manufacturer may
not be available and, in any event, switching to a new manufacturer would
require a delay of six months or more and would involve significant expense and
disruption to our business. We intend to continue to secure multiple sources of
wafer fabrication, assembly and test to reduce our dependence on any single
source, provide additional manufacturing capacity, and access diverse
manufacturing technologies. There can be no assurance that we will be able to
successfully qualify and secure such additional sources of supply.
COMPETITION
We primarily compete with providers of integrated circuits for the DSL
market. The DSL chip set market is intensely competitive. We expect competition
to intensify further as current competitors expand their product offerings and
new competitors enter the market. Our customers place a premium on
interoperability and compliance with open standards in our products.
Consequently, our industry is marked by low barriers to entry and continual
change in the competitive landscape. We believe that we must compete on the
basis of a variety of factors, including time-to-market, functionality,
conformity to industry standards, performance, price, breadth of product lines,
product migration plans and technical
11
support.
We believe our principal competitors include:
o for asymmetric DSL products, Analog Devices, Aware Inc.,
Broadcom Corporation, Centillium Communications, Conexant
Systems, Infineon Technologies, Intel Corporation, Samsung
Electronics, ST Microelectronics, and Texas Instruments;
o for symmetric DSL products, Adtran, Conexant Systems,
Infineon Technologies, and MetaLink;
o for VDSL products, Broadcom Corporation, Ikanos
Communications, Inc. and Infineon Technologies;
o for communications and network processor products, Intel
Corporation, Motorola Corporation, Texas Instruments and
various providers of application-specific integrated
circuits;
o for home router products, ADMTek, Broadcom Corporation,
Conexant Systems and Samsung; and
o for voice compression products, Broadcom Corporation,
Centillium Communications and Texas Instruments.
From time to time new competitors may enter these markets and existing
competitors may exit.
Many of our competitors have greater name recognition, their own
manufacturing capabilities, significantly greater financial and technical
resources, and the sales, marketing and distribution strengths that are normally
associated with large multinational companies. These competitors may also have
pre-existing relationships with our customers or potential customers. These
competitors may compete effectively with us because in addition to the
above-listed factors, they can introduce new technologies faster and address
customer requirements or devote greater resources to the promotion and sale of
their products than we do. Further, in the event of a manufacturing capacity
shortage, these competitors may be able to manufacture products when we are
unable to do so.
The DSL market has become increasingly subject to price competition driven
by the lowest cost providers of DSL systems. We anticipate that average per unit
selling prices of DSL chip sets will continue to decline as product technologies
mature. If we are unable to reduce our costs sufficiently to offset declines in
the average per unit selling prices or are unable to introduce new higher
performance products with higher average per unit selling prices, our operating
results may be adversely impacted. Since we do not manufacture our own products,
we may be unable to negotiate volume discounts with our foundries in order to
reduce the costs of manufacturing our chip sets in response to declining average
per unit selling prices. Many of our competitors are larger, with greater
resources and therefore may be able to achieve greater economies of scale and be
less vulnerable to price competition. Our inability to achieve manufacturing
efficiencies may also have an adverse impact on our operating results.
INTELLECTUAL PROPERTY
Our success depends to a significant degree upon our ability to protect our
intellectual property. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our products or obtain and
use information that we regard as proprietary. In the past, competitors have
recruited our employees who have had access to our proprietary technologies,
processes and operations. Our competitors' recruiting efforts, which we expect
will continue, expose us to the risk that such employees will misappropriate our
intellectual property.
We rely in part on patents to protect our proprietary technologies and
processes and to enhance our ability to obtain cross-licenses of intellectual
property from others either to obtain access to intellectual property we do not
possess or to resolve potential intellectual property claims against us. As of
December 31, 2002, we had approximately 105 patents in the United States and a
number of issued and pending patents in other countries. These patents
principally cover various aspects of systems and features relating to
telecommunications technologies and telecommunications products, including
aspects specifically pertaining to particular DSL algorithms and DSL
communications systems. These patents have expiration dates ranging from 2009 to
2022. In addition, as of December 31, 2002, we had approximately 240 patent
applications pending in
12
the United States Patent and Trademark Office. These patents may never be
issued. Even if these patents are issued, taken together with our existing
patents, they may not provide sufficiently broad protection for our proprietary
rights, or they may prove to be unenforceable. To protect our proprietary
rights, we also rely on a combination of copyrights, trademarks, trade secret
laws, contractual provisions, licenses and mask work protection under the
Federal Semiconductor Chip Protection Act of 1984. It is our policy to require
customers to obtain a software license contract before we provide them with
certain computer programs. We also typically enter into confidentiality
agreements with our employees, consultants and customers and seek to control
access to, and distribution of, our other proprietary information.
The laws of some foreign countries do not protect our proprietary rights as
extensively as do the laws of the United States, and many U.S. companies have
encountered substantial infringement problems in such countries, some of which
are countries in which we have sold and continue to sell products. There is also
a risk that our means of protecting our proprietary rights may not be adequate.
For example, our competitors may independently develop similar technology,
duplicate our products or design around our patents or our other intellectual
property rights. If we fail to adequately protect our intellectual property, it
would be easier for our competitors to sell competing products.
EMPLOYEES
As of December 31, 2002, we had approximately 700 full-time employees,
including 525 employees engaged in product development, 100 engaged in sales,
marketing and technical support and 75 engaged in general and administrative
activities.
Our employees are not represented by any collective bargaining agreements,
and we have never experienced a work stoppage. We believe our employee relations
are good.
AVAILABILITY OF REPORTS AND OTHER INFORMATION
Our website is www.globespanvirata.com. We have begun to make available on
this website, free of charge, access to our annual, quarterly and current
reports and other documents filed by us with the Securities and Exchange
Commission as soon as reasonably practical after the filing date.
CERTAIN BUSINESS RISKS
Our business, financial condition and operating results can be impacted by a
number of factors including, but not limited to, those risks set forth below.
You should carefully consider and evaluate all of the information in this
report, including the risk factors listed below. Any of these risks could
materially and adversely affect our business, financial condition and results of
operations, which in turn could materially and adversely affect the price of our
common stock and other securities.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE BECAUSE OF MANY FACTORS, WHICH
WOULD CAUSE OUR STOCK PRICE TO FLUCTUATE.
Our net revenues and operating results have fluctuated in the past and are
likely to fluctuate significantly in the future on a quarterly and annual basis
due to a number of factors, many of which are outside of our control. Investors
should not rely on the results of any one quarter or series of quarters as an
indication of our future performance.
If our operating results are below the expectations of public market analysts
or investors, the market price of our common stock may decline significantly.
Due to our acquisitions accounted for as purchases, we have incurred substantial
non-cash compensation and amortization expenses and may incur similar expenses
associated with potential future transactions.
These variations in our operating results may be caused by factors related to
the operation of our business, including:
o changes in the timing and size of semiconductor orders from,
and shipments to, our existing and new customers;
o the loss of or decrease in sales to a significant customer
or a failure to complete significant transactions;
13
o the effectiveness of our expense and product cost control
and reduction efforts;
o the mix of our products shipped with different gross
margins, including the impact of volume purchases from our
large customers at discounted average selling prices;
o fluctuations in the manufacturing yields of our third party
semiconductor foundries and other problems or delays in the
fabrication, assembly, testing or delivery of our products;
o the timing and size of expenses, including operating
expenses and expenses of developing new products and product
enhancements;
o the volume and average cost of products manufactured; and
o our ability to attract and retain key personnel.
Variations will also be caused by factors related to the development of the
DSL market and the competition we expect to face from other DSL chip set
suppliers, including:
o the timing and rate of deployment of DSL services by
telecommunications service providers;
o the timing and rate of deployment of alternative high-speed
data transmission technologies, such as cable modems,
high-speed wireless data transmission and fiber optic
networks;
o anticipated decreases in per-unit prices as competition
among DSL chip set suppliers increases; and
o the level of market penetration of our products relative to
those of our competitors.
Variations will also be caused by other factors affecting our business, many
of which are substantially outside of the control of management, including:
o costs associated with future litigation, including
litigation relating to the use or ownership of intellectual
property;
o acquisition costs or other non-recurring charges in
connection with the acquisition of companies, products or
technologies;
o foreign currency and exchange rate fluctuations which may
make dollar-denominated products more expensive in foreign
markets or could expose us to currency rate fluctuation
risks if our sales become denominated in foreign currencies;
o economic and market conditions in the semiconductor industry
and the broadband communications markets, including the
effects of the current significant economic slowdown; and
o international conflicts and acts of terrorism and the impact
of adverse economic, market and political conditions
worldwide.
THE GENERAL ECONOMIC SLOWDOWN, AND SLOWDOWN IN SPENDING IN THE
TELECOMMUNICATIONS INDUSTRY SPECIFICALLY, HAS AND MAY CONTINUE TO ADVERSELY
AFFECT OUR BUSINESS AND OPERATING RESULTS.
During 2001 and 2002, we, like many of our customers and competitors, were
adversely impacted by a global economic slowdown. This slowdown has resulted in
a decrease in spending on DSL equipment by service providers and
lower-than-expected sales volume for DSL equipment manufacturers. Beginning in
2001, the telecommunications markets which we serve were characterized by
dramatic decreases in end-user demand and high levels of channel inventories
that reduced visibility into future demand for our products. As a result of this
sharply reduced demand across our product portfolio, we recorded $80.8 million
of inventory write-downs in 2001. We have not yet fully recovered from the
effects of these unfavorable economic conditions and are unable to predict the
timing, strength and duration of the economic recovery in the semiconductor and
broadband communications markets. These conditions make it extremely difficult
for our customers, vendors and for us to accurately forecast and plan business
activities. If
14
any of these conditions continue or worsen, it could result in lower than
expected demand for, or lower than expected average selling prices of, our
products and could have a material adverse effect on our revenues and results of
operations generally, which could cause the market price of our common stock to
decline.
PRICE COMPETITION AMONG OUR COMPETITORS AND VOLUME PURCHASES BY LARGE CUSTOMERS
MAY RESULT IN A DECLINE OF THE GROSS MARGINS FOR OUR PRODUCTS IN THE FUTURE.
We expect that price competition among our competitors and volume purchases
of our products at discounted prices may reduce our gross margins in the future.
We anticipate that average per-unit selling prices of established DSL products
will continue to decline as product technologies mature. We believe that in
order to remain competitive we must continue to reduce the cost of producing and
delivering existing products. Since we do not manufacture our own products, we
may be unable to reduce manufacturing costs in response to declining average
per-unit selling prices. Many of our potential competitors are larger, with
greater resources, and therefore may be able to achieve greater economies of
scale and are less vulnerable to price competition.
Further, we expect that average per-unit selling prices of our products will
decrease in the future due to volume discounts to our large customers. These
declines in average per-unit selling prices will generally lead to declines in
gross margins for these products.
OUR RESTRUCTURING AND REORGANIZATION EFFORTS COULD RESULT IN THE EROSION OF
EMPLOYEE MORALE, LEGAL ACTIONS AGAINST US AND MANAGEMENT DISTRACTIONS, AND COULD
IMPAIR OUR ABILITY TO RESPOND RAPIDLY TO GROWTH OPPORTUNITIES IN THE FUTURE.
As a result of the continuing significant economic slowdown and the related
uncertainties in the technology sector and semiconductor industry, we have
adopted and continue to adopt and implement a restructuring plan. The plan
focuses on cost reductions and operating efficiencies, and includes workforce
reductions. Additionally, in connection with our merger with Virata Corporation,
we implemented a reorganization plan, which consisted primarily of eliminating
redundant positions and consolidating our worldwide facilities. The recent
workforce reductions resulting from these plans could result in an erosion of
morale, and a lack of focus and reduced productivity by our remaining employees,
including those directly responsible for revenue generation, which in turn may
affect our revenue in the future. In addition, employees directly affected by
the reductions may seek future employment with our business partners, customers,
or competitors. Although all employees are required to sign a confidentiality
agreement with us at the time of hire, there can be no assurances that the
confidential nature of our proprietary information will be maintained in the
course of such future employment. Additionally, we may face wrongful termination
or other claims relating to compensation asserted by employees directly affected
by the reductions. We could incur substantial costs in defending ourselves or
our employees against such claims, regardless of the merits of such actions.
Furthermore, such matters could divert the attention of our management away from
our operations, harm our reputation and increase our expenses. We cannot assure
you that our restructuring and reorganization efforts will be successful, that
future operations will improve, or that the completion of the restructuring will
not disrupt the Company's operations. These plans may also adversely impact our
ability to respond rapidly to any renewed growth opportunities in the future.
Management continues to evaluate our organization and may implement further
restructuring actions in the future.
WE HAVE A HISTORY OF LOSSES, AND WE WILL INCUR SUBSTANTIAL LOSSES IN THE FUTURE,
WHICH MAY PREVENT US FROM ACHIEVING OR SUSTAINING PROFITABILITY OR POSITIVE CASH
FLOW.
We incurred a net loss of $655.0 million, $377.5 million, and $153.1 million
in the years ended December 31, 2002, 2001, and 2000, respectively. We expect to
continue to incur net losses, and these losses may be substantial. Because of
substantial operating expenses, we will need to generate significant quarterly
revenues to achieve profitability or positive cash flow. Even if we do achieve
profitability, we may not be able to sustain or increase profitability or cash
flow on a quarterly or annual basis. Our ability to generate future revenues
will depend on a number of factors, many of which are beyond our control. These
factors include:
o the rate of market acceptance of our products and the demand
for equipment that incorporates our products;
o changes in industry standards governing DSL technologies;
o the extent and timing of new customer transactions;
15
o personnel changes, particularly those involving engineering
and technical personnel;
o regulatory developments; and
o general economic trends.
Due to these factors, we may not be able to achieve or sustain profitability
or positive cash flow. Thus, our ability to continue to operate our business and
implement our business strategy may be hampered and the value of our stock may
decline.
THE LOSS OF ONE OR MORE OF OUR KEY CUSTOMERS WOULD RESULT IN A LOSS OF A
SIGNIFICANT AMOUNT OF OUR NET REVENUES.
A relatively small group of customers, the composition of which has varied
over time, account for a large percentage of our net revenues. We expect this
trend to continue. Our business will be seriously harmed if we do not generate
as much revenue as we expect from our largest customers, or experience a loss of
any of these customers or suffer a substantial reduction in orders from these
customers. We define our largest customers as those customers who individually
represented at least 10% of our net revenues. For the year ended December 31,
2002, we had one large customer, Ambit Microsystems, which accounted for 14.0%
of our net revenues. For the year ended December 31, 2001, our largest customers
were Lucent Technologies and Cisco Systems which accounted for 27.0% and 12.5%
of our net revenues, respectively. For the year ended December 31, 2000, our
largest customers were Cisco Systems, Lucent Technologies and Nortel Networks,
which accounted for 28.0%, 23.7% and 11.3% of our net revenues, respectively.
We do not have long-term purchase contracts with any of our customers that
obligate them to continue to purchase our products and these customers could
cease to purchase our products at any time. It is also possible that equipment
manufacturers may design and develop internally, or acquire, their own
semiconductor technology, rather than continue to purchase these products from
third parties like us. If we are not successful in maintaining relationships
with key customers and winning new customers, sales of our products may decline.
In addition, because a significant portion of our business has been and is
expected to continue to be derived from orders placed by a limited number of
large customers, variations in the timing of these orders can cause significant
fluctuations in our operating results.
Furthermore, we do not have a substantial non-cancelable backlog of orders;
our customers can generally cancel or reschedule orders upon short notice. The
cancellation or deferral of product orders or overproduction due to the failure
of anticipated orders to materialize could result in us holding excess or
obsolete inventory, which has resulted and could again in the future result in
write-downs of inventory that would have a material adverse effect on our
operating results.
BECAUSE WE RELY ON THE TECHNOLOGY OF THIRD PARTIES, THE LOSS OF OR INABILITY TO
OBTAIN THE THIRD PARTY TECHNOLOGY COULD RESULT IN INCREASED COSTS OR DELAYS IN
THE PRODUCTION OR IMPROVEMENT OF OUR PRODUCTS.
We currently license technology of third parties to develop and manufacture
our products. If any of these third party providers were to change their product
offerings or terminate these licenses, we would incur additional developmental
costs and, perhaps, delays in production, or be forced to modify our existing or
planned software product offerings. In addition, if the cost of any of these
third party licenses or products significantly increases, we could suffer a
resulting increase in costs or delays in our ability to manufacture our products
or provide complete customer solutions and this could harm our results of
operations. We cannot be sure that such third party licenses or substitutes will
be available on commercially favorable terms.
BECAUSE MANUFACTURERS OF DSL EQUIPMENT MAY BE RELUCTANT TO CHANGE THEIR SOURCES
OF COMPONENTS, IF WE DO NOT ACHIEVE DESIGN WINS WITH MANUFACTURERS OF DSL
EQUIPMENT, WE MAY BE UNABLE TO SECURE SALES FROM THESE CUSTOMERS IN THE FUTURE.
Once a manufacturer of DSL equipment has designed a supplier's semiconductor
into its products, the manufacturer may be reluctant to change its source of
semiconductors due to the significant costs associated with qualifying a new
supplier. Accordingly, our failure to achieve design wins with manufacturers of
DSL equipment which have chosen a competitor's semiconductor could create
barriers to future sales opportunities for us with these manufacturers.
16
WE MAY INCUR SUBSTANTIAL EXPENSES DEVELOPING PRODUCTS BEFORE WE EARN ASSOCIATED
NET REVENUES AND ULTIMATELY MAY NOT SELL A LARGE VOLUME OF OUR PRODUCTS.
We develop products based on forecasts of demand and incur substantial
product development expenditures prior to generating associated net revenues. We
receive limited orders for products during the period that potential customers
test and evaluate our products. This test and evaluation period typically lasts
from three to six months or longer, and volume production of the equipment
manufacturer's product that incorporates our products typically does not begin
until this test and evaluation period has been completed. As a result, a
significant period of time may lapse between our product development and sales
efforts and the realization of revenues from volume ordering of products by our
customers. In addition, achieving a design win with a customer does not
necessarily mean that this customer will order large volumes of our products and
we may never realize revenues from our efforts. A design win is not a binding
commitment by a customer to purchase products. Rather, it is a decision by a
customer to use our products in the design process of that customer's products.
A customer can choose at any time to discontinue using our products in that
customer's designs or product development efforts. If our products are chosen to
be incorporated into a customer's products, we may still not realize significant
net revenues from that customer if that customer's products are not commercially
successful.
FUTURE ACQUISITIONS MAY BE DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS, DILUTE
STOCKHOLDER VALUE OR DIVERT MANAGEMENT ATTENTION.
In the future, we may seek to acquire or invest in additional businesses,
products, technologies or engineers. While there are currently no unannounced
purchase agreements for the acquisition of any material business or assets, such
transactions can be effected quickly, may occur at any time and may be
significant in size relative to our existing assets or operations.
Mergers and acquisitions of high-technology companies involve many risks,
including:
o difficulties in managing growth following acquisitions;
o difficulties in the integration of the acquired personnel,
operations, technologies, products and systems of the
acquired companies;
o uncertainties concerning the intellectual property rights we
purport to acquire;
o unanticipated costs associated with the acquisitions;
o the diversion of management's attention from other business
concerns;
o adverse effects on existing business relationships with our
customers or the acquired companies' customers;
o potential difficulties in completing projects associated
with purchased in-process research and development;
o the risks of entering markets in which we have no or limited
direct prior experience and where competitors in such
markets have stronger market positions; and
o the inability to retain employees of acquired companies.
Additionally, in periods subsequent to an acquisition, we must evaluate
goodwill and acquisition-related intangible assets for impairment. When such
assets are found to be impaired, they will be written down to estimated fair
value, with a charge against earnings. During 2002, the Company recorded a
charge of $493.6 million to reduce goodwill and other intangible assets recorded
in connection with its various acquisitions, based upon the amount by which the
carrying amount of these assets exceeded their fair value. We expect that future
acquisitions will result in our recording of additional goodwill.
Future acquisitions may also require us to use substantial portions of
available cash as all or a portion of the purchase price. Acquisitions may also
materially and adversely affect our results of operations because they may
require large
17
one-time write-offs, increased debt or contingent liabilities, substantial
depreciation or deferred compensation charges or the amortization of expenses
related to tangible and intangible assets.
Furthermore, if we issue equity or convertible debt securities in connection
with an acquisition, the issuance may be dilutive to our existing stockholders.
The equity or debt securities that we may issue could have rights, preference or
privileges senior to those of holders of our common stock. Any of the events
described in the foregoing paragraphs could cause the price of our common stock
to decline.
IF LEADING EQUIPMENT MANUFACTURERS DO NOT INCORPORATE OUR PRODUCTS INTO
SUCCESSFUL PRODUCTS, SALES OF OUR PRODUCTS WILL SIGNIFICANTLY DECLINE.
Our products will not be sold directly to the end user; rather, they will be
components of other products. As a result, we must rely upon equipment
manufacturers to design our products into their equipment. We must further rely
on this equipment to be successful. If equipment that incorporates our products
is not accepted in the marketplace, we may not achieve adequate sales volume of
products, which would have a negative effect on our results of operations.
Accordingly, we must correctly anticipate the price, performance and
functionality requirements of these DSL equipment manufacturers. We must also
successfully develop products that meet these requirements and make such
products available on a timely basis and in sufficient quantities. Further, if
there is consolidation in the DSL equipment manufacturing industry, or if a
small number of DSL equipment manufacturers otherwise dominate the market for
DSL equipment, then our success will depend upon our ability to establish and
maintain relationships with these market leaders. If we do not anticipate trends
in the market for products enabling the digital transmission of data, voice and
video to homes and business enterprises over existing copper wire telephone
lines and meet the requirements of equipment manufacturers, or if we do not
successfully establish and maintain relationships with leading DSL equipment
manufacturers, then our business, financial condition and results of operations
will be seriously harmed.
IF OUR CUSTOMERS EXPERIENCE COMPONENT SUPPLY SHORTAGES, OUR NET REVENUES AND
OPERATING RESULTS MAY DECLINE.
The semiconductor industry from time to time is affected by limited supplies
of certain key components and materials. We will rely on customers, broadband
and DSL equipment manufacturers, to produce reliable, successful DSL systems by
incorporating our products into their products. In the past, there have been
industry-wide shortages of electronic components, such as capacitors. In some
cases, supply shortages of particular components or materials will substantially
curtail production of products using these components. We cannot guarantee that
we would not lose potential sales from customers if key components or materials
are unavailable to them, and as a result, we are unable to maintain or increase
our production levels.
RAPID CHANGES IN THE MARKET FOR DSL PRODUCTS MAY RENDER OUR SOLUTIONS OBSOLETE
OR UNMARKETABLE.
The market for our products is characterized by:
o intense competition;
o rapid technological change;
o frequent new product introductions by competitors;
o changes in customer demands; and
o evolving industry standards.
Beginning in 2001, the telecommunications markets which we serve were
characterized by dramatic decreases in end-user demand and high levels of
channel inventories that reduced visibility into future demand for our products.
As a result of this sharply reduced demand across our product portfolio, we
recorded $80.9 million of inventory write-downs in 2001. Additionally, the life
cycles of some of our products will depend heavily upon the life cycles of the
end products into which our products will be designed. Products with short life
cycles require us to closely manage production and inventory levels. We cannot
assure you that obsolete or excess inventories, which may result from
unanticipated changes in the estimated total demand for our products and/or the
estimated life cycles of the end
18
products into which our products are designed, will not materially and adversely
affect us.
Any of these factors could make our existing or proposed products obsolete or
unmarketable. If we fail to successfully introduce new products on a timely and
cost-effective basis that meet customer requirements and are compatible with
evolving industry standards, then our business, financial condition and results
of operations will be seriously harmed.
WE DEPEND ON A LIMITED NUMBER OF SUPPLIERS TO MANUFACTURE OUR PRODUCTS, AND ANY
DISRUPTION IN ANY OF THESE RELATIONSHIPS COULD PREVENT US FROM SELLING OUR
PRODUCTS OR RESULT IN SIGNIFICANT COSTS OR DELAYS.
We do not own or operate a semiconductor fabrication facility and intend to
continue to rely on third-party foundries and other specialist suppliers for all
of our manufacturing, assembly and testing requirements. However, these
foundries are not obligated to supply products to us for any specific period, in
any specific quantity or at any specific price, except as may be provided in a
particular purchase order that has been accepted by one of them. As a result, we
cannot directly control semiconductor delivery schedules, which could lead to
product shortages, quality assurance problems and increases in the costs of our
products. We may experience delays in the future and we cannot be sure that we
will be able to obtain semiconductors within the time frames and in the volumes
required by us at an affordable cost or at all. Any disruption in the
availability of semiconductors or any problems associated with the delivery,
quality or cost of the fabrication assembly and testing of our products could
significantly hinder our ability to deliver products to customers and may result
in a decrease in the sales of our products.
Our DSL chip designs are customized by a third-party foundry for their
specific manufacturing processes and IP cores. In order to second source or
switch foundry providers, our products would need to be redesigned for the
process technology and IP cores of the respective foundry. If we are required
for any reason to seek a new manufacturer of our products, a new manufacturer
may not be available and, in any event, switching to a new manufacturer would
require six months or more and would involve significant expense and disruption
to our business. From time to time, there are shortages in worldwide foundry
capacity. Such shortages, if they occur, could make it more difficult for us to
find a new manufacturer of our products if our relationship with any of our
suppliers is terminated for any reason.
WE MAY EXPERIENCE DIFFICULTIES IN TRANSITIONING OUR SEMICONDUCTOR WAFERS TO
SMALLER GEOMETRY PROCESS TECHNOLOGIES OR IN ACHIEVING HIGHER LEVELS OF DESIGN
INTEGRATION, WHICH MAY RESULT IN REDUCED MANUFACTURING YIELDS, DELAYS IN PRODUCT
DELIVERIES AND INCREASED EXPENSES.
In order to remain competitive, we expect to continue to transition our
products to increasingly smaller line width geometries. This transition will
require us to modify the manufacturing processes for our products and redesign
some products. We periodically evaluate the benefits, on a product-by-product
basis, of migrating to smaller geometry process technologies to reduce our
costs. In the past, we have experienced some difficulties in shifting to smaller
geometry process technologies or new manufacturing processes, which has resulted
in reduced manufacturing yields, delays in product deliveries and increased
expenses. We may face similar difficulties, delays and expenses as we continue
to transition our products to smaller geometry processes. We are dependent on
our relationships with our foundries to transition to smaller geometry processes
successfully. We cannot assure you that our foundries will be able to
effectively manage the transition or that we will be able to maintain our
foundry relationships. If we or our foundries experience significant delays in
this transition or fail to efficiently implement this transition, our business,
financial condition and results of operations could be materially and adversely
affected. As smaller geometry processes become more prevalent, we expect to
continue to integrate greater levels of functionality, as well as customer and
third party intellectual property, into our products. However, we may not be
able to achieve higher levels of design integration or deliver new integrated
products on a timely basis, or at all.
THIRD-PARTY CLAIMS REGARDING INTELLECTUAL PROPERTY MATTERS COULD CAUSE US OR OUR
CUSTOMERS TO STOP SELLING PRODUCTS OR PAY MONETARY DAMAGES.
There is a significant risk that third parties, including current and
potential competitors, will claim that our products, or our customers' products,
infringe on their intellectual property rights. The owners of those intellectual
property rights may bring patent infringement litigation against us. Any such
litigation, whether or not determined in our favor or settled by us, would be
costly and divert the attention of our management and technical personnel. As a
result of the merger with Virata, we expect to have significantly greater
revenues, operations in more countries, and more employees than either our
company or Virata had individually prior to the merger. As a result, it can be
expected that some third parties who believe that they have claims against
either company but chose not to assert those claims because of the size of each
individual company prior to the merger, may now believe that those claims
against the larger combined
19
company may be advantageous.
We have received correspondence, including a proposed licensing agreement,
from Texas Instruments (as successor to Amati Corporation) stating that Texas
Instruments believes that it owns or has exclusive licensing rights to a number
of patents that it believes are required for some products to be compliant with
certain ADSL industry standards, including the ANSI standard specification
T1.413. These industry standards are based on the DMT line code. We have
introduced products that we believe are compliant with these industry standards.
Texas Instruments has offered us licenses to these patents on terms that were
not deemed acceptable. If we are not able to agree on license terms in the near
future, we believe that it is likely that we will become engaged in intellectual
property litigation with Texas Instruments. We are also a party to various other
inquiries or claims in connection with intellectual property rights and could be
subject to similar claims, like the Texas Instruments claim, by third parties in
the future. We cannot assure you that we would prevail in litigation given the
complex technical issues and inherent uncertainties in intellectual property
litigation. In the event that we are adjudicated to infringe a patent, we could
be required to obtain a license, pay substantial damages, and/or have the sale
of our products stopped by an injunction.
We will have obligations to indemnify customers under some circumstances for
infringement of third-party intellectual property rights. From time to time, we
have received letters from customers inquiring as to the scope of these
indemnity rights. If any claims from third-parties require us to indemnify
customers under our agreements, the costs could be substantial and our business
could be harmed. Moreover, we may be subject to claims based upon intellectual
property licensed from third parties against whom we would have limited, if any,
indemnification rights.
DESPITE OUR EFFORTS TO PROTECT OUR INTELLECTUAL PROPERTY, THIRD PARTIES MAY GAIN
ACCESS TO OUR PROPRIETARY TECHNOLOGY AND USE IT TO COMPETE WITH US.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or obtain and use information that
we regard as proprietary. We have relied primarily on a combination of patents,
copyrights, trademarks, trade secret laws, contractual provisions, licenses and
mask work protection under the Federal Semiconductor Chip Protection Act of 1984
to protect our intellectual property. In particular, we will have to rely on
these measures to protect our intellectual property because, as a fabless
semiconductor company, we will have third parties, including potential
competitors, manufacture our products. Employees, consultants and customers have
access to our proprietary and confidential information. Any misuse or
misappropriation of this intellectual property could have an adverse impact on
our business. We will continue to take steps to control access to, and the
distribution of, our proprietary information. We cannot guarantee, however, that
such safeguards will protect this intellectual property and other valuable
competitive information.
OUR EFFORTS TO PROTECT OUR INTELLECTUAL PROPERTY MAY BE LESS EFFECTIVE IN SOME
FOREIGN COUNTRIES WHERE INTELLECTUAL PROPERTY RIGHTS ARE NOT WELL PROTECTED BY
LAW OR ENFORCEMENT.
The laws of some foreign countries do not protect our proprietary rights as
extensively as do the laws of the United States, and many U.S. companies have
encountered substantial infringement problems in those countries, some of which
are countries in which we have sold and we will continue to sell products. There
is a risk that our efforts to protect proprietary rights may not be adequate.
For example, our competitors may independently develop similar technology,
duplicate our products or design around our patents or our other intellectual
property rights. If we fail to adequately protect our intellectual property or
if the laws of a foreign jurisdiction do not effectively permit such protection,
it would be easier for our competitors to sell competing products.
BECAUSE THE MARKETS IN WHICH WE COMPETE ARE HIGHLY COMPETITIVE, AND MANY OF OUR
COMPETITORS HAVE GREATER RESOURCES, WE CANNOT BE CERTAIN THAT OUR PRODUCTS WILL
BE ACCEPTED IN THE MARKETPLACE OR CAPTURE MARKET SHARE.
The market for software and communications semiconductor solutions is
intensely competitive. We expect competition to intensify as current competitors
expand their product offerings and new competitors enter the market. Given the
highly competitive environment in which we will operate, we cannot be sure that
any competitive advantages enjoyed by our products would be sufficient to
establish and sustain our products in the market. Any increase in price or other
competition could result in the erosion of our market share, and would have a
negative impact on our financial condition and results of operations. We cannot
be sure that we will have the financial resources, technical expertise or
marketing and support capabilities to continue to compete successfully. We
believe that we must compete on the basis of a variety of factors, including:
20
o time to market;
o level of integration;
o functionality;
o conformity to industry standards;
o quality, reliability and performance;
o price and total system cost;
o breadth of product lines;
o new product innovation; and
o customer and technical support.
We face competition from a variety of vendors, including software and
semiconductor companies, which generally vary in size and in the scope and
breadth of products and services offered. We also face competition from
customers' or prospective customers' own internal development efforts. Many of
the companies that compete or may compete in the future against us have longer
operating histories, greater name recognition, larger installed customer bases
and significantly greater financial, technical and marketing resources. These
competitors may also have pre-existing relationships with our customers or
potential customers. As a result, they may be able to introduce new
technologies, respond faster to changing customer requirements or devote greater
resources to the development, promotion and sale of their products than us. Our
competitors may successfully integrate the functionality of our software and
communication processors into their products and thereby render our products
obsolete. Further, in the event of a manufacturing capacity shortage, these
competitors may be able to manufacture products when we are unable to do so.
We believe our principal competitors include or will include Analog Devices,
Broadcom Corporation, Centillium Communications, Conexant Systems, Infineon
Technologies, Integrated Telecom Express, Intel Corporation, MetaLink, ST
Microelectronics and Texas Instruments, as well as several privately held
companies. In addition, there have been a number of announcements by other
semiconductor companies and smaller emerging companies that they intend to enter
the market segments adjacent to or addressed by our products. Moreover, many of
our customers face significant competition in their markets. If these customers
are unable to successfully market and sell the products that incorporate our
products, these customers may cease to purchase our products, which may have a
negative impact on our results of operations.
OTHER TECHNOLOGIES FOR THE HIGH-SPEED DATA TRANSMISSION MARKET COMPETE
EFFECTIVELY WITH DSL SERVICES.
DSL services are competing with a variety of different high-speed data
transmission technologies, including cable modems, fiber optics, satellite and
other wireless technologies. Many of these technologies compete effectively with
DSL services. All of our products have been deployed in networks that use
standard copper telephone wires. Copper telephone wires have physical properties
that limit the speed and distance over which data can be transmitted. In
general, data transmission rates over copper telephone wires are slower over
longer distances and faster over shorter distances. If any technology that is
competing with DSL technology is more reliable, faster, less expensive,
accessible to more customers or has other advantages over DSL technology, then
the demand for our chip sets and our revenues and gross margins may decrease.
CHANGES IN LAWS OR REGULATIONS OR THE IMPOSITION OF NEW LAWS OR REGULATIONS BY
GOVERNMENT AGENCIES COULD IMPEDE THE SALE OF OUR PRODUCTS OR OTHERWISE HARM OUR
BUSINESS.
Changes in current or future laws or regulations or the imposition of new
laws or regulations by the Federal Communications Commission, other federal or
state agencies or foreign governments could impede the sale of our products or
otherwise harm our business. The FCC has broad jurisdiction over our target
market. Although current FCC regulations and the laws and regulations of other
federal or state agencies would not be directly applicable to our products, they
do apply to much of the equipment into which our products are incorporated. As a
result, the effects of regulation on our customers or the industries in which
they operate may, in turn, materially and adversely impact our
21
business, financial condition and results of operations. FCC regulatory policies
that affect the ability of cable operators or telephone companies to offer some
types of services or other aspects of their business may impede the sale of our
products. We may also be subject to regulation by countries other than the
United States. Foreign governments may impose tariffs, duties and other import
restrictions on components that we obtain from non-domestic supplies and may
impose export restrictions on products that we would sell internationally. These
tariffs, duties or restrictions could materially and adversely affect our
business, financial condition and results of operations. Changes in current laws
or regulations or the imposition of new laws and regulations in the United
States or elsewhere could also materially and adversely affect our business.
OUR FUTURE SUCCESS DEPENDS IN PART ON THE CONTINUED SERVICE OF OUR KEY DESIGN,
ENGINEERING, SALES, MARKETING AND EXECUTIVE PERSONNEL AND OUR ABILITY TO
IDENTIFY, HIRE AND RETAIN ADDITIONAL PERSONNEL.
Our future success depends upon the continuing contributions of members of
our key management, sales, customer support and product development personnel.
The loss of any of such personnel could seriously harm us. We anticipate that
the continued implementation of our restructuring plans, product development
programs and upgrade of our operational and financial systems and procedures and
controls will continue to require substantial management effort and place a
significant strain on our existing management personnel. While certain key
officers are subject to an employment agreement, we cannot be sure that we can
continue to retain their services. In addition, we have not obtained key-man
life insurance on any of our executive officers or key employees. Because DSL
technology is specialized and complex, we need to recruit and train qualified
technical personnel. There are many employers competing to hire qualified
technical personnel and we may have difficulty attracting and retaining such
personnel. Because stock options generally comprise a significant portion of our
compensation packages for all employees, the recent substantial decline in the
price of our common stock may make it more difficult for us to attract and
retain key employees. Further, our competitors have recruited our employees in
the past and may do so in the future. Loss of the services of, or failure to
recruit, key design engineers or other technical and management personnel could
be significantly detrimental to our product development programs and could have
an adverse effect on our business, financial condition and results of
operations.
SALES TO CUSTOMERS BASED OUTSIDE OF THE UNITED STATES HAVE ACCOUNTED FOR A
SIGNIFICANT PORTION OF OUR NET REVENUES, WHICH EXPOSES US TO INHERENT RISKS OF
INTERNATIONAL BUSINESS.
Historically, a significant portion of our net revenues has been derived from
customers outside of North America, and we expect this trend to continue. In
2002, approximately 79.8% of our net revenues were derived from customers
outside of North America, of which 75.6% were derived from customers based in
Asia, 4.1% were derived from customers base in Europe and 0.1% were derived from
customers based in other international markets. In 2001, approximately 45.8% of
our net revenues were derived from customers outside of North America, of which
39.5% were derived from customers based in Asia, 6.0% were derived from
customers based in Europe, and 0.3% were derived from customers based in other
international markets. In 2000, approximately 35.6% of our net revenues were
derived from customers outside of the United States, of which 25.5% were derived
from customers based in Asia, 3.0% were derived from customers based in Europe,
and 7.1% were derived from customers based in other international markets. Our
revenue distribution by geographic region is determined based upon customer ship
to locations, which are not necessarily indicative of the geographic region in
which the customer's equipment is ultimately deployed.
We expect that sales to such international customers will continue to account
for a significant portion of our net revenues for the foreseeable future.
Accordingly, we are subject to risks inherent in our international business
activities, including:
o unexpected changes in regulatory requirements;
o tariffs and other trade barriers, including current and
future import and export restrictions;
o difficulties in collecting account receivables;
o difficulties in staffing and managing international
operations;
o potentially adverse tax consequences, including restrictions
on the repatriation of earnings;
o the burdens of complying with a wide variety of foreign laws
(particularly with respect to intellectual
22
property) and license requirements;
o the risks related to international economic and political
instability and to the recent global military conflicts,
including any of the hostilities sparked by current events;
o difficulties in protecting intellectual property rights in
some foreign countries; and
o a limited ability to enforce agreements and other rights in
some foreign countries.
We are subject to the risks associated with the imposition of legislation and
regulations relating to the import or export of high technology products. We
cannot predict whether quotas, duties, taxes or other changes or restrictions
upon the importation or exportation of our products will be implemented by the
United States or other countries. Because sales of our products have been
denominated to date primarily in United States dollars, increases in the value
of the United States dollar could increase the price of our products so that
they become relatively more expensive to customers in the local currency of a
particular country, leading to a reduction in sales and profitability in that
country. Future international activity may result in increased foreign
currency-denominated sales. Gains and losses on the conversion to United States
dollars of accounts receivable, accounts payable and other monetary assets and
liabilities arising from international operations may contribute to fluctuations
in our results of operations. Some of our customer purchase orders and
agreements are governed by foreign laws, which may differ significantly from
United States laws. Therefore, we may be limited in our ability to enforce our
rights under such agreements and to collect damages, if awarded.
IF WE DELIVER PRODUCTS WITH DEFECTS, OUR REPUTATION WILL BE HARMED, AND THE
SALES AND MARKET ACCEPTANCE OF OUR PRODUCTS WILL DECREASE.
Our products are complex and have contained errors, defects and bugs when
introduced or as new versions are released. If we deliver products with errors,
defects or bugs or products that have reliability, quality or compatibility
problems, our reputation and the market acceptance and sales of our products
could be harmed, which could adversely affect our ability to retain existing
customers or attract new customers. Further, if our products contain errors,
defects and bugs, then we may be required to expend significant capital and
resources to alleviate these problems. Further, these defects or problems could
interrupt or delay sales to our customers. If any of these problems are not
found until we have commenced commercial production, we may be required to incur
additional development costs and product repair or replacement costs. Defects
could also lead to liability as a result of product liability lawsuits against
us or against our customers. We have agreed to indemnify our customers in some
circumstances against liability from defects in their products. A successful
product liability claim could seriously harm our business, financial condition
and results of operations. In addition, these problems may divert our technical
and other resources from other development efforts.
WE HAVE ANTITAKEOVER DEFENSES THAT COULD DELAY OR PREVENT AN ACQUISITION.
Some of the provisions of our restated certificate of incorporation and
bylaws, and the provisions of Delaware law could have the effect of delaying,
deferring or preventing an acquisition of us. For example, we have authorized
but unissued shares of preferred stock which could be used to fend off a
takeover attempt, our stockholders may not take actions by written consent, our
stockholders are limited in their ability to make proposals at stockholder
meetings and our directors may be removed only for cause and upon the
affirmative vote of at least 80% of the outstanding voting shares. In addition,
our Rights Agreement with American Stock Transfer & Trust Company, as rights
agent, dated as of July 5, 2002, gives our stockholders certain rights that
would substantially increase the cost of acquiring us in a transaction not
approved by our board of directors.
WE COULD BE SUBJECT TO CLASS ACTION LITIGATION DUE TO STOCK PRICE VOLATILITY,
WHICH, IF IT OCCURS, WILL DISTRACT MANAGEMENT AND RESULT IN SUBSTANTIAL COSTS,
AND COULD RESULT IN JUDGMENTS AGAINST US.
Securities class action litigation has often been brought against companies
following periods of volatility in the market price of their securities. We may
be the target of similar litigation in the future. Securities litigation could
result in substantial costs and divert management's attention and resources,
which could cause serious harm to our business, financial condition and results
of operations.
23
WE MAY NEED TO RAISE ADDITIONAL CAPITAL THAT MIGHT NOT BE AVAILABLE OR WHICH, IF
AVAILABLE, COULD BE ON TERMS ADVERSE TO OUR STOCKHOLDERS.
We expect that our current cash and cash equivalents, 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
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 acceptable terms, if at all. Further, if
we issue equity securities, the ownership percentage of our stockholders would
be reduced, and the new equity securities may have rights, preferences or
privileges senior to those of existing holders of our common stock. If we cannot
raise needed funds on acceptable terms, we may not be able to develop or enhance
our products, take advantage of future opportunities or respond to competitive
pressures or unanticipated requirements, which could seriously harm our
business, operating results and financial condition.
24
ITEM 2. PROPERTIES
In February 2002, we purchased a 200,000 square foot building in Old Bridge,
New Jersey for approximately $30.0 million. Prior to the acquisition of the
facility, the Company was obligated to lease this facility under a long-term
lease with the landlord. In conjunction with the purchase of the facility, the
Company paid the landlord approximately $5.0 million to terminate the lease
commitment. This facility is currently being held for sale and, depending on
market conditions, the Company may lease all or a portion of the facility prior
to sale. During 2001, we initiated and completed construction of a 7,000 square
foot building in Noida, India for approximately $2.0 million.
Our facility in Red Bank, New Jersey, currently comprises our corporate
headquarters and includes administration, sales and marketing, research and
development, and operations functions. A summary of our leased facilities is as
follows:
Location Size Lease
- -------- (Square Feet) Expiration Date
------------- ---------------
Red Bank, NJ
Headquarters/office 100,000 7/31/11
Irvine, CA
Office 31,720 8/31/05
Cambridge, UK
Office 31,043 3/24/21
Herzlia, Israel
Office 30,440 4/30/06
Eatontown, NJ
Warehouse 9,200 5/31/05
Santa Clara, CA
Office 4,754 7/31/03
In addition, we lease various sales and marketing facilities in the
United States, Japan, Taiwan, Korea, China and several other countries.
We have subleased or are actively seeking subtenants for the following
locations, which are still under lease:
Location Size Lease Sublease
- -------- (Square Feet) Expiration Date Status
------------- --------------- ------
Middletown, NJ Partially
Office 78,120 3/31/03 sublet
Santa Clara, CA Seeking
Office 47,432 8/05/04 subtenants
Andover, MA Seeking
Office 19,773 2/28/06 subtenants
Paris, France Seeking
Office 12,000 8/30/03 subtenants
Santa Clara, CA Seeking
Office 64,750 3/31/08 subtenants
San Diego, CA
Office 15,111 5/31/06 100% sublet
Maynard, MA Seeking
Office 17,489 9/14/05 subtenants
Cupertino, Partially
Office 21,580 1/31/07 sublet
Raleigh, NC
Office 42,972 11/30/10 100% Sublet
Raleigh, NC
Office 12,944 12/31/03 100% sublet
Cambridge, UK
Office 6,000 6/24/03 100% sublet
Santa Barbara, Seeking
Office 10,944 1/31/04 subtenants
25
ITEM 3. LEGAL PROCEEDINGS
In November 2001, Collegeware Asset Management, LP, on behalf of itself and a
putative class of persons who purchased our common stock between June 23, 1999
and December 6, 2000, filed a civil action complaint in the United States
District Court for the Southern District of New York alleging violations of
federal securities laws against certain underwriters of our initial and
secondary public offerings as well as certain of our officers and directors
(Collegeware Asset Management, LP v. Fleetboston Robertson Stephens, Inc., et
al., No. 01-CV-10741). The complaint alleges that the defendants violated
federal securities laws by issuing and selling our common stock in our initial
and secondary offerings without disclosing to investors that some of the
underwriters had (1) solicited and received undisclosed and excessive
commissions and (2) entered into agreements requiring certain of their customers
to purchase our stock in the aftermarket at escalating prices. The complaint
seeks unspecified damages. The complaint was consolidated with approximately 300
other actions making similar allegations regarding the public offerings of
hundreds of other companies that launched offerings during 1998 through 2000 (In
re: Initial Public Offering Securities Litigation, No. 21 MC 92 (SAS)). We
believe our officers and/or directors have meritorious defenses to the
plaintiffs' claims and those defendants will defend themselves vigorously.
The semiconductor and telecommunications industries are characterized by
substantial litigation regarding patent and other intellectual property rights.
Although, as of the date hereof, no legal action has commenced against us, Texas
Instruments has threatened us with a possible lawsuit for patent infringement.
Texas Instruments' claim relates to a group of patents (and related foreign
patents) that it believes are essential to certain industry standards for
sending ADSL signals over the network. Texas Instruments has offered us licenses
to these patents on terms that were not deemed acceptable. We continue to
dispute the applicability of most, if not all, of these patents to our products
and have asserted that Texas Instruments' patents are not infringed, are invalid
and/or are unenforceable. As of the date of the report, it is not possible to
determine whether we will be able to resolve our dispute with Texas Instruments
without litigation, nor can the outcome of this potential patent dispute be
predicted with reasonable particularity if litigation were to ensue. If we are
not able to agree on license terms in the near future, we believe that it is
likely that we will become engaged in intellectual property litigation with
Texas Instruments. Such litigation would be costly and could divert the efforts
and attention of our management and technical personnel from normal business
operations. Although we believe that we have strong arguments in favor of our
position in this dispute, we can give no assurance that we will prevail on any
of these grounds in litigation. If any such litigation is resolved adversely to
us, we could be held responsible for the payment of damages and/or have the sale
of our products stopped by an injunction, which could have a material adverse
effect on our business, financial condition and results of operations.
We are also subject to various other inquiries or claims in connection with
intellectual property rights. These claims have been referred to counsel, and
they are in various stages of evaluation and negotiation. If it appears
necessary or desirable, we may seek licenses for these intellectual property
rights. We can give no assurance that licenses will be offered by all claimants,
that the terms of any offered licenses will be acceptable to us or that in all
cases the dispute will be resolved without litigation, which may be time
consuming and expensive, and may result in injunctive relief or the payment of
damages by us. In addition, we are involved in various other legal proceedings
and claims, either asserted or unasserted, which arise in the ordinary course of
business. While the outcome of these claims cannot be predicted with certainty,
management does not believe that the outcome of any of these legal matters will
have a material adverse effect on our business, results of operations or
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
26
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Price Range of Common Stock
Our common stock is traded on the Nasdaq National Market System under the
symbol "GSPN". The following table sets forth, the periods indicated, the low
and high bid prices per share for our common stock as reported by the Nasdaq
National Market.
Low High Low High
--- ---- --- ----
2002 2001
First Quarter $11.09 $17.97 First Quarter $ 18.00 $44.75
Second Quarter 3.43 14.88 Second Quarter 8.09 27.20
Third Quarter 2.36 3.87 Third Quarter 8.32 18.42
Fourth Quarter 1.67 5.06 Fourth Quarter 7.90 15.52
As of February 24, 2003, there were approximately 875 holders of record of our
common stock. The last reported sales price of our common stock on February 24,
2003 was $4.70 per share.
Dividend Policy
No cash dividends have been paid on our common stock. We currently intend to
retain all future earnings, if any, for use in our business and we do not
anticipate paying any cash dividends on our common stock in the foreseeable
future.
27
ITEM 6. SELECTED HISTORICAL FINANCIAL DATA
The following selected historical financial data was derived from financial
statements audited by PricewaterhouseCoopers LLP, independent accountants, for
the respective periods. This information should be read in conjunction with
management's discussion and analysis of financial condition and results of
operations and the financial statements, including the notes thereto, included
elsewhere in this Form 10-K.
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(in thousands, except per share data)
Statement of Operations Data:
Net product revenues $31,464 $56,220 $345,638 $249,459 $225,368
Cancellation revenues - - - 15,391 3,500
--------------------------------------------------------------
Total net revenues 31,464 56,220 345,638 264,850 228,868
Cost of sales 9,882 20,879 142,060 107,779 111,924
Cost of sales related to termination charge - 1,119 - - -
Cost of sales related to cancellation revenues - - - 1,075 -
Cost of sales - Provision for excess and obsolete
inventory - - - 80,852 -
---------------------------------------------------------------
Total cost of sales 9,882 21,998 142,060 189,706 111,924
--------------------------------------------------------------
Gross profit 21,582 34,222 203,578 75,144 116,944
---------------------------------------------------------------
Operating expenses
Research and development (including non-cash
compensation of $28,631, $22,920 and $16,761
for the years ended December 31, 2002, 2001,
and 2000, respectively) 18,694 26,531 113,438 132,775 155,927
Selling, general and administrative (including
non-cash compensation of $2,293, $3,851 and 7,356
for the years ended December 31, 2002, 2001, and
2000, respectively) 10,217 14,389 53,504 43,983 50,268
Restructuring and other charges - - - 44,752 37,832
Amortization of intangible assets and other 583 - 130,572 209,178 32,730
In process research and development - - 44,854 21,000 -
Impairment of goodwill and other acquired
intangible assets - - - - 493,620
---------------------------------------------------------------
Total operating expenses 29,494 40,920 342,368 451,688 770,377
--------------------------------------------------------------
Loss from operations (7,912) (6,698) (138,790) (376,544) (653,433)
Interest expense - non-cash - - 43,439 - -
Interest and other (income) expense, net 134 (1,133) (1,902) (442) (6,690)
Foreign exchange (gain) loss - - (63) - 38
---------------------------------------------------------------
Loss from continuing operations before income
taxes and extraordinary items (8,046) (5,565) (180,264) (376,102) (646,781)
Provision (benefit) for income taxes (217) - 15,131 (4,111) 260
---------------------------------------------------------------
Loss from continuing operations before
extraordinary item (7,829) (5,565) (195,395) (371,991) (647,041)
Preferred stock deemed dividend and accretion - (3,466) - - -
---------------------------------------------------------------
Loss from continuing operations before
extraordinary item (7,829) (9,031) (195,395) (371,991) (647,041)
Discontinued Operations
Net loss from operations of discontinued
businesses (including net loss on the sale of the
video compression business of $3,887 during the
year ended December 31, 2002) - - (1,143) (5,530) (7,926)
---------------------------------------------------------------
Loss before extraordinary item (7,829) (9,031) (196,538) (377,521) (654,967)
Extraordinary item - gain on the redemption of the
beneficial conversion feature - - 43,439 - -
---------------------------------------------------------------
Net loss $ (7,829) $(9,031) $(153,099) $(377,521) $(654,967)
===============================================================
Other comprehensive (gain) loss:
Unrealized loss (gain) on marketable securities - 22 - (88) (1,733)
Foreign currency translation loss (gain) - 77 (112) (1,357)
---------------------------------------------------------------
Comprehensive loss $ (7,829) $(9,053) $(153,176) $(377,321) $(651,877)
===============================================================
(Loss) income per share basic and diluted:
Loss from continuing operations before
extraordinary item $ (0.22) $ (0.19) $ (3.01) $ (4.91) $ (4.76)
Net loss from discontinued operations - - (0.02) (0.07) (0.06)
Extraordinary item - - 0.67 - -
---------------------------------------------------------------
Net loss $ (0.22) $ (0.19) $ (2.36) $ (4.98) $ (4.82)
===============================================================
Shares used in computing (loss) income per share:
Basic and diluted 36,254 46,613 64,924 75,796 135,934
===============================================================
28
December 31,
------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(In thousands except per share data)
Balance Sheet Data:
Cash and cash equivalents and investments
(including long-term marketable securities) $12 $36,668 $99,129 $679,476 $528,057
Working capital (deficit) (2,655) 44,616 164,156 520,103 270,708
Total assets 13,430 70,991 905,129 1,448,930 722,990
Long-term liabilities, less current portion 5,506 443 26,396 184,332 149,702
Accumulated deficit (7,787) (13,352) (166,451) (543,972) (1,198,939)
Total stockholders' equity (deficit) ($1,293) $55,433 $803,551 $1,103,910 $449,842
See Note 13 to the Financial Statements for an explanation of the method used to
calculate earnings per share.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following commentary should be read in conjunction with the financial
statements and related notes contained elsewhere in this Form 10-K. The
information in this discussion contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, as amended. Such statements are based upon
current expectations that involve risks and uncertainties. Any statements
contained herein that are not statements of historical fact may be deemed to be
forward-looking statements. For example, the words "believes," "anticipates,"
"plans," "expects," "intends" and similar expressions are intended to identify
forward-looking statements. GlobespanVirata's actual results and the timing of
certain events may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such a discrepancy include,
but are not limited to, those set forth under "Certain Business Risks" and
elsewhere in this Form 10-K. All forward-looking statements in this document are
based on information available to GlobespanVirata as of the date hereof and
GlobespanVirata assumes no obligation to update any such forward-looking
statements.
OVERVIEW
COMPLETION OF MERGER WITH VIRATA CORPORATION
On December 14, 2001, we completed a merger with Virata under an Agreement
and Plan of Merger, dated as of October 1, 2001. Under that agreement, a
wholly-owned subsidiary of our company merged with and into Virata and Virata
became our wholly-owned subsidiary. At the effective time of the merger, we
changed our name from "GlobeSpan, Inc." to "GlobespanVirata, Inc." The merger
with Virata was accounted for as a purchase; accordingly, operating results for
Virata have been included from the date of acquisition.
In connection with the merger with Virata, we formulated reorganization and
restructuring plans that were implemented during 2002. As a result of the
reorganization plans, we recognized as liabilities assumed in the purchase
business combination and included in the allocation of the acquisition cost in
accordance with Statement of Financial Accounting Standards (SFAS) No. 141,
entitled "Business Combinations" and Emerging Issues Task Force (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. In addition to the amounts recorded
pursuant to EITF 95-3, we have recorded restructuring and other charges during
the year ended December 31, 2002 of $37.8 million in accordance with EITF 94-3,
entitled, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit and Activity (including Certain Costs Incurred in a
Restructuring)" and SFAS No. 144, entitled "Accounting for the Impairment or
Disposal of Long-Lived Assets". As a result of the effects of our reorganization
plans, our research and development and selling, general and administrative
expenses decreased from $68,115 for the three months ended March 31, 2002 to
$42,376 for the three months ended December 31, 2002.
GENERAL
GlobespanVirata is a leading provider of integrated circuits, software and
system designs for broadband communication applications that enable high-speed
transmission of data, voice and video to homes and business enterprises
throughout the world. Currently, our integrated circuits, software and system
designs are primarily used in DSL applications, which utilize the existing
network of copper telephone wires, known as the local loop, for high-speed
transmission of data. We have sold our products to more than 400
telecommunications equipment manufacturers for incorporation into their products
which have been used in systems deployed by more than 50 telecommunications
service providers and end users in more than 30 countries.
Historically, a significant portion of our net revenues in any quarter or
annual period has been derived from sales to relatively few customers, and we
expect this trend to continue. In the years ended December 31, 2002, 2001, and
2000, our largest customers who individually represented more than 10% of our
net revenues accounted for 14.0%, 39.5%, and 63.0%, respectively, of our net
revenues. In 2002, our largest customer was Ambit Microsystems, which accounted
for 14.0% of our net revenues. In 2001, our largest customers were Lucent
Technologies and Cisco Systems, which
29
accounted for 27.0% and 12.5% of our net revenues, respectively. In 2000, our
largest customers were Cisco Systems, Lucent Technologies and Nortel Networks,
which accounted for 28.0%, 23.7% and 11.3% of our net revenues, respectively. We
do not have long-term contracts with any of our customers that obligate them to
continue to purchase our products, and they could cease purchasing products from
us at any time. Because fluctuations in orders from our major customers could
cause our net revenues to fluctuate significantly in any given quarter or annual
period, we do not believe that period-to-period comparisons of our financial
results are necessarily meaningful and they should not be relied upon as an
indication of future performance.
Members of the group comprising our largest customers are subject to frequent
change due to our lack of long-term contracts with our customers, the timing of
our customers' product implementations, demand cycles in the sales of our
customers' products and our long sales cycle. In particular, the amount of
revenues we derive from our customers depends upon their success in selling DSL
equipment to telecommunications service providers for use in DSL service
deployments. Our largest customers in any particular period have varied with the
timing of DSL deployments and the identity of the telecommunications service
provider initiating the deployment. Further, since we are a worldwide supplier,
our net revenues and customers may be influenced by local economic conditions
that influence our customers' level of business with us. Our long sales cycle is
another factor in the frequent change of our principal customers. In general,
our customers will evaluate our products for three to six months prior to
incorporating our products into their products and beginning volume production.
As a result, our principal customers will vary depending on their stage in the
sales cycle.
Historically, a significant portion of our net revenues has been derived
from customers outside of North America, and we expect this trend to continue.
Net revenues from customers outside of North America are primarily due to the
implementation of DSL in international markets and third party manufacturing of
our customers' product at locations outside of North America. In 2002,
approximately 79.8% of our net revenues were derived from customers outside of
North America, of which 75.6% were derived from customers based in Asia, 4.1%
were derived from customers based in Europe and 0.1% were derived from customers
based in other international markets. In 2001, approximately 45.8% of our net
revenues were derived from customers outside of North America, of which 39.5%
were derived from customers based in Asia, 6.0% were derived from customers
based in Europe, and 0.3% were derived from customers based in other
international markets. In 2000, approximately 35.6% of our net revenues were
derived from customers outside of North America, of which 25.5% were derived
from customers based in Asia, 3.0% were derived from customers based in Europe,
and 7.1% were derived from customers based in other international markets. Our
revenue distribution by geographic region is determined based upon customer ship
to locations, which are not necessarily indicative of the geographic region in
which the customer's equipment is ultimately deployed. Substantially all of our
net revenues to date have been denominated in United States dollars.
Competition and technological change in the rapidly evolving DSL market
has and may continue to influence our quarterly and annual net revenues and
results of operations. Average selling prices of our chip sets tend to be higher
at the time we introduce new products and decline over time due to competitive
pressures. We expect this pattern to continue with existing and future products.
Further, our revenues and gross margins are impacted by our customer
concentration and product mix. For example, purchases from our major customers
are generally at lower average selling prices and certain of our products, such
as discrete components, are generally lower margin products.
Our product development and marketing strategy is focused on generating
design wins with DSL equipment manufacturers. The sales cycle for design wins
includes detailed testing and evaluation of our products, followed by a customer
product development cycle. Due to these cycles, which may be up to 12 months or
longer, we invest significant resources in research and development and
marketing in advance of generating substantial revenues related to these
investments. Additionally, the rate and timing of customer orders may vary
significantly from month-to-month. Our backlog has fluctuated from
quarter-to-quarter and has not been indicative of quarterly results.
Accordingly, if sales of our products do not occur when we expect and we are
unable to predict or adjust our estimates on a timely basis, our expenses and
inventory levels may increase as a percentage of net revenues and total assets,
respectively.
Our net losses have resulted from our significant investment in research
and development, in building sales and marketing and general and administrative
infrastructure, from the effects of purchase accounting for our acquisitions, as
a result of the provision for excess and obsolete inventory and restructuring
and other charges. These expenses have exceeded our revenues and may continue to
do so in the future.
All of the acquisitions we made in 2001 and 2000 were accounted for as
purchase acquisitions. Under purchase accounting, we recorded the market value
of our shares of common stock issued in connection with the purchases and the
amount of direct transaction costs as the cost of acquiring the companies. That
cost was allocated to the individual
30
assets acquired and liabilities assumed, including various tangible and
identifiable intangible assets such as in process research and development,
acquired technology, acquired trademarks and trade names, based on their
respective fair values. We allocated the excess of the purchase cost over the
fair value of the net assets to goodwill. Additionally, we granted certain
employees stock options at less than fair market value and converted unvested
options of acquired entities into options to purchase our common stock, which
resulted in our recording of deferred compensation. We estimate that the
amortization of intangible assets and deferred compensation will result in
annual amortization and other non-cash acquisition related charges of
approximately $30.0 million, using useful lives of two years to four years. As a
result, purchase accounting treatment of our acquisitions could have a material
adverse effect on the market value of our stock. We will continue to seek out
other acquisition opportunities which would increase the charges related to
amortization of intangible assets and other non-cash charges.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's discussion and analysis of our financial condition and results
of operations is based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods presented. These estimates include assessing the
collectability of accounts receivable, the use and recoverability of inventory,
the realizability of deferred tax assets, and useful lives or amortization
periods of intangible assets. Actual results could differ from those estimates.
The markets for our products are characterized by intense competition, rapid
technological development and frequent new product introductions, all of which
could impact the future realizability of our assets.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
REVENUE RECOGNITION
Revenue from product sales is recognized upon shipment to the customer, when
the risk of loss has been transferred to the customer, price and terms are
fixed, no significant vendor obligations exist and collection of the resulting
receivable is reasonably assured. Our revenue recognition policy is significant
because our revenue is a key component of our operations. In addition, our
revenue recognition determines the timing of certain expenses, such as sales
commissions. We follow very specific and detailed guidelines in measuring
revenue; however, certain judgments affect the application of our revenue
policy. Revenue results are difficult to predict, and any shortfall in revenue
or delay in recognizing revenue could cause our operating results to vary
significantly from quarter to quarter and could result in future operating
losses. Substantially all of our revenues for the years ended December 31, 2002,
2001, and 2000 were derived from product sales of our DSL semiconductor
products.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined on
a first-in, first-out basis. We regularly review inventory values and quantities
on hand and write down our inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the
estimated market value based upon assumptions about future demand and market
conditions. Our estimates of future product demand may prove to be inaccurate,
in which case we may have understated or overstated the provision required for
excess and obsolete inventory. If actual market conditions are less favorable
than those expected by management, additional inventory write-downs may be
required. If our inventory is determined to be undervalued, we may have
over-reported our costs of goods sold in previous periods and would be required
to recognize such additional operating income at the time of sale. Therefore,
although we make every effort to ensure the accuracy of our estimates of future
product demand, any significant unanticipated changes in demand or technological
developments could have a significant impact on the value of our inventory and
our reported operating results.
VALUATION OF INTANGIBLES AND LONG-LIVED ASSETS
We assess the impairment of identifiable intangibles, long-lived assets and
related goodwill annually, or whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Factors we consider
important which could trigger an impairment review include the following:
31
o significant underperformance relative to expected historical
or projected future operating results;
o significant changes in the manner of our use of the acquired
assets or the strategy for our overall business;
o significant negative industry or economic trends;
o significant decline in our stock price for a sustained
period; and
o our market capitalization relative to net book value.
When we determine that the carrying value of intangibles, long-lived assets
and related goodwill may not be recoverable based upon the existence of one or
more of the above indicators of impairment, we measure any impairment based on
the market value of our stock and current and estimated future profitability and
undiscounted cash flows.
As a result of the implementation of SFAS No. 142, entitled "Goodwill and
Other Intangible Assets," which was effective for fiscal year 2002, goodwill is
no longer amortized to the income statement. In lieu of amortization, we
performed an initial impairment review of our goodwill. As a result of our
initial impairment review, we did not record any impairment charge. However,
during the second quarter of 2002, we performed an additional impairment test as
a result of the sale of our video compression business and due to significant
negative industry and economic trends affecting both the Company's operations
and expected future sales, as well as the general decline in valuation of
technology company stocks, including the valuation of our stock. As a result of
the impairment test, we recorded a charge of $493.6 million to reduce goodwill
and other identifiable intangible assets, based upon the amount by which the
carrying amount of these assets exceeded their fair value.
PRODUCT WARRANTIES
We provide purchasers of our products with certain warranties, generally
twelve months, and record a related provision for estimated warranty costs at
the date of sale. Warranty expense has been immaterial for all periods
presented.
INCOME TAXES
We account for income taxes under the provisions of SFAS No. 109, entitled
"Accounting for Income Taxes," which requires use of the asset and liability
method. Deferred income taxes are recorded for temporary differences between
financial statement carrying amounts and the tax bases of assets and
liabilities. Deferred tax assets and liabilities reflect the tax rates expected
to be in effect for the years in which the differences are expected to reverse.
A valuation allowance is provided if it is more likely than not that some or all
of the deferred tax asset will not be realized.
We have provided a valuation allowance against our deferred tax assets due to
the uncertainty of their realization. At such time as it is determined that it
is more likely than not that the deferred tax assets are realizable, the
valuation allowance will be reduced. The reduction in the valuation allowance
could have a material positive affect on our net results in the period in which
such determination is made. In addition, our effective tax rate would likely
increase significantly in periods subsequent to the initial reversal of the
valuation allowance.
RESTRUCTURING AND OTHER CHARGES
We have recorded $37.8 million and $44.8 million of restructuring and other
charges during the years ended December 31, 2002 and 2001, respectively. These
charges primarily relate to reductions in our workforce and the related impact
on the use of facilities and asset impairments. The estimated charges are
particularly dependent on estimates and assumptions made by management about
matters that are highly uncertain at the time the accounting estimates are made.
While we have used our best estimates based on facts and circumstances available
to us at the time, different estimates reasonably could have been used in the
relevant periods, or changes in the accounting estimates we used are reasonably
likely to occur from period to period which may have a material impact on the
presentation of our financial condition and results of operations. We review
these estimates and assumptions periodically and reflect the effects of
revisions in the period that they are determined to be necessary.
32
STOCK BASED COMPENSATION
We account for stock options granted to employees in accordance with
Accounting Principles Board Opinion No. 25, entitled "Accounting for Stock
Issued to Employees." Had the compensation cost for our stock option plans been
determined based on the fair value at the grant dates for awards under the
plans, consistent with the method of SFAS No. 123, entitled, "Accounting for
Stock-Based Compensation,", our net loss and fully diluted loss per share
would have been greater. Refer to Note 15 to the footnotes to our financial
statements for the pro forma results as if we applied the provisions of SFAS No.
123.
33
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, statement of
operations data. Our results of operations are reported as a single business
segment.
Year Ended December 31,
2002 2001 2000
---- ---- ----
Statement of Operations Data:
Net product revenues $225,368 $249,459 $345,638
Cancellation revenues 3,500 15,391 -
------------------------------------
Total net revenues 228,868 264,850 345,638
Cost of sales 111,924 107,779 142,060
Cost of sales related to cancellation revenues - 1,075 -
Cost of sales - Provision for excess and obsolete
inventory - 80,852 -
-----------------------------------
Total cost of sales 111,924 189,706 142,060
-----------------------------------
Gross profit 116,944 75,144 203,578
-----------------------------------
Operating expenses
Research and development (including non-cash
compensation of $28,631, $22,920 and $16,761 for
the years ended December 31, 2002, 2001,
and 2000, respectively) 155,927 132,775 113,438
Selling, general and administrative (including
non-cash compensation of $2,293, $3,851 and
$7,356 for the years ended December 31, 2002,
2001, and 2000, respectively) 50,268 43,983 53,504
Restructuring and other charges 37,832 44,752 -
In process research and development - 21,000 44,854
Amortization of intangible assets 32,730 209,178 130,572
Impairment of goodwill and other acquired
intangible assets 493,620 - -
------------------------------------
Total operating expenses 770,377 451,688 342,368
------------------------------------
Loss from operations (653,433) (376,544) (138,790)
Interest expense - non-cash - - 43,439
Interest and other income, net (6,690) (442) (1,902)
Foreign exchange (gain) loss 38 - (63)
-------------------------------------
Loss from continuing operations before income taxes
and extraordinary item (646,781) (376,102) (180,264)
Provision (benefit) for income taxes 260 (4,111) 15,131
--------------------------------------
Loss from continuing operations before extraordinary
item $(647,041) $(371,991) $(195,395)
Discontinued operations
Net loss from operations of discontinued businesses
(including net loss on the sale of the video compression
business of $3,887 during the year ended December 31,
2002) (7,926) (5,530) (1,143)
--------------------------------------
Loss before extraordinary item (654,967) (377,521) (196,538)
Extraordinary item - - 43,439
--------------------------------------
Net loss $(654,967) $(377,521) $(153,099)
======================================
34
The following table sets forth, for the periods indicated, certain statement of
operations data as a percentage of net revenues. Our results of operations are
reported as a single business segment.
2002 2001 2000
---- ---- ----
Statement of Operations Data:
Net product revenues 98.6% 94.2% 100.0%
Cancellation revenues 1.4 5.8 -
----------------------------
Total net revenues 100.0% 100.0% 100.0%
----------------------------
Cost of sales 48.9 40.7 41.1
Cost of sales related to cancellation revenues - 0.4 -
Cost of sales - Provision for excess and obsolete
inventory - 30.5 -
----------------------------
Total cost of sales 48.9 71.6 41.1
----------------------------
Gross profit 51.1 28.4 58.9
----------------------------
Operating expenses
Research and development (including non-cash
compensation of 12.5%, 8.7% and 4.8% for the years
ended December 31, 2002, 2001, and 2000,
respectively) 68.1 50.1 32.8
Selling, general and administrative (including
non-cash compensation of 1.0%, 1.5% and 2.1% for
the years ended December 31, 2002, 2001, and 2000,
respectively) 22.0 16.6 15.5
In process research and development - 7.9 13.0
Amortization of intangible assets 14.3 79.0 37.8
Restructuring and other charges 16.5 16.9 -
Impairment of goodwill and other acquired
intangible assets 215.7 - -
----------------------------
Total operating expenses 336.6 170.5 99.1
----------------------------
Loss from operations (285.5)% (142.1)% (40.2)%
=============================
RESULTS OF OPERATIONS IN THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
NET REVENUES. Our net revenues were $228.9 million, $264.9 million, and
$345.6 million in the years ended December 31, 2002, 2001 and 2000,
respectively. These amounts represent a decrease of 13.6% from 2001 to 2002, and
a decrease of 23.4% from 2000 to 2001. The decrease in net revenues from 2001 to
2002 was primarily due to declining average selling prices of our products. The
decrease in net revenues and net product revenues from 2000 to 2001 was
primarily due to the overall slowdown in the telecommunications equipment market
and the resulting reduction in the number of our products sold.
GROSS PROFIT. Our gross profit was $116.9 million, $75.1 million and $203.6
million in the years ended December 31, 2002, 2001 and 2000, respectively. These
amounts represent an increase of 55.6% from 2001 to 2002 and a decrease of 63.0%
from 2000 to 2001. Our gross profit as a percentage of revenues was 51.1%,
28.4%, and 58.9% in the years ended December 31, 2002, 2001 and 2000,
respectively. The increase in gross profit and gross profit percentage from 2001
to 2002 is primarily attributable to the provision for excess and obsolete
inventories recorded during 2001, which we refer to as the Provision, of $80.9
million. Excluding the revenue from previously reserved inventories and
cancellation revenues, our gross profit percentage on net product revenues was
43.2% and 55.8% for the years ended December 31, 2002 and 2001. During 2002, we
had revenue of $28.4 million related to inventory that was previously reserved
and $3.5 million of cancellation revenues, as compared to $5.4 million of
revenue from inventory that was previously reserved and $15.4 million of
cancellation revenues during 2001. The decrease in gross profit percentage
related to net product revenues, excluding the revenue from previously reserved
inventories, from 2001 to 2002 can be attributed to a decrease in the average
selling price of our products. The
35
decrease in gross profit percentage and dollars from 2000 to 2001 is primarily
attributed to the Provision, net of the positive effect of $15.4 million in
cancellation revenues with minimal associated costs and $5.4 million of revenue
from the sale of inventories that were previously reserved. Excluding revenue
from previously reserved product, our gross profit percentage from product
revenue was 55.8% and 58.9% for the years ended December 31, 2001 and 2000,
respectively. The decrease in gross profit percentage from 2000 to 2001 was
related to lower average selling prices per port. 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
$7.5 million in our sales backlog for the first quarter of 2003 for products in
inventory which are fully reserved. 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,
depreciation and amortization and other related equipment expenses. Our research
and development expenditures were $155.9 million, $132.8 million, and $113.4
million, in the years ended December 31, 2002, 2001 and 2000, respectively.
Included in research and development expenditures for the years ended December
31, 2002, 2001 and 2000 is $28.6 million, $22.9 million and $16.8 million,
respectively, of non-cash compensation. During the years ended December 31, 2001
and 2000, we exchanged our common stock with employee principals of an acquired
entity which was considered compensation, we granted certain employees stock
options at less than fair market value and we converted unvested options of
acquired entities into options to purchase our common stock. The deferred stock
compensation recorded is being amortized over the respective vesting periods
ranging from two 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 Technology, Inc., 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. Our research and development expenditures increased by
17.4% (15.9% excluding non-cash compensation) from 2001 to 2002 and by 17.0%
(13.6% excluding non-cash compensation) from 2000 to 2001. The increase in
research and development spending during 2002 and 2001 is attributable primarily
to the increase in the number of employees engaged in research, design and
development activities. Research and development expenditures represented 68.1%
(55.6% excluding non-cash compensation), 50.1% (41.5% excluding non-cash
compensation) and 32.8% (27.8% excluding non-cash compensation) of net revenues
in the years ended December 31, 2002, 2001 and 2000, respectively. The increase
in research and development expenditures as a percentage of revenues from 2001
to 2002 was due to our decreased revenue and higher research and development
expenses. We expect our research and development expenses to decrease in 2003 as
a result of the effects of our reorganization and restructuring plans.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expense is primarily comprised of salaries and related costs for sales, general
and administrative personnel as well as general non-personnel related expenses.
Our selling, general and administrative expense was $50.3 million, $44.0
million, and $53.5 million in the years ended December 31, 2002, 2001 and 2000,
respectively. Included in selling, general and administrative expense for the
years ended December 31, 2002, 2001 and 2000 is $2.3 million, $3.9 million and
$7.4 million, respectively, of non-cash compensation. During the years ended
December 31, 2002, 2001 and 2000, we exchanged our common stock with employee
principals of an acquired entity which was considered compensation, we granted
certain employees stock options at less than fair market value, we converted
unvested options of acquired entities into options to purchase common stock and
we granted options to non-employees. The deferred stock compensation recorded is
being amortized over the respective vesting periods ranging from two to four
years. The non-employee options granted in 2001 and 2000 were recorded as an
expense when they were issued as the performance required to earn those options
was complete. Our selling, general and administrative expenses increased by
14.3% (19.5% excluding non-cash compensation), from 2001 to 2002, and decreased
by 17.8% (13.0% excluding non-cash compensation) from 2000 to 2001. Selling,
general and administrative expense represented 22.0% (21.0% excluding non-cash
compensation), 16.6% (15.2% excluding non-cash compensation), and 15.5% (13.4%
excluding non-cash compensation) of net revenues in the years ended December 31,
2002, 2001 and 2000, respectively. The increase in dollars from 2001 to 2002 can
be attributed to the increase in the number of employees which resulted from our
merger with Virata. The decrease in dollars from 2000 to 2001 resulted from the
decrease in sales commissions as a result of lower product revenues and
reductions in consulting and legal expenses. We expect our selling, general and
administrative expenses to decrease in 2003 as a result of the effects of our
reorganization and restructuring plans.
IN PROCESS RESEARCH AND DEVELOPMENT. During the years ended December 31,
2001 and 2000, we completed the acquisition of several companies that had
development projects which were not yet complete at the date of the
acquisitions. The amounts allocated to in process research and development, or
IPR&D, of $21.0 million in 2001 and $44.9 million in 2000 were expensed upon
acquisition, as it was determined that the underlying projects had not
36
reached technical feasibility, had no alternative future use and successful
development was uncertain. In the allocation of the acquisition purchase price
to IPR&D, consideration was given to the following for the projects under
development at the time of acquisition:
o the present value of the forecasted cash flows and income that were
expected to result from the project;
o the status of the project;
o completion costs;
o project risks;
o the value of core technology; and
o the stage of completion of the project.
In valuing core technology, the relative allocations to core technology and
IPR&D were consistent with the relative contribution of the projects. The
determination of the value of IPR&D was based on efforts completed as of the
date the respective entities were acquired.
AMORTIZATION OF INTANGIBLE ASSETS. During the years ended December 31, 2001
and 2000, we completed the acquisition of several companies which resulted in
our recording goodwill and other intangible assets. We amortize these assets on
a straight-line basis over their estimated useful lives. Our expense for
amortization was $32.7 million, $209.2 million and $130.6 million in the years
ended December 31, 2002, 2001 and 2000, respectively. The decrease in
amortization from 2001 to 2002 is a result of our implementation of SFAS No. 142
and the impairment of goodwill and other intangible assets recorded during 2002.
The increase in amortization expense from 2000 to 2001 is the result of the
timing of our acquisitions.
RESTRUCTURING AND OTHER CHARGES.
2002 RESTRUCTURING CHARGES
In connection with the merger with Virata, we began to formulate
reorganization and restructuring plans, which consisted primarily of eliminating
redundant positions and consolidating our worldwide facilities. As a result of
these plans, we recorded $37.8 million of restructuring charges during the year
ended December 31, 2002, in accordance with the provisions of EITF No. 94-3 and
SFAS No. 144. The details of these charges are described below.
There was no net impact on the statement of operations for the restructuring
and other charges during the first quarter of 2002, as we recorded $1.5 million
related to an involuntary workforce reduction, which was offset by the reversal
of $1.5 million of facility charges, explained in more detail as follows. In
February of 2002, we purchased a 200,000 square foot facility located in Old
Bridge, New Jersey for approximately $30.0 million. Prior to the acquisition of
the facility, we had an operating lease related to 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 our 2001 Restructuring Plan, which is more fully described below,
related to the expected losses from this non-cancelable lease commitment. At the
time of the purchase, we intended to move our 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
December 31, 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 were $4.4 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
37
million and a $4.4 million charge related to the write-down of the Old Bridge
facility to its estimated fair value. The write-down of $4.4 million during the
third quarter of 2002 was included within the restructuring and other charges on
our statements of operations for the year ended December 31, 2002. Depending on
market conditions, we may lease all or a portion of the facility prior to sale.
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 markets in certain 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. These non-cancelable lease commitments range from three months to
eight years in length.
During the fourth quarter of 2002, we announced additional workforce
reductions and facilities consolidation, which resulted in our recording $12.9
million of workforce related charges, including $3.7 million of non-cash charges
related to the modification of stock options. This announcement impacted
approximately 110 employees across all geographic regions. As a result of the
reduction in our workforce, we further consolidated our use of facilities and
recorded $4.7 million of facility related charges which pertain primarily to
asset impairments as a result of the reduction in workforce and resulting
decrease in the use of facilities and equipment.
We expect to implement further restructuring actions during 2003.
2001 RESTRUCTURING 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.
The table below presents the liabilities associated with the 2001
Restructuring Plan as of December 31, 2001 and 2002, respectively, including
payments and adjustments made during 2002, and merger related restructuring
charges recorded during 2002 (the "2002 Restructuring Charge") (in thousands):
December 31, 2001 December 31,2002,
Restructuring 2002 Restructuring Non-Cash Cash Restructuring
Liability Charges Charges Payments Liability
-------------------------------------------------------------------------------------------------
Workforce reduction $ 1,827 $ 16,678 $ (4,377) $(7,334) $6,794
Facilities consolidation 31,672 21,154 (12,154) (11,854) $28,818
Other charges 774 - - - 774
-------------------------------------------------------------------------------------------------
Total charges $34,273 $ 37,832 $(16,531) ($19,188) $36,386
=================================================================================================
INTEREST EXPENSE NON-CASH. As part of the purchase price for the
Microelectronics Group of PairGain Technologies, in 2000, we issued a
subordinated redeemable convertible note, which we refer to as the PairGain
note, with a beneficial conversion feature measured by the price of our common
stock at closing of the acquisition and the conversion price as defined. We
amortized the difference between the price of our common stock at the closing of
the acquisition and the
38
conversion price of approximately $43.4 million through August 9, 2000, the date
we repaid the PairGain note.
IMPAIRMENT OF GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS. As a result of
the sale of our video compression business and due to the significant negative
industry and economic trends affecting both our current operations and expected
future sales as well as the general decline in valuation of technology company
stocks, including the valuation of our stock, we performed an assessment of the
carrying value of our long-lived assets to be held and used, including
significant amounts of goodwill and other intangible assets recorded in
connection with our various acquisitions. The assessment was performed pursuant
to SFAS No. 144 and SFAS No. 142. As a result, we recorded a charge of $493.6
million to reduce goodwill and other intangible assets during the year ended
December 31, 2002, based upon the amount by which the carrying amount of these
assets exceeded their fair value. Of the total charge, $458.4 million relates to
goodwill and $35.3 million relates to other identifiable intangible assets. Fair
value was determined based on market value, including a review of the discounted
future cash flows.
INTEREST AND OTHER INCOME, NET. Net interest income for the year ended
December 31, 2002 was $6.7 million, which resulted from interest income of $14.6
million, other income of $0.3 million and interest expense of $8.4 million. The
increase in interest income from 2001 to 2002 resulted from increase in cash and
investments as a result of our merger with Virata. The increase in interest
expense from 2001 to 2002 is attributable to the timing of the issuance of our
$130.0 million aggregate principal amount of our convertible subordinated notes
issued in May 2001. Net interest income for the year ended December 31, 2001 was
$0.4 million, which resulted from interest income of $6.8 million, net of
interest expense of $6.4 million. The decrease in net interest income from 2000
to 2001 was a result of the issuance of our convertible subordinated notes in
May 2001, offset by higher interest income from the funds received as a result
of the issuance of the notes. Net interest income for the year ended December
31, 2000 was $4.9 million, offset by interest expense of $3.0 million, resulting
in net interest income of $1.9 million.
PROVISION FOR INCOME TAXES. Our effective tax rate for the year ended
December 31, 2002 was 0.0%. The effective rate is primarily impacted by
permanent differences, which resulted from our prior acquisitions, and changes
in the valuation allowance. Our effective tax rate for the year ended December
31, 2001 was 1.5%. The 2001 effective rate is impacted by permanent differences
which resulted from our acquisitions and a change in the valuation allowance,
net of acquired valuation allowances and differences resulting from
acquisitions. Our effective tax rate for the year ended December 31, 2000 was
10.9%, excluding the tax effect of non-cash interest expense and the
extraordinary gain related to a note issued in connection with our acquisition
of the Microelectronics Group of PairGain Technologies. The 2000 effective rate
was impacted by permanent differences which resulted from our acquisitions, and
an increase in the valuation allowance.
EXTRAORDINARY GAIN. In connection with the repayment of the note issued in
connection with our acquisition of the Microelectronics Group of PairGain
Technologies, we recognized a gain of $43.4 million for the year ending December
31, 2000 on the redemption of the beneficial conversion feature.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation 46, "Consolidation of Variable Interest Entities." In general, a
variable interest entity is a corporation, partnership, trust, or any other
legal structure used for business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities.
Interpretation 46 requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. The consolidation requirements of
Interpretation 46 apply immediately to variable interest entities created after
January 31, 2003. The consolidation requirements apply to older entities in the
first fiscal year or interim period beginning after June 15, 2003. Certain of
the disclosure requirements apply in all financial statements issued after
January 31, 2003, regardless of when the variable interest entity was
established. We do not believe its adoption will not have a material impact on
our financial statements.
In December of 2002, SFAS No. 148 entitled "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FAS 123" was issued.
SFAS No. 148 amends SFAS No. 123 entitled "Accounting for Stock Based
Compensation", to provide alternative methods of transition for a voluntary
change to the fair market value based method of accounting for stock-based
employee compensation. In addition, the statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on the reported results.
39
In November 2002, the FASB issued Interpretation 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." The Interpretation elaborates on the
existing disclosure requirements for most guarantees, including loan guarantees
such as standby letters of credit. It also clarifies that at the time a company
issues a guarantee, the company must recognize an initial liability for the fair
value, or market value, of the obligations it assumes under the guarantee and
must disclose that information in its interim and annual financial statements.
The provisions related to recognizing a liability at inception of the guarantee
for the fair value of the guarantor's obligations does not apply to product
warranties or to guarantees accounted for as derivatives. The initial
recognition and initial measurement provisions apply on a prospective basis to
guarantees issued or modified after December 31, 2002. We believe that adoption
of the recognition and measurement provisions of Interpretation 45 will not have
a material impact on our financial statements.
In June 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 Cost 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 April 2002, the FASB issued SFAS No. 145, entitled "Rescission of FASB
Statements No. 4, 44, and 62, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 requires gains and losses on extinguishments of debt
to be classified as income or loss from continuing operations rather than as
extraordinary items as previously required under Statement 4. Extraordinary
treatment will be required for certain extinguishments as provided in APB 30.
SFAS No. 145 also amends Statement 13 to require certain modifications to
capital leases be treated as a sale-leaseback and modifies the accounting for
subleases when the original lessee remains a secondary obligor (or guarantor).
In addition, SFAS No. 145 rescinded Statement 44 addressing the accounting for
intangible assets of motor carriers and made numerous technical corrections.
SFAS No. 145 is effective for all fiscal years beginning after May 15, 2002 and
will be adopted by us in 2003. The adoption of SFAS No. 145 will not have a
material impact on our results of operations or financial position.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Total assets at December 31, 2002 were $723.0 million, a decrease of $725.9
million, or 50.1% from December 31, 2001 total assets of $1,448.9 million. The
decrease from December 31, 2001, primarily relates to the reduction of goodwill
and other intangible assets as a result of the impairment charge, the sale of
the video compression business and 2002 intangible asset amortization, and a
decrease in cash and investments, as more fully described below.
As of December 31, 2002, we had working capital of approximately $270.7
million, and had $297.3 million in cash and cash equivalents and short-term
marketable securities. Additionally, at such date, we had $230.8 million in
long-term marketable securities. As of December 31, 2001, we had working capital
of approximately $520.1 million, and had $567.2 million in cash and cash
equivalents and short-term marketable securities. Additionally, at such date, we
had $112.3 million in long-term marketable securities.
Net cash used in operating activities was $80.6 million for the year ended
December 31, 2002, compared to net cash used in operating activities of $10.8
million for the year ended December 31, 2001. The increase in cash used was
primarily due to an increase in the loss from operations, changes in working
capital and payments made as a result of our restructuring and reorganization
actions during the year ended December 31, 2002 as compared to the year ended
December 31, 2001. Net cash provided by operating activities was $7.3 million
for the year ended December 31, 2000. The decrease was primarily due to lower
revenues during the year ended December 31, 2001 as compared to the year ended
December 31, 2000.
Net cash provided by investing activities amounted to $33.9 million for the
year ended December 31, 2002. Net proceeds from the sale/maturity of marketable
securities of $65.0 million and proceeds from the sale of the video compression
business of $21.0 million were offset by the purchase of a facility held for
sale of $34.9 million, cash paid for accrued acquisition costs of $10.1 million
and capital expenditures of $7.2 million. Net cash received from the acquisition
of Virata of $73.9 million, was offset by purchases of property and equipment
and net purchases of marketable securities for the year ended December 31, 2001.
Net cash provided by investing activities amounted to $7.8 million for the year
ended December 31, 2000. Net cash received from the acquisition of businesses of
$19.0
40
million, proceeds from the maturities of marketable securities of $19.8 million
and the sale of an intangible asset of $.5 million, were offset by purchases of
property and equipment and purchases of marketable securities of $18.9 million
and $12.6 million, respectively for the year ended December 31, 2000.
Net cash used in financing activities for the year ended December 31, 2002
was $40.5 million. This consisted primarily of cash used to purchase treasury
stock, net of proceeds from the exercise of options and the employee stock
purchase plan. Net cash provided by financing activities of $130.7 million for
the year ended December 31, 2001 primarily consisted of borrowings under the
convertible subordinated notes, net of offering costs, of $126.4 million, and
net proceeds from the issuances of common stock of $7.5 million offset by $3.3
million in repayments of capital lease obligations. Net cash provided by
financing activities of $48.5 million for the year ended December 31, 2000
primarily consisted of net proceeds from a follow-on public offering and other
proceeds from the issuances of common stock of $139.8 million, offset by a $90.0
million repayment of the PairGain note and other items.
We lease certain facilities for office and research and development
activities under agreements that expire at various dates through 2021. In
addition, we lease certain computer and office equipment under agreements that
are classified as capital leases, the net book value of which was $0.5 million,
and $1.6 million at December 31, 2002 and 2001, respectively. Minimum required
future lease payments under our capital and operating leases, including those
lease commitments that have been included within our restructuring liability, at
December 31, 2002 are as follows:
Operating Leases
Included in
Capital Operating Restructuring
Leases Leases Plans
------ ------ ---------------
Years Ended December 31, (in thousands)
2003 1,221 $4,076 $11,453
2004 7 3,936 9,536
2005 6 3,762 8,099
2006 - 3,497 7,217
2007 - 3,467 6,234
Thereafter - 24,437 4,058
--------- ------ -----
Total minimum lease payments $1,234 $43,175 $46,597
======= =======
Less: amount representing interest (66)
---------
Present value of net minimum lease payments 1,168
Less: current portion (1,156)
---------
Long term capital lease obligations $12
========
Approximately $10.3 million of the operating lease commitments is payable in
periods beyond ten years. As of December 31, 2002, we have facility related
restructuring reserves of $42.3 million.
On May 11, 2001, we sold $130.0 million of 5 1/4% Convertible Subordinated
Notes due 2006 in a private placement through an initial purchaser to qualified
institutional buyers in accordance with Rule 144A under the Securities Act.
These notes are unsecured obligations of our company and will mature on May 15,
2006. Interest on the notes is payable semi-annually.
Holders of these notes may convert the notes into shares of common stock at
any time prior to maturity at an initial conversion price of $26.67 per share,
subject to adjustment. We may redeem some or all of the notes at any time prior
to May 20, 2004 at a redemption price equal to 100% of the principal amount of
the notes to be redeemed, plus accrued and unpaid interest to the redemption
date, if (1) the closing price of our common stock has exceeded 130% of the
conversion price of the notes for at least 20 of the 30 trading days prior to
the mailing of the redemption notice, and (2) in accordance with the terms of
the registration rights agreement we executed at the time we issued the notes,
the shelf registration statement covering resales of the notes and the common
stock issuable upon conversion of the notes is effective and available for use
and expected to remain effective and available for use for the 30 days following
the provisional redemption date. In the event of a provisional redemption, we
will make an additional payment equal to the total value of the aggregate amount
of the interest that would have been payable on the notes from the redemption
date to May 20, 2004. On and after May 20, 2004, we may also redeem the notes at
any time at our option, in whole or in part, at the redemption price shown in
the note, plus accrued interest, if any.
As of December 31, 2002, we could purchase up to an additional $54.6 million
of our common stock under our
41
previously announced $100.0 million stock buyback program, which was authorized
in June 2002. During 2002, we repurchased 13.5 million shares of our common
stock at a total cost of approximately $45.4 million. Additional purchases of
our common stock may be made from time to time in the open market or in
privately negotiated transactions, depending on market conditions. We will
determine the timing and amount of any shares to be repurchased based on our
evaluation of market conditions, applicable legal requirements and other
factors.
We expect 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 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 acceptable terms, if at all.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our investment activities is to preserve principal
while at the same time maximizing the income we receive from our investments
without significantly increasing risk. Some of the securities that we may invest
in may be subject to market risk. This means that a change in prevailing
interest rates may cause the principal amount of the investment to fluctuate.
For example, if we hold a security that was issued with a fixed interest rate at
the then-prevailing rate and the prevailing interest rate later rises, the
principal amount of our investment will probably decline. To minimize this risk
in the future, we intend to maintain our portfolio of cash equivalents and
investments in a variety of securities, including commercial paper, money market
funds, government and non-government debt securities and certificates of
deposit. As of December 31, 2002, substantially all of our investments were in
money market funds, certificates of deposit, or high-quality commercial paper.
Long-term securities are primarily comprised of AA or better rated corporate
bonds and U.S. Government-backed securities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the financial statements of our Company included herein and listed under
the heading "(a) (1) Financial Statements" of Part IV Item 15.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
42
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference to the sections of our proxy statement for the
2003 Annual Meeting of Stockholders entitled "Election of Directors."
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the sections of our proxy statement for the
2003 Annual Meeting of Stockholders entitled "Executive Compensation," "Report
of the Compensation Committee," "Certain Transactions" and "Compensation of
Directors."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Incorporated by reference to the section of our proxy statement for the
2003 Annual Meeting of Stockholders entitled "Stock Ownership of Principal
Stockholders and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the section of our proxy statement for the 2003
Annual Meeting of Stockholders entitled "Certain Transactions."
ITEM 14. CONTROLS AND PROCEDURES
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.
CHANGE 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.
43
Part IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements - The following financial statements are
included at the indicated page of this Form 10-K and incorporated into this Item
15(a)(1) by reference:
Report of Independent Accountants....................................45
Consolidated Balance Sheets..........................................46
Consolidated Statements of Operations................................47
Consolidated Statements of Changes in Stockholders' Equity...........48
Consolidated Statements of Cash Flows................................49
Notes to Consolidated Financial Statements...........................50
(a)(2) Financial Statement Schedule - Schedule II - Valuation and Qualifying
Accounts
The financial statement schedule has not been included herein since the
schedule has been included in the financial statements included elsewhere in
this Form 10-K.
(a)(3) Exhibits - See Index to Exhibits
(b) Reports on Form 8-K - The Company has not filed any reports on
Form 8-K during the fourth quarter ended December 31, 2002.
44
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
GlobespanVirata, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of changes in stockholders'
equity and of cash flows present fairly, in all material respects, the financial
position of GlobespanVirata, Inc. and its subsidiaries at December 31, 2002 and
2001, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2002 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 2 to the Consolidated Financial Statements,
effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" and Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets".
/s/ PricewaterhouseCoopers LLP
- ----------------------------------
PricewaterhouseCoopers LLP
Florham Park, New Jersey
January 24, 2003
45
GLOBESPANVIRATA, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31,
2002 2001
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 183,234 $269,586
Investments - marketable securities 114,065 297,575
Accounts receivable, less allowance for
doubtful accounts of $1,979 and $5,761,
respectively 34,058 22,582
Inventories, net 23,932 30,697
Deferred income taxes 16,786 49,532
Assets related to businesses held for sale - 2,295
Prepaid expenses and other current assets 22,079 8,524
---------- ----------
Total current assets 394,154 680,791
Property and equipment, net 21,405 32,894
Facility held for sale 24,987 -
Intangible assets, net 39,087 611,960
Investments - marketable securities 230,758 112,315
Other assets 12,599 10,970
---------- ----------
Total assets $722,990 $1,448,930
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 20,717 $30,666
Restructuring and reorganization liabilities 52,486 66,015
Accrued expenses and other liabilities 32,825 38,443
Payroll and benefit related liabilities 16,262 20,941
Liabilities related to businesses held for sale - 1,414
Current portion of capital lease obligations 1,156 3,209
---------- ----------
Total current liabilities 123,446 160,688
Other long-term liabilities 2,904 3,144
Subordinated redeemable convertible notes 130,000 130,000
Deferred taxes 16,786 49,532
Capital lease obligations, less current portion 12 1,656
---------- ----------
Total liabilities 273,148 345,020
---------- ----------
Commitments and contingencies (Refer to Note 16)
Stockholders' equity:
Preferred stock, par value $0.001; 10,000,000 shares
authorized; none issued or outstanding - -
Common stock, par value $0.001; 400,000,000 shares
authorized; 142,392,573 and 140,304,309 shares
issued and outstanding, respectively. 142 140
Treasury Stock - 13,523,530 shares (45,373) -
Stock purchase warrant 1 1
Additional paid-in capital 1,711,664 1,713,904
Notes receivable from stock sales (5,231) (5,037)
Deferred stock compensation (15,613) (61,227)
Accumulated other comprehensive income 3,191 101
Accumulated deficit (1,198,939) (543,972)
---------- ----------
Total stockholders' equity 449,842 1,103,910
---------- -----------
Total liabilities and stockholders' equity $722,990 $1,448,930
========== ===========
The accompanying notes are an integral part of these financial statements.
46
GLOBESPANVIRATA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year Ended December 31,
2002 2001 2000
---- ---- ----
Net product revenues $ 225,368 $249,459 $345,638
Cancellation revenues 3,500 15,391 -
---------- ---------- ----------
Total net revenues 228,868 264,850 345,638
Cost of sales 111,924 107,779 142,060
Cost of sales related to cancellation revenues - 1,075 -
Cost of sales - provision for excess and obsolete
inventories - 80,852 -
---------- ---------- ----------
Total cost of sales 111,924 189,706 142,060
---------- ---------- ----------
Gross profit 116,944 75,144 203,578
---------- ---------- ----------
Operating expenses:
Research and development (including non-cash
compensation of $28,631, $22,920 and $16,761 for
the years ended December 31, 2002, 2001 and 2000,
respectively) 155,927 132,775 113,438
Selling, general and administrative (including
non-cash compensation of $2,293, $3,851 and $7,356
for the years ended December 31, 2002, 2001 and
2000, respectively) 50,268 43,983 53,504
Restructuring and other charges 37,832 44,752 -
In process research and development - 21,000 44,854
Amortization of intangible assets 32,730 209,178 130,572
Impairment of goodwill and other acquired
intangible assets 493,620 - -
---------- ---------- ----------
Total operating expenses 770,377 451,688 342,368
---------- ---------- ----------
Loss from operations (653,433) (376,544) (138,790)
Interest expense non-cash - - 43,439
Interest and other income, net (6,690) (442) (1,902)
Foreign exchange (gain) loss 38 - (63)
--------- ---------- ----------
Loss from continuing operations before income taxes
and extraordinary item (646,781) (376,102) (180,264)
Provision (benefit) for income taxes 260 (4,111) 15,131
---------- ---------- ----------
Loss from continuing operations before
extraordinary item (647,041) (371,991) (195,395)
---------- ---------- ----------
Discontinued Operations
Net loss from operations of discontinued businesses
(including net loss on the sale of the video
compression business of $3,887 in the year ended
December 31, 2002) (7,926) (5,530) (1,143)
---------- ---------- ----------
Loss before extraordinary item (654,967) (377,521) (196,538)
Extraordinary item - gain on the redemption of the
beneficial conversion feature - - 43,439
---------- ---------- ----------
Net loss $(654,967) $(377,521) $(153,099)
========== ========== ==========
Other comprehensive gain loss:
Unrealized gain on marketable securities (1,733) (88) -
Foreign currency translation (gain) loss (1,357) (112) 77
---------- ---------- ----------
Comprehensive loss $(651,877) $(377,321) $(153,176)
========= ========== ==========
Basic and diluted loss per share:
Loss from continuing operations before
extraordinary item $(4.76) $ (4.91) $ (3.01)
Discontinued operations (.06) (.07) (.02)
Extraordinary item - - 0.67
---------- ---------- ----------
Net loss $ (4.82) $ (4.98) $ (2.36)
========== ======== =========
Basic and diluted weighted average shares 135,934 75,796 64,924
========== ======== =========
The accompanying notes are an integral part of these financial statements.
47
GLOBESPANVIRATA, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except share data)
Accumulated
Notes Other Total
Stock Additional Receivable Deferred Comprehen- Stock-
Common Stock Treasury Purchase Paid-in From Stock Stock sive Income Accumulated holders'
Shares Amount Stock Warrant Capital Sales Compensation (Loss) Deficit Equity
------ ------ ----- ------- ------- ---- ------------ ------ ------- ------
Balance at December 31,
1999 58,134,678 $58 $1 $77,378 $(7,412) $(1,218) $(22) $(13,352) $55,433
Net loss (153,099) (153,099)
Issuance of common stock
due to secondary public
offering, net of costs 1,406,250 1 132,970 132,971
Issuance of common stock
and exercise of stock
options 1,971,952 2 5,442 5,444
Acquisitions and acquisition
related stock options issued
at less than fair value 10,734,310 11 843,418 (85,420) 758,009
Redemption of beneficial
conversion feature (47,340) (47,340)
Tax benefit for deferred
stock compensation 30,116 30,116
Interest earned on and
repayment of notes receivable 2,150 2,150
Stock options issued at
less than fair market value (563) (563)
Amortization of compensatory
stock options 18,972 18,972
Options issued to non-employees 1,535 1,535
Accumulated other comprehensive
loss (77) (77)
---------- ----- ------ --------- --------- -------- -------- ------- --------- --------
Balance at December 31,
2000 72,247,190 72 - 1 1,043,519 (5,262) (68,229) (99) (166,451) 803,551
Net loss (377,521) (377,521)
Tax benefit for deferred
stock compensation 259 259
Options issued to non-
employees 2,383 2,383
Issuance of common stock and
exercise of stock options 1,516,466 1 7,410 7,411
Acquisitions and acquisition
related stock options issued
at less than fair value 66,540,653 67 660,333 (17,386) 643,014
Interest earned on and
repayment of notes receivable 225 225
Amortization of compensatory
stock options 24,388 24,388
Accumulated other
comprehensive income 200 200
---------- ----- ------- --------- --------- -------- -------- ------- --------- --------
Balance at December 31,
2001 140,304,309 140 - 1 1,713,904 (5,037) (61,227) 101 (543,972) 1,103,910
Net loss (654,967) (654,967)
Issuance of common stock and
exercise of stock options 2,088,264 2 8,064 12 8,078
Acquisitions and acquisition
related stock options issued
at less than fair value
Interest earned on and
repayment of notes receivable (206) (206)
Deferred compensation (10,304) 11,818 1,514
Treasury stock purchase (13,523,530) (45,373) (45,373)
Amortization of compensatory
stock options 33,796 33,796
Accumulated other
comprehensive income 3,090 3,090
---------- ----- ------- --------- --------- -------- -------- ------- --------- --------
Balance at December 31,
2002 128,869,043 $142 $(45,373) $ 1 $1,711,664 $(5,231) $(15,613) $3,191 $(1,198,939) $449,842
=========== ===== ======== ======== ========== ======== ======== ======= =========== =========
The accompanying notes are an integral part of these financial statements.
48
GLOBESPANVIRATA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
------------------------
2002 2001 2000
---- ---- ----
Cash flows (used in) provided by operating activities:
Net loss $ (654,967) $(377,521) $(153,099)
Adjustments to reconcile net loss to cash (used in)
provided by operating activities:
Deferred income taxes - (6,385) (7,914)
Tax benefits from the exercise of employee stock
options - 257 21,997
Non-cash compensation 33,796 26,771 24,120
Provision for bad debts - 458 5,066
Amortization of intangible assets (including
amortization of $1,260, $2,520 and $1,260 related
to discontinued operations for the years ended
December 31, 2002, 2001, and 2000, respectively) 33,990 211,697 131,832
Impairment of goodwill and other acquired
intangible assets 493,620 - -
Net loss on sale of the video compression business 3,887 - -
Provision for inventory obsolescence - 80,852 -
Amortization and depreciation 16,887 15,403 10,368
In process research and development - 21,000 44,854
Restructuring and other charges 20,723 39,667 -
Changes in assets and liabilities net of the
effect of acquisitions and divestitures:
(Increase) decrease in accounts receivable (11,476) 46,817 (54,816)
(Increase) decrease in inventories 6,765 (42,902) (49,054)
(Increase) in prepaid expenses and other assets (554) (3,526) (999)
Increase (decrease) in accounts payable (9,949) (19,384) 29,062
Increase (decrease) in accrued expenses and other
current liabilities (13,336) (4,038) 5,843
--------- -------- -------
Net cash provided by (used in) operating
activities (80,614) (10,834) 7,260
--------- -------- -------
Cash flows provided by investing activities:
Capital expenditures (7,179) (8,612) (18,902)
Purchase of facility held for sale (34,902) - -
Sale of intangible asset - 404 500
Net cash received from acquisition of businesses
(See Note 9) - 73,853 18,975
Cash paid for accrued acquisition related costs (10,117) - -
Proceeds from the sale of the video compression
business 21,000 - -
Purchases of marketable securities (544,203) (74,161) (12,631)
Proceeds from sale/maturities of marketable
securities 609,270 69,136 19,860
--------- -------- -------
Net cash provided by investing activities 33,869 60,620 7,802
--------- -------- -------
Cash flows provided by (used in) financing activities:
Repurchase of common stock (45,373) - -
Repayments of borrowings under subordinated
note payable - - (90,000)
Borrowings under subordinated redeemable
convertible note, net of offering costs - 126,425 -
Repayments of borrowings under line of credit - - (192)
Proceeds received from exercise of stock
options and employee stock purchase plan 8,554 7,491 139,788
Proceeds from repayment of notes receivable - 225 2,070
Repayments of capital lease borrowings (3,697) (3,396) (3,161)
--------- -------- -------
Net cash provided (used in) by financing activities (40,516) 130,745 48,505
--------- -------- -------
Net increase (decrease) in cash and cash equivalents (87,261) 180,531 63,567
Effect of exchange rates on cash and cash equivalents 909 566 265
Cash and cash equivalents at beginning of period 269,586 88,489 24,657
--------- -------- -------
Cash and cash equivalents at end of period $183,234 $269,586 $88,489
========= ======== =======
Supplemental disclosure of cash flow information
refer to Note 9
Cash paid:
Interest $ 7,439 $5,421 $2,890
========= ======== =======
Income taxes 21 - $116
========= ======== =======
Equipment acquired under capital lease $ - $ - $4,664
========= ======== =======
The accompanying notes are an integral part of these financial statements.
49
GLOBESPANVIRATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
On December 14, 2001, GlobeSpan, Inc. ("GlobeSpan") completed a merger
with Virata Corporation ("Virata") under an Agreement and Plan of Merger dated
as of October 1, 2001 (the "Merger Agreement"). Under that agreement, a
wholly-owned subsidiary of GlobeSpan merged with and into Virata and Virata
became a wholly-owned subsidiary of GlobeSpan. At the effective time of the
merger, GlobeSpan was renamed GlobespanVirata, Inc. ("GlobespanVirata" or the
"Company"). The merger with Virata was accounted for as a purchase; accordingly,
the operating results for Virata have been included from the date of
acquisition.
GlobespanVirata is a leading provider of integrated circuits, software and
system designs for broadband communication applications that enable high-speed
transmission of data voice and video to homes and business enterprises
throughout the world. Currently, the Company's 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 has
sold its products to more than 400 telecommunications equipment manufacturers
for incorporation into their products, which have been used in systems deployed
by more than 50 telecommunications service providers and end users in more than
30 countries.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting principles and practices used in the preparation
of the accompanying financial statements are summarized below:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
GlobespanVirata, Inc. and all of its wholly-owned subsidiaries. The results of
operations for the years ended December 31, 2002, 2001 and 2000 include the
results of acquired subsidiaries from their effective dates (See Note 3). All
intercompany transactions and balances are eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods presented. These estimates include assessing the
collectability of accounts receivable, the use and recoverability of inventory,
the realizability of deferred tax assets, and useful lives or amortization
periods of intangible assets. Actual results could differ from those estimates.
The markets for the Company's products are characterized by intense competition,
rapid technological development and frequent new product introductions, all of
which could impact the future realizability of the Company's assets.
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, no significant vendor obligations exist and collection of the resulting
receivable is reasonably assured. Substantially all of the Company's revenue
during the years ended December 31, 2002, 2001 and 2000 were from product sales.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments purchased with an
original maturity of ninety days or less to be cash equivalents.
50
INVESTMENTS
Short-term marketable securities consist of debt securities with original
maturity dates between ninety days and one year. Long-term marketable securities
consist of debt securities with original maturity dates greater than one year.
The Company's investments are classified as available-for-sale, and are reported
at fair value at the balance sheet date. The unrealized gains and losses, net of
related taxes, are reported as a component of accumulated other comprehensive
income. Management determines the appropriate classification of debt securities
at the time of purchase and reassesses the classification at each reporting
date. Gains and losses on the sale of available-for-sale investments are
determined using the specific-identification method.
For all investment securities, unrealized losses that are other than
temporary are recognized in net income. The Company does not hold these
securities for speculative or trading purposes.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined on
a first-in, first-out basis. The Company writes down its inventory for estimated
obsolescence or unmarketable inventory equal to the difference between the cost
of inventory and the estimated realizable value based upon assumptions about
future demand and market conditions. If actual market conditions are less
favorable than those expected by management, additional inventory write-downs
may be required.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is provided on a straight-line basis over the estimated useful
lives of the related assets, ranging from three to five years. Leasehold
improvements are amortized on a straight-line basis over the lesser of the terms
of the leases or the estimated useful lives of the assets. Gains or losses on
disposals of property and equipment are recorded in current operations.
INTANGIBLES ASSETS
Intangible assets at December 31, 2002 and 2001 consist of the excess of the
purchase price of acquired businesses over the fair value of net assets
acquired, as follows:
2002 2001
---- ----
Goodwill $ - $779,689
Core technology 39,693 148,800
Other identifiable intangibles 10,450 27,000
Accumulated amortization (11,056) (343,529)
-------- --------
Net intangible assets $ 39,087 $611,960
======== ========
The intangible assets acquired in the years ended December 31, 2001 and
2000 are being amortized over periods ranging from two years to four years.
Amortization expense related to intangible assets for the years ended December
31, 2002, 2001, and 2000 was $32,730, $209,178 and $130,572, respectively. As a
result of the implementation of Statement of Financial Accounting Standards
(SFAS) No. 142, entitled "Goodwill and Other Intangible Assets," effective
January 1, 2002, goodwill is no longer subject to amortization. Management
evaluates the recoverability of the carrying amount of intangible assets
annually, or whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. Current and estimated future
profitability, undiscounted cash flows and the market value of the Company's
common stock are the primary indicators used to assess the recoverability of
intangible assets.
The following is a reconciliation of net income, and basic and diluted loss
per share between the amounts reported by the Company in the twelve months ended
December 31, 2001 and 2000 and the adjusted amounts reflecting this new
accounting standard.
51
Twelve Months Twelve Months
Ended Ended
December 31, 2001 December 31, 2000
------------------ --------------------
Net loss:
Reported loss from continuing operations before
extraordinary item $(371,991) $(195,395)
Discontinued operations (5,530) (1,143)
Extraordinary item -- 43,439
--------- ---------
Reported net loss $(377,521) $(153,099)
Goodwill amortization 168,003 119,947
--------- ---------
Adjusted net loss $(209,518) $ (33,152)
========= =========
Basic and diluted loss per share:
Reported basic and diluted loss per share from
continuing operations before extraordinary item $ (4.91) $ (3.01)
Discontinued operations (.07) (.02)
Extraordinary item -- 0.67
--------- ---------
Reported basic and diluted net loss per share $ (4.98) $ (2.36)
========= =========
Goodwill amortization $ 2.22 $ 1.85
========= =========
Adjusted basic and diluted loss per share from
continuing operations before extraordinary item $ (2.69) $ (1.16)
========= =========
Adjusted basic and diluted net loss per share $ (2.76) $ (0.51)
========= =========
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 it various
acquisitions. The assessment was performed pursuant to SFAS No. 144 entitled
"Accounting For the Impairment or Disposal of Long-Lived Assets" and SFAS No.
142. As a result, the Company recorded a charge of $493,620 to reduce goodwill
and other intangible assets during the year ended December 31, 2002, based upon
the amount by which the carrying amount of these assets exceeded their fair
value. Of the total charge, $458,385 relates to goodwill and $35,235 relates to
other identifiable intangible assets. The charge is included within the caption
"Impairment of goodwill and other acquired intangible assets" on the Company's
Statements of Operations. Fair value was determined based on market value,
including a review of the discounted future cash flows.
A reconciliation of the Company's net intangible assets from December 31,
2001 to December 31, 2002 is as follows:
Intangible assets, net at December 31, 2001 $611,960
Amortization for the year ended December 31, 2002 (33,990)
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 (8,111)
--------
Intangible assets, net at December 31, 2002 $ 39,087
========
The Company had goodwill, net of accumulated depreciation, of $491,739 at
December 31, 2001, all of which was written off during the year ended December
31, 2002. At December 31, 2002, the Company does not have any goodwill recorded
on its balance sheet.
PRODUCT WARRANTIES
The Company provides purchasers of its products with certain warranties,
generally twelve months, and records a related provision for estimated warranty
costs at the date of sale. Warranty expense has been immaterial for all periods
presented.
52
STOCK BASED COMPENSATION
The Company accounts for employee stock-based compensation in accordance with
the intrinsic value method prescribed in Accounting Principles Board Opinion
(APB) No. 25 entitled "Accounting for Stock Issued to Employees," and related
interpretations. Accordingly, compensation cost for stock options is measured as
the excess, if any, of the fair value of the Company's stock at the date of
grant over the amount an employee must pay to acquire the stock amortized over
the vesting period. The Company applies the disclosure requirements of SFAS No.
123 entitled, "Accounting for Stock-Based Compensation" (Note 15).
RESEARCH AND DEVELOPMENT COSTS
Costs incurred in connection with the research and development of the
Company's products and enhancements to existing products are expensed as
incurred unless technological feasibility has been established. Based on the
Company's product development process, technological feasibility is established
upon completion of a working model. Costs incurred by the Company between
completion of the working model and the point at which the product is ready for
general release have not been material. Accordingly, research and development
costs have been expensed as incurred.
INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No. 109,
entitled "Accounting for Income Taxes," which requires use of the asset and
liability method. Deferred income taxes are recorded for temporary differences
between financial statement carrying amounts and the tax bases of assets and
liabilities. Deferred tax assets and liabilities reflect the tax rates expected
to be in effect for the years in which the differences are expected to reverse.
A valuation allowance is provided if it is more likely than not that some or all
of the deferred tax assets will not be realized.
COMPREHENSIVE INCOME
The Company follows SFAS No. 130, entitled "Reporting Comprehensive Income."
SFAS No. 130 requires companies to classify items of other comprehensive income
by their nature in the financial statements and display the accumulated balance
of other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the balance sheet.
LONG-LIVED ASSETS
The impairment of long-lived assets is assessed by management of the Company
using certain factors including probable comparable fair market values,
anticipated future cash flows, and the aggregate value of the related businesses
taken as a whole. These factors are periodically reviewed to determine whether
current events or circumstances require an adjustment to the carrying values or
estimated useful lives of fixed or intangible assets in accordance with the
provisions of SFAS No. 144.
STOCK SPLITS
On January 21, 2000, the Company's board of directors approved a 3-for-1
stock split applicable to all issued and outstanding shares of its common stock,
par value $0.001. This 3-for-1 stock split was effected in the form of a stock
dividend and became effective on February 25, 2000, when stockholders of record
received two additional shares of common stock for each outstanding share of
common stock held as of the record date.
All share, stock option and stock warrant information included in the
accompanying financial statements and related notes have been restated for all
periods to reflect this stock split.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation 46 entitled, "Consolidation
of Variable Interest Entities." In general, a variable interest entity is a
corporation, partnership, trust, or any other legal structure used for business
purposes that either (a) does not have equity investors with voting rights or
(b) has equity investors that do not provide sufficient financial resources for
the entity to support its activities. Interpretation 46 requires a variable
interest entity to be
53
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. The consolidation
requirements of Interpretation 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements apply to
older entities in the first fiscal year or interim period beginning after June
15, 2003. Certain of the disclosure requirements apply in all financial
statements issued after January 31, 2003, regardless of when the variable
interest entity was established. The Company believes the adoption will not have
a material impact on its financial statements.
In December 2002, SFAS No. 148 entitled "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FAS 123" was issued.
SFAS No. 148 amends SFAS No. 123 to provide alternative methods of transition
for a voluntary change to the fair market value based method of accounting for
stock-based employee compensation. In addition, the statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on the
reported results.
In November 2002, the Financial Accounting Standards Board (FASB) issued
Interpretation 45 entitled "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others." The
Interpretation elaborates on the existing disclosure requirements for most
guarantees, including loan guarantees such as standby letters of credit. It also
clarifies that at the time a company issues a guarantee, the company must
recognize an initial liability for the fair value, or market value, of the
obligations it assumes under the guarantee and must disclose that information in
its interim and annual financial statements. The provisions related to
recognizing a liability at inception of the guarantee for the fair value of the
guarantor's obligations does not apply to product warranties or to guarantees
accounted for as derivatives. The initial recognition and initial measurement
provisions apply on a prospective basis to guarantees issued or modified after
December 31, 2002. The Company believes that adoption of the recognition and
measurement provisions of Interpretation 45 will not have a material impact on
its financial statements.
In June 2002, SFAS No. 146 entitled "Accounting for Costs Associated with
Exit or Disposal Activities" was issued, replacing EITF 94-3 entitled,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Cost 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 SFAS No. 146 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 April 2002, the FASB issued SFAS No. 145 entitled "Rescission of FASB
Statements No. 4, 44, and 62, Amendment of FASB Statement No. 13, and Technical
Corrections". SFAS No. 145 requires gains and losses on extinguishments of debt
to be classified as income or loss from continuing operations rather than as
extraordinary items as previously required under Statement 4. Extraordinary
treatment will be required for certain extinguishments as provided in APB No.
30. SFAS No. 145 also amends SFAS No. 13 to require certain modifications to
capital leases be treated as a sale-leaseback and modifies the accounting for
subleases when the original lessee remains a secondary obligor (or guarantor).
In addition, SFAS No. 145 rescinded SFAS No. 44 addressing the accounting for
intangible assets of motor carriers and made numerous technical corrections.
SFAS No. 145 is effective for all fiscal years beginning after May 15, 2002 and
will be adopted by the Company in 2003. The adoption of SFAS No. 145 is not
expected to have a material impact on the Company's results of operations or
financial position.
RECLASSIFICATIONS:
Certain reclassifications have been made to conform prior-year amounts to the
current year presentation.
3. ACQUISITIONS
On December 14, 2001, the Company completed its merger with Virata by issuing
65.9 million shares of its own common stock for the outstanding shares of
Virata. In addition, the Company assumed the outstanding and unexercised options
of Virata for the equivalent of 13.6 million options to purchase its common
stock. The Company valued the options at fair value, as determined using the
Black-Scholes option pricing model, and recorded such fair value, less the
intrinsic value of the unvested portion of the stock options, as a component of
the transaction purchase price. The intrinsic value of the unvested stock
options, of $18,900, has been recorded as deferred compensation and will be
54
amortized over the remaining vesting periods of the stock options, or
approximately 24 months.
In connection with the merger with Virata, the Company began to formulate a
reorganization and restructuring plan (the "Reorganization Plan"). As a result
of the Reorganization Plan, the Company recorded restructuring and other charges
related to its operations of $37,832 during the year ended December 31, 2002.
Additionally, the Company recognized as liabilities assumed in the purchase
business combination and included in the allocation of the acquisition cost in
accordance with SFAS No. 141, entitled "Business Combinations" and EITF 95-3,
entitled "Recognition of Liabilities in Connection with a Purchase Business
Combination," the estimated costs related to Virata facilities consolidation and
the related impact on the Virata outstanding real estate leases and Virata
employee relocations and workforce reductions (refer to Note 10 for a complete
description of the Company's reorganization and restructuring plans).
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 a 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.
On February 24, 2000, the Company acquired certain technology and employees
of the Microelectronics Group of PairGain Technologies, Inc. ("PairGain"),
designers of integrated circuits and software for DSL applications. The Company
paid 3.2 million shares of its common stock and issued to PairGain a $90,000
subordinated redeemable convertible note (the "PairGain Note"). The terms of the
PairGain Note gave the Company the option to redeem the PairGain Note, in cash,
within the first six months after its issue, and thereafter gave PairGain the
option to convert the PairGain Note into 2.9 million shares of the Company's
common stock. The Company redeemed the PairGain Note for a cash payment of
$90,000 during the year ended December 31, 2000, plus interest, which accrued at
an annual rate of 5.0% through the date of redemption. In connection with the
repayment of the PairGain Note, the Company recognized the redemption of the
beneficial conversion feature previously recorded for $47,300 and an
extraordinary gain on the associated redemption of $43,400. The beneficial
conversion feature was recorded upon issuance of the PairGain Note and reflected
the intrinsic value of the beneficial conversion feature. Such amount was
amortized as non-cash interest expense over the period the beneficial conversion
feature was first available. For the year ended December 31, 2000, $43,400 was
recorded as non-cash interest expense.
On April 27, 2000, the Company acquired all the issued and outstanding shares
of T.sqware, Inc. ("T.sqware"), a provider of fully programmable scalable
network processors supporting high-speed data communications. The Company paid
for these shares by issuing 2.0 million shares of common stock and assuming the
outstanding T.sqware options for the equivalent of 178,000 options to purchase
its common stock.
On June 30, 2000, the Company acquired all of the issued and outstanding
shares of iCompression, Inc., ("iCompression"), a supplier of advanced signal
processing technology for delivering voice, video and data for the broadband
infrastructure in applications such as broadband video conferencing. The Company
paid for these shares by issuing 3.4 million shares of its common stock and
assuming the outstanding iCompression options for the equivalent of
approximately 530,000 options to purchase its common stock.
55
The following is a summary of all consideration paid for the acquisitions
during the years ended December 31, 2001 and 2000:
2001 2000
---- ----
Fair value of common stock issued and
vested stock options converted $629,213 $717,436
Subordinated redeemable convertible note
issued - 90,000
Cash paid - 8,231
Transaction costs 21,864 5,104
-------- --------
Total purchase price $651,077 $820,771
======== ========
The assets and liabilities of the acquired entities were recorded at their
appraised fair market value at the dates of acquisition. The allocations were as
follows:
Cash, short-term and long-term investments $490,454 $ 36,364
Accounts receivable 10,380 867
Inventory 7,116 -
Prepaid and other assets 7,271 2,297
Property and equipment 15,681 4,441
Identifiable intangible assets 80,000 82,787
Goodwill 94,262 680,713
-------- --------
705,164 807,469
In process research and development 21,000 44,854
Liabilities assumed (75,087) (31,552)
-------- --------
Total purchase price $651,077 $820,771
======== ========
Each of the acquisitions was accounted for as a purchase and has been
included in the Company's results of operations from its closing date.
The amount allocated to in process research and development ("IPR&D") of
$21,000 and $44,900 in the years ended December 31, 2001 and 2000, respectively,
were expensed upon acquisition, as it was determined that the underlying
projects had not reached technical feasibility, had no alternative future use
and successful development was uncertain. In the allocation of the acquisition
purchase price to IPR&D, consideration was given to the following items for the
projects under development at the time of the acquisition:
- - the present value of the forecasted cash flows and income that were expected
to result from the project;
- - the status of the project;
- - completion costs;
- - project risks;
- - the value of core technology; and
- - the stage of completion of the project.
In valuing core technology, the relative allocations to core technology and
IPR&D were consistent with the relative contribution of the projects. The
determination of the value of IPR&D was based on efforts completed as of the
date the respective entities were acquired.
The Company granted stock options to employees, including those of acquired
entities, at various discounts to fair market value as part of its long-term
employee retention strategy and has recorded deferred stock compensation
associated with such option grants amounting to $60,800 during the year ended
December 31, 2000. These amounts are being amortized over vesting periods
ranging from six months to four years on a straight-line basis.
56
The following unaudited pro forma information represents a summary of the
results of operations as if the acquisitions occurred on January 1, 2000.
Year ended December 31,
2001 2000
-------- ---------
Revenue $ 366,449 $ 476,951
========= =========
Net loss $(440,053) $(297,783)
========= =========
Net loss per common share $ (3.18) $ (2.23)
========= =========
The pro forma results are based on various assumptions and are not necessarily
indicative of what would have occurred had these transactions been consummated
on January 1, 2000.
4. INVENTORIES, NET
Inventories at December 31, 2002 and 2001 consisted of the following:
December 31, December 31,
2002 2001
---- ----
Raw materials $ - $ 1,959
Work in process 6,796 6,099
Finished Goods 65,041 97,083
Reserve for excess and
obsolete inventories (47,905) (74,444)
-------- -------
Inventories, net $ 23,932 $ 30,697
======== =======
As a result of a slowdown in the global telecommunications equipment market
during the first quarter of 2001 and customer inventory balancing problems, the
Company received customer requests to reduce or cancel sales orders and/or delay
delivery dates. These conditions reflected a rapid change in its business
environment and in customer demand as compared to the fourth quarter of 2000.
Consequently, the Company's backlog was reduced significantly and its ability to
estimate customer demand was negatively impacted.
The Company does not produce its own inventory, but subcontracts the
manufacturing to foundries. The Company must order inventory from these
foundries substantially in advance of delivery. In the fourth quarter of 2000,
the Company ordered inventory for delivery in the first quarter of 2001 based on
a record level of demand in the fourth quarter of 2000. Due to the reduction and
cancellation of orders and delay of delivery dates in the first quarter of 2001,
as well as management's decision to accelerate customer transition to higher
density and higher performance product, a provision for excess and obsolete
inventories was recorded during the first quarter of 2001 of approximately
$49,000. Of the provision, $20,000 related to products for which customer demand
no longer existed and the remainder to product for which management decided to
migrate customers to more advanced products.
During the fourth quarter of 2001, the Company recorded an additional $31,800
for excess and obsolete inventory. These charges were primarily a result of the
accelerated migration of its customers to next generation products, in
conjunction with its merger with Virata.
5. CONCENTRATION OF RISK AND CUSTOMER INFORMATION
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of cash equivalents and trade receivables. At
December 31, 2002 and 2001, five of the Company's customers accounted for
$26,146 (76.8%) and $16,537 (71.2%), of net accounts receivable, respectively.
Approximately 41.9% of the net accounts receivable at December 31, 2002 is due
from customers from whom the Company has collateralized payment arrangements
through a letter of credit with a bank.
57
Sales to customers who individually represented more than 10% of the
Company's net revenues amounted to $32,121 (14.0%), $104,671 (39.5%), and
$217,768 (63.0%) of total revenues for the years ended December 31, 2002, 2001
and 2000, respectively. Revenues from customers who represented more than 10% of
net revenues were as follows:
Years Ended
December 31,
2002 2001 2000
---- ---- ----
Net revenues:
Customer A $ - $32,774 $96,494
Customer B - 71,897 82,234
Customer C - - 39,040
Customer D 32,121 - -
The Company's sales to overseas customers are predominantly denominated in
the U.S. dollar. Revenues by geographic region for the years ended December 31,
2002, 2001 and 2000 were as follows:
Years Ended
December 31,
2002 2001 2000
---- ---- ----
Net revenues:
North America $ 44,979 $ 146,273 $224,276
Europe 9,469 16,116 10,291
Mexico/Latin America 1,413 909 24,713
Asia 172,860 101,452 86,306
Australia 147 100 52
-------- --------- --------
$228,868 $ 264,850 $345,638
======== ========= ========
The Company's revenue distribution by geographic region is determined based
upon customer ship to locations, which are not necessarily indicative of the
geographic region in which the customer's equipment is ultimately deployed.
The Company has diversified its manufacturing among several vendors.
Purchases from the Company's top five inventory vendors represented 87.9% of
total inventory purchases for the year ended December 31, 2002. One vendor
represented 33.0% of the Company's total inventory purchases for the year ended
December 31, 2002.
A single vendor manufactured substantially all of the chip sets sold by the
Company during 2001 and 2000. Purchases from this vendor approximated 87.0% and
90.0%, of total inventory purchases for the years ended December 31, 2001 and
2000, respectively.
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31,
2002 2001
---- ----
Computers and equipment $ 29,529 $ 29,996
Office furniture and fixtures 2,125 3,736
Software 11,228 15,005
Leasehold improvements 4,449 4,912
Property under capital leases,
primarily computers and equipment 3,310 3,510
Land and building 1,688 1,640
-------- --------
52,329 58,799
Less: accumulated depreciation and
amortization (30,924) (25,905)
-------- --------
$ 21,405 $ 32,894
======== ========
Accumulated amortization on assets accounted for as capital leases, amounted
to approximately $2,787 and $1,598
58
as of December 31, 2002 and 2001, respectively.
Included in operating expenses is depreciation and amortization expense of
$16,887, $9,639 and $9,275, for the years ended December 31, 2002, 2001 and
2000, respectively.
7. MARKETABLE SECURITIES
Marketable securities are included in investments - marketable securities in
both the current assets and non current asset categories, as appropriate. At
December 31, 2002, 2001 and 2000, marketable securities totaling $344,823,
$409,890 and $10,778 were available-for-sale and recorded at fair value:
Gross Unrealized Unrealized
Cost Holding Gains (Losses) Market Value
---------------- ---------------------- ------------
December 31, 2002 $343,002 $1,821 $344,823
December 31, 2001 $409,802 $ 88 $409,890
Proceeds from the sale of available-for-sale securities during the years
ended December 31, 2002, 2001 and 2000 were approximately $609,270, $69,136 and
$19,860, respectively, for which there was an immaterial associated gain or
loss.
As of December 31, 2002, substantially all of the Company's short-term
investments were in money market funds, certificates of deposits, or
high-quality commercial paper. Long-term securities are primarily comprised of
corporate bonds rated AA or better and U.S. Government backed securities.
The Company classifies its existing debt securities as available-for-sale in
accordance with the provisions of SFAS No. 115, entitled "Accounting for Certain
Investments in Debt and Equity Securities." These securities are carried at fair
market value, with unrealized gains and losses reported in stockholders' equity
as a component of other comprehensive income (loss). Gains or losses on
securities sold are based on the specific identification method.
8. DEFINED CONTRIBUTION PLAN
The Company participates in a 401(k) plan covering substantially all
employees. Benefits vest based on number of years of service. The Company's
policy is to match two-thirds of an employee's contributions, up to 6.0% of an
employee's annual salary. Additionally, the board of directors may grant
discretionary contributions based on an employee's age. Contributions to the
plan by the Company amounted to approximately $2,435, $2,006 and $1,423 for the
years ended December 31, 2002, 2001 and 2000. In connection with the merger with
Virata, the Company assumed the former Virata 401(k) Plan. Under this plan, the
Company provides 50% matching contribution, up to $2 per calendar year, per
employee. During 2002, the Virata 401(k) Plan was merged into the
GlobespanVirata 401(k) plan.
9. SUPPLEMENTAL CASH FLOW DATA
The Company acquired cash of $73,853 in connection with its merger with
Virata in 2001, as described below.
The Company acquired cash of approximately $31,900 in connection with the
acquisitions of T.sqware and iCompression completed during the second quarter of
2000 and used cash of approximately $12,900 in connection with the purchases of
Ficon, certain technology and employees of PairGain and other acquisitions
completed during 2000, resulting in net cash received from acquisitions of
$18,975 during the year ended December 31, 2000, as follows:
2001 2000
---- ----
Purchase price $ 651,077 $ 820,771
Common stock issued (629,213) (717,436)
Subordinated redeemable
convertible note payable - (90,000)
Accrued transaction costs (2,699) (434)
--------- ---------
Cash paid $ 19,165 $ 12,901
59
Less: cash acquired (93,018) (31,876)
--------- ---------
Net cash received from
acquisition of businesses $ (73,853) $ (18,975)
========= =========
10. RESTRUCTURING AND REORGANIZATION LIABILITIES
REORGANIZATION LIABILITIES
In connection with the merger with Virata, the Company began to formulate 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, 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 were based on
preliminary estimates of fair value at the time of the merger and have been
adjusted to fair value as of December 31, 2002.
The estimated costs related to the Reorganization Plan, which consists of
Virata facilities consolidation and the related impact on the Virata outstanding
real estate leases and Virata relocations and workforce reductions, is as
follows:
December 31, 2001
Reorganization 2002 Reorganization December 31, 2002
Liability Payments Adjustments Liability
-------------------------------------------------------------
Workforce related $ 14,524 ($6,548) $(5,393) $2,583
Facilities charges 16,318 (2,669) (132) 13,517
Other charges 900 (900) - -
-------------------------------------------------------------
Total $ 31,742 ($10,117) $(5,525) $16,100
=============================================================
As a result of the Reorganization Plan, approximately 240 employees of Virata
have either relocated or been 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 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 December 31,
2002, the Company paid $6,548 of these workforce related charges. Additionally,
the Company reduced its estimated liability for workforce reduction related
charges by $5,393 due primarily to lower than expected relocation costs. The
adjustment was recorded as a reduction to acquired intangible assets.
Substantially all of the remaining liability of $2,583 is expected to be paid
during the first quarter of 2003.
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 the Company 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
2002 RESTRUCTURING CHARGES
In connection with the Reorganization Plan, the Company recorded
restructuring and other charges in the year ended December 31, 2002 of $37,832.
These charges were primarily recorded in accordance with the provisions of EITF
94-3 and SFAS No. 144.
60
The details of these charges are described below.
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, explained in more detail as
follows. In February of 2002, the Company purchased a 200,000 square foot
facility located in Old Bridge, New Jersey 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, which is more
fully described below, 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 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 December 31, 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 were $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 year ended December 31, 2002. Depending on market conditions,
the Company may lease all or a portion of the facility prior to sale. 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.
During the fourth quarter of 2002, the Company announced additional workforce
reductions and facility consolidations, which resulted in it recording $12.9
million of workforce related charges, including $3.7 million of non-cash charges
related to the modification of stock options. This announcement impacted
approximately 110 employees across all geographic regions. As a result of the
reduction in the Company's workforce, it further consolidated its use of
facilities and recorded $4.7 million of facility related charges which pertain
primarily to asset impairments as a result of the reduction in workforce and
resulting decrease in the use of facilities and equipment.
The Company expects to implement further restructuring actions during 2003.
2001 RESTRUCTURING CHARGES
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 it is 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
61
from eighteen months to ten years in length.
The remaining $4,330 consisted primarily of the write-off of certain
investments which the Company deemed to have no future value.
The table below presents the liabilities associated with the 2001
Restructuring Plan as of December 31, 2001 and 2002, respectively, including
payments and adjustments made during 2002, and merger related restructuring
charges recorded during 2002 (the "2002 Restructuring Charge"):
December 31, 2001 December 31,2002,
Restructuring 2002 Restructuring Non-Cash Cash Restructuring
Liability Charges Charges Payments Liability
------------------------------------------------------------------------------------------
Workforce reduction $ 1,827 $ 16,678 $ (4,377) $ (7,334) $ 6,794
Facilities consolidation 31,672 21,154 (12,154) (11,854) 28,818
Other charges 774 - - - 774
------------------------------------------------------------------------------------------
Total charges $ 34,273 $ 37,832 $(16,531) $(19,188) $ 36,386
==========================================================================================
The table below presents the liabilities associated with the 2001
Restructuring Plan as of December 31, 2001, including payments made during the
year ended December 31, 2001:
Total Non-cash Cash Restructuring
Charges Charges Payments Liability
Workforce reduction $ 3,672 $ (1,262) $ (583) $ 1,827
Facilities consolidation 36,750 (1,514) (3,564) 31,672
Other charges 4,330 (2,630) (926) 774
---------------------------------------------------
Total $ 44,752 $ (5,406) $(5,073) $ 34,273
===================================================
11. PRIVATE OFFERING OF CONVERTIBLE SUBORDINATED NOTES
On May 11, 2001, the Company sold $130,000 of its 5 1/4% Convertible
Subordinated Notes due 2006 in a private placement through an initial purchaser
to qualified institutional buyers in accordance with Rule 144A under the
Securities Act. The Company received net proceeds from the sale of the notes of
$126,400. The Company expects to continue to use the net proceeds of the
offering for general corporate purposes, including working capital, capital
expenditures and possible acquisitions. The notes are unsecured obligations of
the Company and will mature on May 15, 2006. The notes are contractually
subordinated in right of payment to all of the Company's existing and future
senior indebtedness.
Holders of the notes may convert the notes into shares of common stock at any
time prior to maturity at an initial conversion price of $26.67 per share,
subject to adjustment. The Company may redeem some or all of the notes at any
time prior to May 20, 2004 at a redemption price equal to 100% of the principal
amount of the notes to be redeemed, plus accrued and unpaid interest to the
redemption date, if (1) the closing price of the Company's common stock has
exceeded 130% of the conversion price of the notes for at least 20 of the 30
trading days prior to the mailing of the redemption notice, and (2) in
accordance with the terms of the Registration Rights Agreement, the shelf
registration statement covering resales of the notes and the common stock
issuable upon conversion of the notes is effective and available for use and
expected to remain effective and available for use for the 30 days following the
provisional redemption date. In the event of a provisional redemption, the
Company will make an additional payment equal to the total value of the
aggregate amount of the interest that would have been payable on the notes from
the redemption date to May 20, 2004. On and after May 20, 2004, the Company may
also redeem the notes at any time at the Company's option, in whole or in part,
at the redemption price shown in the note, plus accrued interest, if any.
The Company subsequently registered the resale of the notes and common stock
issuable upon conversion of the notes on a Registration Statement on Form S-3
(File No. 333-66478), which was declared effective on August 10, 2001.
62
12. INCOME TAXES
Deferred tax assets (liabilities) are comprised of the following:
December 31,
2002 2001
---- ----
Amortization of intangibles $ 63,073 $ -
Net depreciable assets 10,739 12,603
Accrued expenses 17,815 9,711
Inventory reserve and
capitalization 50,208 19,690
Deferred compensation 24,446 65,731
Net operating loss carryforwards 127,362 88,830
Other 8,182 5,481
-------- --------
301,825 202,046
Less valuation allowance (301,825) (187,954)
-------- --------
Net deferred tax assets - 14,092
Net intangible assets - (14,092)
-------- --------
Net deferred tax liability $ - $ -
======== ========
The Company has acquired and generated federal, state and foreign net
operating loss carryforwards of approximately $522,206 and $356,731, as of
December 31, 2002 and 2001, respectively, which are due to expire between 2003
and 2023. Certain foreign net operating losses may be carried forward
indefinitely. Section 382 of the Internal Revenue Code of 1986, as amended,
places a limitation on the annual and aggregate utilization of federal net
operating loss carryforwards when an ownership change occurs. Generally, an
ownership change occurs when a greater than 50% change in ownership takes place
over a three-year test period. The annual utilization of net operating loss
carryforwards generated prior to such change in ownership is limited, in any one
year, to a percentage of the fair market value of the Company at the time of the
ownership change.
Due to the uncertainty of realization of its deferred tax assets, the Company
has provided a valuation allowance against its deferred tax assets. At such time
when it is determined that it is more likely than not that the deferred tax
assets are realizable, the valuation allowance will be reduced.
For the years ended December 31, 2001 and 2000, the Company's federal and
state income taxes payable have been reduced by the tax benefits associated with
dispositions and exercise of employee stock options. The Company receives an
income tax benefit calculated as the difference between the fair market value of
the stock issued at the time of exercise and the option price, related to
non-qualified stock options or disqualifying dispositions of incentive stock
options. These benefits were credited directly to shareholders' equity and
amounted to $0, $304 and $30,116 for the years ended December 31, 2002, 2001 and
2000, respectively.
The components of the provision (benefit) for income taxes for continuing
operations are as follows:
Years Ended
December 31,
2002 2001 2000
---- ---- ----
Current:
Federal $ -- $ -- $ 18,678
State 10 316 4,368
Foreign 250 1,959 --
------- ------- --------
Subtotal Current 260 2,275 23,046
------- ------- --------
Deferred:
Federal (97,641) (73,117) (26,621)
State (13,868) (10,975) (3,780)
Foreign (2,362) 178 --
Change in valuation allowance 113,871 77,528 22,486
------- ------- --------
Subtotal Deferred -- (6,386) (7,915)
------- ------- --------
Income tax provision (benefit) $ 260 $(4,111) $ 15,131
======= ======= ========
63
The provision (benefit) for income taxes differs from the amount of income
tax determined by applying the applicable income tax rate to income before
taxes, excluding amounts associated with the beneficial conversion feature in
2000, as follows:
Years Ended
December 31,
2002 2001 2000
---- ---- ----
U.S. statutory rate (35.0)% (35.0)% (35.0)%
State taxes (2.1) (2.7) 2.1
Amortization of intangible assets 19.6 10.0 13.1
In process research and development -- 1.9 11.4
Net operating loss utilized -- -- 2.9
Other -- (.3) .1
Change in valuation allowance 17.5 25.1 16.3
----- ----- -----
Effective tax rate 0.0% (1.0)% 10.9%
===== ===== =====
13. EARNINGS PER SHARE
The Company has adopted 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. The computation of
Diluted EPS does not assume conversion, exercise or contingent exercise of
securities that would have an anti-dilutive effect on earnings. The dilutive
effect of the outstanding stock warrants and options is required to be computed
using the treasury stock method. As of December 31, 2002, 2001 and 2000, the
Company had outstanding options, restricted stock and warrants to purchase an
aggregate of 44.8 million, 45.0 million, and 17.4 million shares of common
stock, respectively, which were not included in the calculation of earnings per
share for such periods, due to the anti-dilutive nature of these instruments. In
addition, the Company has $130,000 of convertible subordinated notes which can
be converted into common stock of the Company at a conversion price of $26.67
per share. The notes were anti-dilutive to earnings per share for the years
ended December 31, 2002 and 2001 and therefore have been excluded from the
calculation.
The computations of Basic EPS and Diluted EPS for the years ended December
31, 2002, 2001 and 2000, are as follows:
2002 2001 2000
---- ---- ----
Numerator:
Loss from continuing operations before
extraordinary item $(647,041) $(371,991) $(195,395)
Discontinued operations (7,926) (5,530) (1,143)
--------- --------- ---------
Loss before extraordinary item (654,967) (377,521) (196,538)
Extraordinary item -- -- 43,439
--------- --------- ---------
Net loss $(654,967) $(377,521) $(153,099)
========= ========= =========
Denominator:
Basic shares 135,934 75,796 64,924
Effect of dilutive instruments -- -- --
--------- --------- ---------
Diluted shares 135,934 75,796 64,924
========= ========= =========
Basic and diluted loss per share:
Loss from continuing operations before
extraordinary item $ (4.76) $ (4.91) $ (3.01)
Discontinued operations (0.06) (0.07) (0.02)
Extraordinary item -- -- $ 0.67
--------- --------- ---------
Net loss $ (4.82) $ (4.98) $ (2.36)
========= ========= =========
64
14. STOCKHOLDERS' EQUITY
On June 19, 2002, the Company's board of directors authorized the repurchase
of up to $100,000 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 December 31, 2002, the Company
repurchased 13.5 million shares at an average price per share of $3.36, for an
aggregate purchase price of $45,373.
On August 2, 2000, the Company completed a follow-on public offering of 8.6
million shares of common stock at a price of $100 per share. Of the 8.6 million
shares of common stock, 1.4 million shares were sold by the Company, resulting
in proceeds from the offering of $133,000, net of related expenses, and 7.2
million shares were sold by selling shareholders (including 1.1 million shares
sold by selling shareholders upon exercise by the underwriters of their
over-allotment option). The Company did not receive any of the proceeds from the
sales of shares by the selling shareholders.
In June 2000, the Company amended its certificate of incorporation to
increase the number of authorized shares of common stock, $0.001 par value, to
400.0 million shares.
On January 21, 2000, the Company's board of directors approved a 3-for-1
stock split applicable to all issued and outstanding shares of its common stock,
par value $0.001. The 3-for-1 stock split was effected in the form of a stock
dividend and became effective on February 25, 2000 when stockholders of record
received two additional shares of common stock for each outstanding share of
common stock held on the record date.
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.
15. STOCK OPTION PLANS AND EMPLOYEE STOCK PURCHASE PLAN
1996 EQUITY INCENTIVE PLAN
In December 1996, the Company adopted the 1996 Equity Incentive Plan (the
"1996 Plan") pursuant to which, as amended, nonqualified or incentive stock
options, stock bonus and restricted stock awards (collectively, "Stock Awards")
to purchase up to 10.2 million shares of the Company's common stock may be
granted to employees, directors and consultants. Stock Awards granted under the
1996 Plan generally vest in equal installments over a four-year period. The
exercise price of incentive stock options granted under the 1996 Plan may not be
less than the fair market value of the underlying shares (110% of the fair
market value in the case of a 10% voting shareholder) at the grant date. Each
stock option is exercisable for ten years (five years in the case of a 10%
voting stockholder) from the date of grant. Through December 31, 2000, no stock
options had been granted to a 10% stockholder.
Under the 1996 Plan, certain individuals to whom stock options have been
granted may elect to exercise those options prior to the lapse of the full
vesting period. Upon termination of employment, the Company may repurchase any
unvested shares issued pursuant to such election at the exercise price. During
the years ended December 31, 2001 and 2000, the Company repurchased 25,000 and
179,000 shares under such provision. At December 31, 2002, 2001 and
65
2000 there were 0.0 million, 0.7 million, and 2.3 million shares, respectively,
issued and outstanding that were subject to this repurchase provision.
Stock bonuses and restricted stock awards issued under the 1996 Plan provide
that shares awarded may not be sold or otherwise transferred until restrictions
established by the underlying agreements have elapsed. Upon termination of
employment, the Company may repurchase shares upon which restrictions have not
lapsed. The 1996 Plan provides that the price for each restricted stock award
shall not be less than 85% of the fair market value of the share at the date of
grant.
The 1996 Plan permits optionees to exercise their stock options by issuing a
promissory note. When stock options are exercised utilizing a promissory note,
the Company records notes receivable from stock sales. The notes are full
recourse promissory notes bearing interest at fixed rates ranging from 5.22% to
6.16% and are collateralized by the stock issued upon exercise of the stock
options. The notes including accrued interest thereon mature five years from the
date of issuance. As of December 31, 2002 and 2001, notes receivable from stock
sales amounted to $5,231 and $5,037, respectively.
1999 SUPPLEMENTAL STOCK OPTION PLAN
In December 1999, the Company's board of directors approved the adoption of
the 1999 Supplemental Stock Option Plan (the "1999 Supplemental Plan"). Upon
adoption of the 1999 Supplemental Plan, the Company reserved 6.0 million shares
of its common stock for issuance under the 1999 Supplemental Plan. During 2002,
2001 and 2000, the Company reserved an additional 5.7 million, 10.0 million and
5.3 million shares of its common stock, for issuance under the 1999 Supplemental
Plan. Under the 1999 Supplemental Plan, the Company may grant incentive or
nonqualified stock options to non-officer employees and consultants. The 1999
Supplemental Plan is administered by the Compensation Committee of the board of
directors in accordance with the terms of the 1999 Supplemental Plan.
1999 EQUITY INCENTIVE PLAN
In March 1999, the Company's board of directors approved the adoption of the
1999 Equity Incentive Plan (the "1999 Plan"). The 1999 Plan was approved by the
Company's stockholders in May 1999. Upon adoption of the 1999 Plan, the Company
reserved 3.0 million shares of its common stock, together with the shares of
common stock remaining available for issuance under the 1996 Plan, for issuance
under the 1999 Plan. The number of shares reserved for issuance under the 1999
Plan automatically increased each year beginning May 1, 2000 and ending May 1,
2002, by the lesser of 5.0% of the total number of shares of common stock then
outstanding or 3.0 million shares. Under the 1999 Plan, the Company may grant
incentive or nonqualified stock options, stock appreciation rights, restricted
stock or stock units to employees, non-employee directors and consultants. The
1999 Plan is administered by the Compensation Committee of the board of
directors in accordance with the terms of the 1999 Plan.
1999 DIRECTOR STOCK OPTION PLAN
In March 1999, the Company's board of directors approved the adoption of the
1999 Director Stock Plan (the "Director Plan"). The Director Plan was approved
by the Company's shareholders in May 1999. The Company reserved 750,000 shares
of its common stock for issuance under the Director Plan. Under the Director
Plan, the Company may only grant nonqualified stock options to non-employee
directors. The Director Plan provides for automatic grants to non-employee
directors of the Company at defined intervals. Each non-employee director of the
Company was granted an option to purchase 30,000 shares of common stock at the
fair market value at the date in which the non-employee director was appointed
or at $5.00 with the consummation of the Company's IPO, an additional option to
purchase 15,000 shares of common stock on the date of the Company's annual
stockholders' meeting in the year 2000 and an additional option to purchase
15,000 shares of common stock on the date of the Company's annual stockholders'
meeting in the year 2001, provided that the director continues to serve as a
director of the Company. Each non-employee director elected to serve will be
granted an option to purchase 30,000 shares of common stock on the date he or
she is first elected to the board of directors and an additional option to
purchase 15,000 shares of common stock on the date of the Company's annual
stockholder's meeting in the calendar year following such initial election. At
each annual stockholders' meeting following the annual meeting during which each
non-employee director received the second option to purchase 15,000 shares of
common stock, each non-employee director will be granted an option to purchase
7,500 shares of common stock. Stock options granted pursuant to the Director
Plan vest upon the director's completion of twelve months of service during
which he or she attended at least 75% of the meetings of the Company's board of
directors.
66
On January 22, 2002, the Company's board of directors approved a one-year
extension to the exercise period of all outstanding and vested options held by
the Directors who resigned on December 14, 2001, in connection with the Virata
merger. The Company recognized approximately $2,500 as a result of this action.
The following table summarizes stock options granted, exercised and forfeited
(in thousands) since December 31, 1999:
Weighted
Average
Purchase
Options Price
------- --------
Balance at
December 31, 1999 7,849 $10.91
Granted 10,576 $65.85
Exercised (1,497) $1.56
Forfeited (544) $74.00
----- ------
Balance at
December 31, 2000 16,384 $45.23
Granted 31,384 $10.62
Exercised (898) $2.29
Forfeited (2,585) $57.08
------- ------
Balance at
December 31, 2001 44,285 $20.96
Granted 9,620 $3.35
Exercised (1,344) $3.03
Forfeited (8,420) $24.70
------ ------
Balance at
December 31, 2002 44,141 $16.93
====== ======
The following table summarizes information about outstanding stock options
(in thousands) as of December 31, 2002:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average Weighted Exercisable Weighted
Outstanding Remaining Average at Average
Actual Ranges of Exercise at December Contractual Exercise December Exercise
Prices 31, 2002 Life Price 31, 2002 Price
------------------------- ----------- ----------- -------- ----------- --------
$0.01 - 09.99 21,107 7.3 $4.82 9,155 $5.21
$10.00 - 19.83 15,071 7.5 $13.41 7,190 $13.89
$20.13 - 29.06 2,481 6.7 $23.13 2,287 $23.09
$30.19 - 39.61 1,414 7.0 $31.88 972 $31.88
$40.63 - 48.29 494 6.9 $44.71 403 $44.42
$50.13 - 59.00 62 6.4 $54.73 38 $54.77
$60.88 - 69.50 969 7.0 $63.58 652 $63.56
$72.06 - 79.75 584 5.8 $75.24 438 $75.18
$80.00 - 89.44 232 6.7 $83.08 145 $83.20
$90.00 - 98.06 275 5.0 $94.63 241 $94.83
$100.00 - 107.81 411 6.6 $102.21 259 $102.21
$110.00 - 119.56 850 7.1 $115.16 504 $115.27
$120.56 - 129.81 129 6.8 $125.69 85 $125.50
$130.38 - 139.13 57 7.4 $133.48 39 $133.36
$141.63 - 146.00 5 6.7 $146.00 3 $146.00
------------------------------ ------------- ------------ ---------- ----------- ----------
$0.01 - 146.00 44,141 7.3 $16.93 22,411 $20.59
The Company has, in connection with the acquisitions discussed in Note 3,
assumed the stock option plans of each acquired company. During the years ended
December 31, 2001 and 2000, respectively, a total of approximately 18.6 million
and 0.7 million shares of the Company's common stock were reserved for issuance
under the assumed plans and the related outstanding options, which aggregate
14.3 million as of December 31, 2002, are included in the preceding table.
EMPLOYEE STOCK OPTIONS ACCOUNTING
The Company accounts for stock options granted to employees in accordance
with APB No. 25. Had the compensation cost for the Company's
67
stock option plans been determined based on the fair value at the grant dates
for awards under the plans consistent with the method of SFAS No. 123, the
Company's net loss and fully diluted earnings per share on a pro forma basis
would have been ($770,199), ($484,634), and ($230,553), and ($5.67), ($6.39),
and ($3.55), for the years ended December 31, 2002, 2001 and 2000, respectively,
as calculated utilizing the Black-Scholes option-pricing model. The following
assumptions were used for the years ended December 31, 2002, 2001 and 2000: (1)
risk-free interest rate of 3.3%, 4.0%, and 6.3%, respectively; (2) dividend
yield of 0.00%; (3) expected life of four years for December 31, 2002, 2001 and
2000 and (4) volatility of 102%, 105% and 100% for December 31, 2002, 2001 and
2000, respectively.
During 2002, 2001 and 2000, the Company granted stock options to employees to
purchase shares of common stock at exercise prices less than the estimated fair
market value of the Company's common stock at the date of grant. In connection
with these issuances, the Company recorded $0, $18,530, and $89,552, of deferred
compensation, of which $33,796, $24,388, and $22,582 was recognized during 2002,
2001 and 2000, respectively, as compensation expense. The deferred compensation
is being amortized over the vesting period, which ranges from two to four years.
The Company determined the amount of deferred compensation as the difference
between the fair market value of the Company's common stock and the exercise
price on the date of grant.
NON-EMPLOYEE OPTIONS
In 2001 and 2000, the Company granted 122,000 and 32,000 stock options,
respectively, to non-employees. In accordance with the requirements of EITF
96-18 entitled "Accounting for Equity Instruments that are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling Goods or Services." The
Company recorded $2,383 and $1,535, respectively, reflecting the estimated fair
value of these options utilizing the Black-Scholes option-pricing model and the
assumptions indicated above. The Company has amortized this obligation to
expense over the period services were performed. In 2002, no stock options were
granted to non-employees.
EMPLOYEE STOCK PURCHASE PLAN
On March 12, 1999, the Company's board of directors approved the adoption of
an Employee Stock Purchase Plan (the "Purchase Plan"). The Purchase Plan was
approved by the Company's stockholders in May 1999. The Company reserved 1.2
million shares of its common stock for issuance under the Purchase Plan, which
automatically increased each year beginning February 1, 2000 and ending February
1, 2002, by the lesser of 2.0% of the total number of shares of common stock
then outstanding or 1.2 million shares. The Purchase Plan permits each eligible
employee, as defined, to purchase shares of the Company's common stock through
payroll deductions, provided that the aggregate amount of each employee's
payroll deductions does not exceed 15.0% of his cash compensation. Purchases of
common stock occur on January 31 and July 31 of each year. The Purchase Plan is
administered by the compensation committee of the board of directors in
accordance with the terms of the Purchase Plan.
16. COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities for office and research and development
activities under agreements that expire at various dates through 2021. In
addition, the Company leases certain computer and office equipment under
agreements that are classified as capital leases, the net book value of which
was $523 and $1,912 at December 31, 2002 and 2001, respectively. Minimum
required future lease payments under the Company's capital and operating leases
at December 31, 2002 are as follows:
Operating Leases
Included in
Capital Operating Restructuring
Leases Leases Plans
------- --------- ----------------
Years Ended December 31,
2003 1,221 $4,076 $11,453
2004 7 3,936 9,536
2005 6 3,762 8,099
2006 - 3,497 7,217
2007 - 3,467 6,234
Thereafter - 24,437 4,058
------- ------- -------
Total minimum lease payments $1,234 $43,175 $46,597
======= =======
Less: amount representing interest (66)
-------
Present value of net minimum lease payments 1,168
Less: current portion (1,156)
-------
Long term capital lease obligations $12
=======
68
Approximately $10.3 million of the operating lease commitments is payable in
periods beyond ten years. As of December 31, 2002, the Company had facility
related restructuring reserves of $42.3 million.
Rent expense for the years ended December 31, 2002, 2001 and 2000 was
approximately $7,512, $8,408 and $2,850, respectively, and is included in
operating expenses.
In November 2001, Collegeware Asset Management, LP, on behalf of itself and a
putative class of persons who purchased our common stock between June 23, 1999
and December 6, 2000, filed a civil action complaint in the United States
District Court for the Southern District of New York alleging violations of
federal securities laws against certain underwriters of the Company's initial
and secondary public offerings as well as certain of the Company's officers and
directors (Collegeware Asset Management, LP v. Fleetboston Robertson Stephens,
Inc., et al., No. 01-CV-10741). The complaint alleges that the defendants
violated federal securities laws by issuing and selling the Company's common
stock in our initial and secondary offerings without disclosing to investors
that some of the underwriters had (1) solicited and received undisclosed and
excessive commissions and (2) entered into agreements requiring certain of their
customers to purchase our stock in the aftermarket at escalating prices. The
complaint seeks unspecified damages. The complaint was consolidated with
approximately 300 other actions making similar allegations regarding the public
offerings of hundreds of other companies that launched offerings during 1998
through 2000 (In re: Initial Public Offering Securities Litigation, No. 21 MC 92
(SAS)). The Company believes its officers and/or directors have meritorious
defenses to the plaintiffs' claims and those defendants will defend themselves
vigorously.
The semiconductor and telecommunications industries are characterized by
substantial litigation regarding patent and other intellectual property rights.
Although, as of the date hereof, no legal action has commenced against the
Company, Texas Instruments has threatened the Company with a possible lawsuit
for patent infringement. Texas Instruments' claim relates to a group of patents
(and related foreign patents) that it believes are essential to certain industry
standards for sending ADSL signals over the network. Texas Instruments has
offered the Company licenses to these patents on terms that were not deemed
acceptable. The Company continues to dispute the applicability of most, if not
all, of these patents to our products and have asserted that Texas Instruments'
patents are not infringed, invalid and/or are unenforceable. As of the date of
the report, it is not possible to determine whether the Company and Texas
Instruments will be able to resolve their dispute without litigation, nor can
the outcome of this potential patent dispute be predicted with reasonable
particularity if litigation were to ensue. If the Company is not able to agree
on license terms in the near future, the Company believes that it is likely that
it will become engaged in intellectual property litigation with Texas
Instruments. Such litigation would be costly and could divert the efforts and
attention of the Company's management and technical personnel from normal
business operations. Although the Company believes that it has strong arguments
in favor of its position in this dispute, the Company can give no assurance that
it will prevail on any of these grounds in litigation. If any such litigation is
resolved adversely to the Company, the Company could be held responsible for the
payment of damages and/or have the sale of its products stopped by an
injunction, which could have a material adverse effect on our business,
financial condition and results of operations.
The Company is also a subject to various other inquiries or claims in
connection with intellectual property rights. These claims have been referred to
counsel, and they are in various stages of evaluation and negotiation. If it
appears necessary or desirable, the Company may seek licenses for these
intellectual property rights. The Company can give no assurance that licenses
will be offered by all claimants, that the terms of any offered licenses will be
acceptable to it or that in all cases the dispute will be resolved without
litigation, which may be time consuming and expensive, and may result in
injunctive relief or the payment of damages by the Company. In addition, the
Company is involved in various other legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business. While
the outcome of these claims cannot be predicted with certainty, management does
not believe that the outcome of any of these legal matters will have a material
adverse effect on the Company's business, results of operation or financial
condition.
17. RELATED PARTY TRANSACTIONS
Pursuant to a Purchase Agreement, dated June 18, 1996, three direct
wholly-owned subsidiaries and two indirect wholly-owned subsidiaries of
Communication Partners, L.P. (formerly Paradyne Partners, L.P.), acquired
certain assets of AT&T Paradyne Corporation from its parent company, Lucent
Technologies Inc. ("Lucent"), in exchange for $146.0 million in cash and notes
and the assumption of certain liabilities effective July 31, 1996. The assets
and liabilities were purchased by four separate operating subsidiaries of
Communication Partners, L.P., including the Company.
As of December 31, 2002 and 2001, Communication Partners, L.P. or other
entities affiliated with Texas Pacific
69
Group owned 11.7% and 10.7%, respectively, of the Company's outstanding stock.
During the years ended December 31, 2002, 2001, and 2000, the Company
recorded product sales of $1,802, $1,027 and $8,355, respectively, related to
goods sold to Paradyne Networks. At December 31, 2002 the Company had a
receivable from Paradyne Networks in the amount of $76 and at December 31, 2001,
the Company had a payable to Paradyne Networks in the amount of $1,196.
In 1999, the Company and Paradyne Networks entered into a four-year Supply
Agreement that gave Paradyne Networks preferential pricing and other terms in
connection with the sale by the Company of products to Paradyne Networks. Under
the terms of the Supply Agreement, the Company is required to honor Paradyne
Networks' orders for the Company's products in quantities at least consistent
with Paradyne Networks' past ordering practices and must afford Paradyne
Networks at least the same priority for Paradyne Networks' orders as the Company
affords its other similarly situated customers. The Company also granted
Paradyne Networks a standard customer immunity under the Company's intellectual
property rights with respect to any of Paradyne Networks' products which
incorporate the Company's products.
In 2002, the Company licensed certain technology related to subscriber line
integrated circuit products from Legerity, Inc., a provider of
analog/mixed-signal integrated circuits for wireline voice and data networks.
Dipanjan Deb, a director of the Company, is a partner of an investment firm that
is a controlling stockholder of Legerity and is also a director of Legerity. The
Company paid license fees of $800 to Legerity during 2002.
18. DISCONTINUED OPERATIONS
During the second quarter of 2002, management of the Company committed to a
plan to dispose of its video compression and EmWeb businesses (the "Discontinued
Businesses"). The Discontinued Businesses meet the component of an entity
criteria, as defined in SFAS No. 144. As required by SFAS No. 144, the results
of the Discontinued Businesses, including the loss on sale of the video
compression business, have been presented separately in the Company's statements
of operations and the assets and liabilities of the Discontinued Businesses have
been presented separately on the Company's balance sheets, for all periods
presented.
The results of discontinued operations, for the periods presented, are as
follows:
Year Year Year
Ended Ended Ended
December 31, 2002 December 31, 2001 December 31, 2000
-------------------------------------------------------------
Net loss from operations of businesses
discontinued/held for sale:
Video ($3,168) ($5,530) ($1,143)
EmWeb (871) - -
-------- -------- ----------
Net loss from operations of businesses
discontinued/held for sale ($4,039) ($5,530) ($1,143)
Net Loss on Sale (3,887) - -
-------- -------- ----------
Net loss from discontinued operations ($7,926) ($5,530) ($1,143)
======== ======== ==========
70
Revenues related to the Discontinued Businesses, for the periods presented,
are as follows:
Year Year Year
Ended Ended Ended
December 31, 2002 December 31, 2001 December 31, 2000
-------------------------------------------------------------
Revenues:
Video $4,002 $5,086 $2,460
EmWeb 443 - -
-------- ------- --------
Total revenues $4,445 $5,086 $2,460
======== ======= ========
19. VALUATION AND QUALIFYING ACCOUNTS
Balance at Additions - Balance at
Beginning Costs and End of
Classification of Period Expenses Deductions (a) Period
(In thousands) ---------- ----------- -------------- ----------
Year ended December 31, 2002:
Allowance for doubtful accounts $5,761 - (3,782) 1,979
Valuation allowance-deferred tax asset $187,954 113,871 - 301,825
Inventory obsolescence reserve $74,444 1,250(b) (27,789) 47,905
Year ended December 31, 2001:
Allowance for doubtful accounts $5,403 458 (100) $5,761
Valuation allowance-deferred tax asset $35,325 152,628 - $187,953
Inventory obsolescence reserve $262 79,602(b) (5,420) $74,444
Year ended December 31, 2000:
Allowance for doubtful accounts $337 5,094 (28) $5,403
Valuation allowance-deferred tax asset $4,926 30,399 - $35,325
Inventory obsolescence reserve $95 167 - $262
(a) Represents accounts written off as uncollectable and inventory previously
reserved, which was subsequently sold.
(b) $1,250 of the provision for excess and obsolete inventory recorded during
the year ended December 31, 2001 was related to a non-cancelable purchase
commitment and was recorded to accrued liabilities on the Company's balance
sheet at December 31, 2001. During the year ended December 31, 2002, the
inventory was received and the accrued liability was transferred to the
inventory obsolescence reserve.
71
20. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Three Months Ended
------------------
Mar. 31, Jun. 30, Sep. 29, Dec. 31, Mar. 31, Jun. 30, Sep. 30, Dec. 31,
2002 2002 2002 2002 2001 2001 2001 2001
-------- -------- -------- -------- -------- -------- -------- --------
(In thousands except per share data)
Statement of Operations:
Net revenues $84,404 $45,943 $47,391 $51,130 $106,945 $58,495 $44,560 $54,850
Gross profit 47,137 23,048 21,753 25,006 12,766 36,504 25,065 809
Loss from operations (33,088) (547,349) (32,553) (40,443) (92,447) (102,379) (65,612) (116,106)
Loss from continuing
operations before taxes (31,219) (545,540) (31,216) (38,806) (91,350) (102,330) (65,973) (116,449)
Loss from continuing
operations (31,479) (545,540) (31,216) (38,806) (89,162) (102,820) (65,303) (126,236)
Net loss from operations of
discontinued businesses
(including net loss on the
sale of the video
compression business of
$3,887 during the quarter
ended June 30, 2002) (1,230) (6,696) - - (861) (832) (1,398) (2,439)
Net loss (32,709) (552,236) (31,216) (38,806) (89,162) (102,820) (65,302) (120,237)
Loss from continuing
operations per share -
basic and diluted $(0.22) $(3.87) $(0.23) $(0.30) $(0.66) $(1.41) $(0.87) $(1.36)
======== ======== ======= ======= ========= ========= ========= ========
Net loss per share -
basic and diluted $(0.23) $(3.92) $(0.23) $(0.30) $ (0.77) $(1.42) $(0.89) $(1.39)
======== ======== ======= ======= ========= ========= ========= ========
72
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities
Exchange Act of 1934, the registrant has caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
GLOBESPANVIRATA, INC.
/s/ ARMANDO GEDAY
March 10, 2003 By ______________________________________
Armando Geday
President, Chief Executive Officer and Director
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Armando Geday and Robert McMullan, or
either of them, each with the power of substitution, his attorney-in-fact, to
sign any amendments to this Form 10-K (including post-effective amendments), and
to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ ARMANDO GEDAY
________________________ President, Chief Executive March 10, 2003
Armando Geday Officer and Director
/s/ ROBERT MCMULLAN
________________________ Vice President and Chief March 10, 2003
Robert McMullan Financial Officer
/s/ GARY BLOOM
________________________ Director March 10, 2003
Gary Bloom
/s/ JAMES COULTER
________________________ Director March 10, 2003
James Coulter
/s/ DIPANJAN DEB
________________________ Director March 10, 2003
Dipanjan Deb
/s/ HERMANN HAUSER
________________________ Director March 10, 2003
Hermann Hauser
/s/ JOHN MARREN
________________________ Director March 10, 2003
John Marren
/s/ GIUSEPPE ZOCCO
________________________ Director March 10, 2003
Giuseppe Zocco
73
I, Armando Geday, certify that:
1. I have reviewed this annual report on Form 10-K of GlobespanVirata, Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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
annual report (the "Evaluation Date"); and
c) Presented in this annual 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
annual 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: March 10, 2003
/s/ ARMANDO GEDAY
- --------------------
Armando Geday
Chief Executive Officer
74
I, Robert McMullan, certify that:
1. I have reviewed this annual report on Form 10-K of GlobespanVirata, Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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
annual report (the "Evaluation Date"); and
c) Presented in this annual 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
annual 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: March 10, 2003
/s/ ROBERT MCMULLAN
- --------------------
Robert McMullan
Chief Financial Officer
75
INDEX TO EXHIBITS
Exhibit
Number
- -------
2.1 Agreement and Plan of Merger, dated October 1, 2001, by and among the
Company, Wine Acquisition Corp. and Virata Corporation (incorporated
herein by reference to Annex A to the joint proxy statement/
prospectus which constitutes a part of the Registration Statement on
Form S-4 (File No.: 333-72028)).
3.1 Restated Certificate of Incorporation of the Company (incorporated
herein by reference to Exhibit 3.1 to the Company's Annual Report on
Form 10-K filed April 1, 2002).
3.2 Amended and Restated Bylaws of the Company (incorporated herein by
reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K
filed April 1, 2002).
4.1 Specimen Common Stock certificate (incorporated herein by reference to
Exhibit 4.1 to the Company's Annual Report on Form 10-K filed April 1,
2002).
4.2 Investors' Rights Agreement between the Company, Intel Corporation,
Cisco Systems, Inc. and Communication Partners, L.P., dated May 6,
1999 (incorporated herein by reference to Exhibit 10.20 to the
Company's Registration Statement on Form S-1 (File No. 333-75173)).
4.3 Registration Rights Agreement between the Several Persons named in
Annex I thereto, dated January 28, 2000 (incorporated herein by
reference to Exhibit 4.7 to the Company's Registration Statement on
Form S-3 filed on July 7, 2000).
4.4 Instrument Defining Rights of Stockholders of the Company
(incorporated into this document by reference to the Company's Form
8-A (File No. 000-26401)).
4.5 Indenture dated as of May 11, 2001 between the Company and United
States Trust Company of New York (incorporated herein by reference to
Exhibit 4.1 to the Company's Current Report on Form 8-K filed on May
15, 2001).
4.6 Registration Rights Agreement dated as of May 11, 2001, by and among
the Company and Morgan Stanley & Co. Incorporated (incorporated herein
by reference to Exhibit 4.2 to the Company's Current Report on Form
8-K filed on May 15, 2001).
4.7 Rights Agreement, dated as of July 5, 2002, between the Company and
American Stock Transfer & Trust Company, as Rights Agent (incorporated
by reference to Exhibit 1 to the Form 8-A filed on July 11, 2002).
4.8 Certificate of Designations of Series A Preferred Stock (incorporated
by reference to Exhibit 2 to the Form 8-A filed on July 11, 2002).
10.1* Form of Indemnification Agreement entered into by the Company with
each of its directors and executive officers (incorporated herein by
reference to Exhibit 10.1 to the Company's Registration Statement on
Form S-1 (File No. 333-75173)).
10.2* 1999 Equity Incentive Plan (incorporated herein by reference to
Exhibit 10.2 to the Company's Registration Statement on Form S-1 (File
No. 333-75173)).
10.3* Employee Stock Purchase Plan (incorporated herein by reference to
Exhibit 10.3 to the Company's Registration Statement on Form S-1 (File
No. 333-75173)).
10.4* 1999 Director Stock Plan (incorporated herein by reference to Exhibit
10.4 to the Company's Registration Statement on Form S-1 (File No.
333-75173)).
10.5 Lease Agreement between Shav Associates and the Company, dated March
20, 2001(incorporated herein by reference to Exhibit 10.5 to the
Company's Annual Report on Form 10-K filed March 30, 2001).
76
10.6 Termination Agreement between the Company and Paradyne Corporation,
dated December 31, 1998 (incorporated herein by reference to Exhibit
10.10 to the Company's Registration Statement on Form S-1 (File No.
333-75173)).
10.7* Employment Agreement between the Company and Armando Geday, dated as
of October 1, 2001 (incorporated herein by reference to Exhibit 10.7
to the Company's Annual Report on Form 10-K filed April 1, 2002).
10.8* Employment Agreement between the Company and Charles Cotton, dated as
of October 1, 2001(incorporated herein by reference to Exhibit 10.8 to
the Company's Annual Report on Form 10-K filed April 1, 2002).
10.9* Employment Agreement between the Company and Nicholas Aretakis, dated
as of January 17, 2002.
10.10* Employment Agreement between the Company and Robert McMullan, dated as
of January 17, 2002, executed and amended on August 13, 2002
(incorporated herein by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q filed November 12, 2002).
10.11 Intellectual Property Agreement among the Company, Lucent Technologies
Inc. and Paradyne Corporation, dated July 31, 1996 (incorporated
herein by reference to Exhibit 10.16 to the Company's Registration
Statement on Form S-1 (File No. 333-75173)).
10.12+ Product Supply Agreement between the Company and Paradyne Corporation
dated March 16, 1999 (incorporated herein by reference to Exhibit
10.18 to the Company's Registration Statement on Form S-1 (File No.
333-75173)).
10.13* 1999 Supplemental Plan (incorporated herein by reference to Exhibit
4.4 to the Company's Registration Statement on Form S-8 (File No.
333-40720)).
10.14* T.Sqware, Inc. 1997 Stock Option Plan (incorporated herein by
reference to Exhibit 4.6 to the Company's Registration Statement on
Form S-8 (File No. 333-40720)).
10.15* T.Sqware, Inc. 1997 Stock Option Plan Sub Plan for French Employees
(incorporated herein by reference to Exhibit 4.7 to the Company's
Registration Statement on Form S-8 (File No. 333-40720)).
10.16* 2000 Stock Option Plan Sub Plan for French Employees (incorporated
herein by reference to Exhibit 4.5 to the Company's Registration
Statement on Form S-8 (File No. 333-40720)).
10.17* iCompression, Inc. 1998 Equity Incentive Plan (incorporated herein by
reference to Exhibit 4.8 to the Company's Registration Statement on
Form S-8 (File No. 333-40720)).
10.18* Internext Compression, Inc. 1997 Equity Incentive Plan (incorporated
by reference to Exhibit 4.9 to the Company's Registration Statement on
Form S-8 (File No. 333-40720)).
10.19* Ultima Communication, Inc. 1999 Stock/Option Issuance Plan
(incorporated herein by reference to Exhibit 4.9 to the Company's
Registration Statement on Form S-8 (File No. 333-49864)).
10.20* AtecoM, Inc. 1996 Stock Plan (incorporated herein by reference to
Exhibit 4.3 to the Company's Registration Statement on Form S-8 (File
No. 333-49864)).
10.21* Amended and Restated Virata Corporation 1999 Stock Incentive Plan
(incorporated herein by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-8 (File No. 333-75324)).
10.22* Virata Corporation 1999 Non-Employee Director Compensation Plan
(incorporated herein by reference to Exhibit 4.3 to the Company's
Registration Statement on Form S-8 (File No. 333-75324)).
10.23* D2 Technologies, Inc. Tandem Stock Option Plan (incorporated herein by
reference to Exhibit 4.4 to the Company's Registration Statement on
Form S-8 (File No. 333-75324)).
77
10.24* Inverness Systems Ltd. Share Option Plan (incorporated herein by
reference to Exhibit 4.5 to the Company's Registration Statement on
Form S-8 (File No. 333-75324)).
10.25* Agranat Systems, Inc. 1996 Stock Option Plan (incorporated herein by
reference to Exhibit 4.6 to the Company's Registration Statement on
Form S-8 (File No. 333-75324)).
10.26* Excess Bandwidth 1998 Equity Incentive Plan (incorporated herein by
reference to Exhibit 4.7 to the Company's Registration Statement on
Form S-8 (File No. 333-75324)).
10.27# Employment Agreement between the Company and Charles Michael Powell,
dated as of January 17, 2002.
10.28# Employment Agreement between the Company and Vivek Bansal, dated as of
January 17, 2002.
10.29# Separation Letter between the Company and Andrew Vought, dated July 3,
2002.
10.30# Separation Letter between the Company and Charles Cotton, dated
December 20, 2002.
21.1# Subsidiaries of the Company.
23.1# Consent of PricewaterhouseCoopers LLP.
24.1# Power of Attorney (included on signature page).
99.1# Certification of the Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
99.2# Certification of the Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
+ Certain portions of this exhibit have been granted confidential treatment by
the Commission. The omitted portions have been separately filed with the
Commission.
* Constitutes a management contract or compensatory plan or arrangement.
# Filed herewith.
78