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Form 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended March 30, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 000-26401
GlobespanVirata, Inc.
(Exact name of registrant as specified in its charter)
Delaware 75-2658218
(State of incorporation) (IRS Employer Identification No.)
100 Schulz Drive, Red Bank, New Jersey 07701
(Address of principal executive offices, including ZIP code)
(732) 345-7500
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
The number of shares outstanding of the Registrant's Common Stock as of
April 25, 2003 was 130,451,350
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GlobespanVirata, Inc.
INDEX
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of March 30, 2003 and
December 31, 2002.....................................................2
Condensed Consolidated Statements of Operations for the Three Months
Ended March 30, 2003 and March 31, 2002...............................3
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 30, 2003 and March 31, 2002...............................4
Notes to Condensed Consolidated Financial Statements..................5
Item 2. Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations...............................14
Item 3. Quantitative and Qualitative Disclosures About Market Risk........19
Item 4. Controls and Procedures...........................................20
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K...................................20
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
GlobespanVirata, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except share data)
March 30, December 31,
2003 2002
--------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 199,210 $ 183,234
Investments - marketable securities 136,405 114,065
Accounts receivable, less allowance for doubtful
accounts of $1,886 and $1,979, respectively 33,457 34,058
Inventories, net 18,111 23,932
Deferred income taxes 14,668 16,786
Prepaid expenses and other current assets 22,997 22,079
--------- ---------
Total current assets 424,848 394,154
Property and equipment, net 18,849 21,405
Facility held for sale 24,987 24,987
Intangible assets, net 31,135 39,087
Investments - marketable securities 197,695 230,758
Other assets 14,124 12,599
--------- ---------
Total assets $ 711,638 $ 722,990
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 29,570 $ 20,717
Restructuring and reorganization liabilities 42,489 52,486
Accrued expenses and other liabilities 24,638 32,825
Payroll and benefit related liabilities 14,174 16,262
Current portion of capital lease obligations 696 1,156
--------- ---------
Total current liabilities 111,567 123,446
Other long-term liabilities 3,010 2,904
Convertible subordinated note 130,000 130,000
Deferred income taxes 14,668 16,786
Capital lease obligations, less current portion 8 12
--------- ---------
Total liabilities 259,253 273,148
--------- ---------
Stockholders' equity
Preferred stock - -
Common stock 143 142
Treasury stock - 13,523,530 shares (45,373) (45,373)
Stock purchase warrants 1 1
Notes receivable from stock sales (4,384) (5,231)
Additional paid in capital 1,714,728 1,711,664
Deferred stock compensation (11,936) (15,613)
Accumulated deficit (1,203,582) (1,198,939)
Accumulated other comprehensive income 2,788 3,191
--------- ---------
Total stockholders' equity 452,385 449,842
--------- ---------
Total liabilities and stockholders' equity $ 711,638 $ 722,990
========= =========
The accompanying notes are an integral part of these financial statements.
2
PART I. FINANCIAL INFORMATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share data)
For The Three Months Ended
March 30, 2003 March 31, 2002
----------------- -----------------
Continuing operations:
Net revenues $ 68,680 $ 84,404
Cost of sales 34,642 37,267
----------------- -----------------
Gross profit 34,038 47,137
----------------- -----------------
Operating expenses:
Research and development (including non-cash 24,245 52,929
compensation of $2,757 and $15,406 for the three
months ended March 30, 2003 and March 31, 2002,
respectively)
Selling, general & administrative (including non-cash 9,789 15,186
compensation of $919 and $823 for the three
months ended March 30, 2003 and March 31, 2002,
respectively)
Restructuring and other charges 734 -
Amortization of intangible assets 5,294 12,110
----------------- -----------------
Total operating expenses 40,062 80,225
----------------- -----------------
Loss from operations (6,024) (33,088)
Interest and other income, net (686) (1,869)
----------------- -----------------
Loss from continuing operations before income taxes (5,338) (31,219)
Provision (benefit) for income taxes (695) 260
----------------- -----------------
Loss from continuing operations (4,643) (31,479)
Discontinued operations:
Net loss from operations of discontinued businesses - (1,230)
----------------- -----------------
Net loss $ (4,643) $ (32,709)
----------------- -----------------
Other comprehensive loss:
Unrealized loss on marketable securities 271 166
Foreign currency translation loss 132 497
----------------- -----------------
Comprehensive loss $ (5,046) $ (33,372)
================= =================
Basic and diluted loss per share:
Loss from continuing operations $ (0.04) $ (0.22)
Discontinued operations - (0.01)
----------------- -----------------
Net loss $ (0.04) $ (0.23)
================= =================
Weighted average shares of common stock outstanding
used in computing basic and diluted loss per share 129,660 140,122
================= =================
The accompanying notes are an integral part of these financial statements.
3
GlobespanVirata, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
For the Three Months Ended
March 30, 2003 March 31, 2002
-------------- --------------
Cash flows provided by (used in) operating activities:
Net loss $ (4,643) $ (32,709)
Adjustments to reconcile net loss to cash provided by (used in) operating activities:
Non-cash compensation expense 3,676 16,229
Depreciation and amortization 3,430 5,025
Amortization of intangible assets (including amortization of $630 related
to discontinued operations for the three months ended March 31, 2002) 5,294 12,740
Restructuring payments, net of non-cash restructuring charges (7,276) -
Tax benefit related to investment credits for research in a foreign
jurisdiction (945) -
Changes in assets and liabilities, net of the effect of acquisitions and divestitures:
Decrease (increase) in accounts receivable 601 (25,731)
Decrease in inventory 5,821 19,910
Increase in prepaid expenses and other assets (23) (72)
Increase (decrease) in accounts payable 8,853 (11,637)
Decrease in accrued expenses and other liabilities (8,252) (7,310)
---------- ----------
Net cash provided by (used in) operating activities 6,536 (23,555)
---------- ----------
Cash flows provided by (used in) investing activities:
Capital expenditures (358) (2,344)
Purchase of facility held for sale - (34,902)
Cash paid for accrued acquisition related costs (2,721) (1,382)
Proceeds from sale/maturities of marketable securities 67,507 159,949
Purchases of marketable securities (56,784) (125,750)
---------- ----------
Net cash provided by (used in) investing activities 7,644 (4,429)
---------- ----------
Cash flows provided by financing activities:
Proceeds received from exercise of stock options and employee stock
purchase plan 1,826 4,213
Proceeds from repayment (issuance) of notes receivable 890 (54)
Repayments of capital lease borrowings (464) (2,042)
---------- ----------
Net cash provided by financing activities 2,252 2,117
---------- ----------
Effect of exchange rates on cash and cash equivalents (456) (604)
---------- ----------
Net increase (decrease) in cash and cash equivalents 15,976 (26,471)
Cash and cash equivalents at beginning of period 183,234 269,586
---------- ----------
Cash and cash equivalents at end of period $ 199,210 $ 243,115
========== ==========
The accompanying notes are an integral part of these financial statements.
4
GlobespanVirata, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business and Basis of Presentation
GlobespanVirata, Inc. ("GlobespanVirata" or the "Company") is a leading
provider of integrated circuits, software and system designs for broadband
communication applications that enable high-speed transmission of data, voice
and video to homes and business enterprises throughout the world. Currently, its
integrated circuits, software and system designs are primarily used in digital
subscriber line, or DSL, applications, which utilize the existing network of
copper telephone wires, known as the local loop, for high-speed transmission of
data. The Company 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.
Unaudited Interim Financial Statements
The accompanying unaudited consolidated financial statements have been
prepared by GlobespanVirata and reflect all adjustments, consisting only of
normal recurring adjustments, which in the opinion of management are necessary
to present fairly the financial position and the results of operations for the
interim periods. The balance sheet at December 31, 2002 has been derived from
audited financial statements at that date. The financial statements have been
prepared in accordance with the regulations of the Securities and Exchange
Commission, but omit certain information and footnote disclosure necessary to
present the statements in accordance with generally accepted accounting
principles. For further information, refer to the financial statements and notes
thereto included in GlobespanVirata's Annual Report on Form 10-K, filed with the
Securities and Exchange Commission on March 10, 2003. Results for the interim
periods are not necessarily indicative of results for the entire fiscal year.
2. Summary of Significant Accounting Policies
The significant accounting principles and practices used in the preparation
of the accompanying financial statements are summarized below:
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods presented. These estimates include assessing the
collectability of accounts receivable, the use and recoverability of inventory,
the realizability of deferred tax assets and useful lives or amortization
periods of intangible and other fixed assets. Actual results could differ from
those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of
GlobespanVirata and all of its wholly-owned subsidiaries. All intercompany
transactions and balances are eliminated in consolidation.
Revenue Recognition
Revenue from product sales is recognized upon shipment to the customer,
when the risk of loss has been transferred to the customer, price and terms are
fixed, and when no significant vendor obligations exist and collection of the
resulting receivable is reasonably assured. Substantially all of the Company's
revenue during the three months ended March 30, 2003 were from product sales.
Net revenues for the three months ended March 31, 2002 include approximately
$3.5 million of fees associated with the resolution of previous customer
purchase commitments.
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.
5
Earnings Per Share
The Company applies the provisions of Statement of Financial Accounting
Standards, or SFAS, No. 128, entitled "Earnings per Share", which requires the
presentation of basic earnings per share and diluted earnings per share by all
entities that have publicly traded common stock or potential common stock. Basic
earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding during
the period. Diluted earnings per share gives effect to all dilutive potential
common shares outstanding during the period.
As of March 30, 2003 and March 31, 2002, the Company had outstanding
options, restricted stock and warrants to purchase an aggregate of 45.7 million
and 43.4 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 $130.0
million of aggregate principal amount of convertible subordinated notes (the
"Convertible Notes") which can be converted into common stock of the Company at
a conversion price of $26.67 per share. The Convertible Notes were anti-dilutive
to earnings per share for the three months ended March 30, 2003 and March 31,
2002 and were therefore excluded from the calculation.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
on a first-in, first-out basis. The Company regularly reviews inventory values
and quantities on hand and writes down its inventory for estimated obsolescence
or unmarketable inventory equal to the difference between the cost of inventory
and the estimated market value based upon assumptions about future demand and
market conditions. The Company's estimates of future product demand may prove to
be inaccurate, in which case it may have understated or overstated the provision
required for excess and obsolete inventory. If actual market conditions are less
favorable than those expected by management, additional inventory write-downs
may be required. If the Company's inventory is determined to be undervalued, it
may have over-reported its costs of goods sold in previous periods and would be
required to recognize such additional operating income at the time of sale.
Therefore, although the Company makes every effort to ensure the accuracy of its
estimates of future product demand, any significant unanticipated changes in
demand or technological developments could have a significant impact on the
value of its inventory and its reported operating results.
Inventories at March 30, 2003 and December 31, 2002 consisted of the
following:
(in thousands) March 30, 2003 December 31, 2002
-------------- ------------------
Work in process $3,947 $ 6,796
Finished Goods 60,469 65,041
Reserve for excess and obsolete
inventories (46,305) (47,905)
-------- --------
Inventories $ 18,111 $23,932
======== =======
Long-lived assets
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.
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
6
to the carrying values or estimated useful lives of fixed or intangible assets
in accordance with the provisions of SFAS No. 144.
Intangibles Assets
Intangible assets at March 30, 2003 and December 31, 2002 consist of
identifiable intangibles from acquired businesses over the fair value of net
assets acquired, as follows (in thousands):
March 30, December 31,
2003 2002
---- ----
Core technology $ 37,035 $ 39,693
Other identifiable intangibles 10,450 10,450
Accumulated amortization (16,350) (11,056)
--------- --------
Net intangible assets $ 31,135 $ 39,087
======== =========
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 three months ended
March 30, 2003 and March 31, 2002 was $5.3 million and $12.1 million
respectively. 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.
A reconciliation of the Company's net intangible assets from December 31,
2002 to March 30, 2003 is as follows (in thousands):
Intangible assets, net at December 31, 2002 $39,087
Amortization for the three months ended March 30, 2003 (5,294)
Tax benefit realized from acquired entity(1) (2,658)
-------
Intangible assets, net at March 30, 2003 $ 31,135
========
(1) Pursuant to an agreement reached on March 24, 2003, the Company
recognized prior research credits of an acquired entity that were not previously
recognized due to the uncertainty of their ultimate realization. These credits
were related to investments in research in a foreign jurisdiction. Of the total
amount agreed to of approximately $3.6 million, approximately $2.7 million
relates to periods prior to the Company's acquisition of the entity and has been
credited against intangible assets recorded from the acquisition. The remainder
of the credits were recorded as an income tax benefit in the three months ended
March 30, 2003 (see Note 5). As of March 30, 2003, approximately $2.0 million of
these amounts has been collected, approximately $0.7 million is recorded on the
Company's balance sheet as a current asset and approximately $0.9 million is
recorded on the Company's balance sheet as a non-current asset.
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 7). Had the compensation cost for the Company's 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 as follows:
7
For the three months ended
--------------------------
March 30, 2003 March 31, 2002
-------------- --------------
(in thousands)
Net loss, as reported $(4,643) $(32,709)
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (32,633) (28,808)
-------- --------
Pro forma net loss $(37,276) $(61,517)
========= =========
Earnings per share basic and diluted as reported $ (0.04) $(0.23)
========= =========
Earnings per share basic and diluted pro forma $ (0.29) $(0.44)
======== =========
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.
Restructuring and Other Charges
We have recorded restructuring and other charges during the three months
ended March 30, 2003 and the year ended December 31, 2002. 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.
Reclassifications
Certain reclassifications have been made to conform prior year amounts to
the current year presentation.
3. Acquisitions
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.
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 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 6
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 $5.0 million in cash and the right for Ficon shareholders to
receive up to a maximum of 1,959,999 shares of the Company's common stock. A
portion of 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 $28.8 million, was recorded to deferred stock
compensation as a result of the guidance in EITF 95-8, entitled "Accounting for
Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a
Purchase Business Combination", and was being amortized over the three year
vesting period on a straight line basis. As of March 31, 2002, 710,000 shares
were issued as a result of continued employment and 999,999
8
shares were issued as a result of the completion of development milestones. On
March 31, 2002 the Company agreed to accelerate vesting of the remaining 250,000
unvested shares and as a result the Company recorded a non-cash charge during
the three months ended March 31, 2002 of approximately $8.0 million,
representing the unamortized deferred stock compensation at the time the Company
agreed to the acceleration. No incremental charge was recorded as the fair
market value of the Company's stock on March 31, 2002 was below the fair market
value on the date the deferred stock compensation was recorded.
4. Concentration of Risk and Customer Information
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of cash and cash equivalents, investment -
marketable securities and trade receivables. At March 30, 2003 and December 31,
2002, five of the Company's customers accounted for $28.3 million (84.6%) and
$26.1 million (76.8%) of net accounts receivable, respectively. Approximately
21.0% and 41.9% of the net accounts receivable at March 30, 2003 and December
31, 2002 is due from customers from whom the Company has collateralized payment
arrangements through a letter of credit with a bank. From time to time, the
Company settles letter of credit instruments with the bank prior to their due
date. Fees associated with these transaction have been nominal for all periods
presented.
The Company's top ten customers accounted for $51.3 million (74.7%) and
$53.9 million (64.2%) of the Company's net revenues during the three months
ended March 30, 2003 and March 31, 2002, respectively. In the three months ended
March 30, 2003 there were two customers who individually represented more than
10% of the Company's net revenues, collectively accounting for 44.4%, of the
Company's net revenues. These customers were UTStarcom and Ambit Microsystems
which accounted for 24.2% and 20.2%, respectively of the Company's net revenues.
There were no customers who represented more than 10% of the Company's net
revenues during the three months ended March 31, 2002.
The Company's sales to overseas customers are predominantly denominated in
U.S. dollars. Revenues by geographic region for the three months ended March 30,
2003 and March 31, 2002 were as follows:
For the Three Months
Ended
--------------------------
March 30, March 31,
2003 2002
---- ----
(in thousands)
Net revenues:
Asia $62,499 $51,809
North America 5,034 27,295
Europe 1,077 5,300
Other 70 1
--------- --------
$68,680 $84,404
========= ========
The Company's revenue distribution by geographic region is determined based
upon the location where its customer request products to be shipped, which are
not necessarily indicative of the geographic region in which the customer's
equipment is ultimately deployed.
5. Income Taxes
The Company recorded a current provision for income taxes of $0.3 million
and a deferred benefit of $1.0 million during the three months ended March 30,
2003, resulting in a net tax benefit of $0.7 million. The deferred benefit
resulted from the recognition of credits for investment in research in a foreign
jurisdiction. The net benefit recorded reflects an effective tax rate of 13.0%
for the three months ended March 30, 2003. The primary differences between the
effective rate and the statutory rate of 35.0% relate to changes in the
valuation allowance and the recognition of credits for investment in research in
a foreign jurisdiction. During the three months ended March 31, 2002, the
Company recorded a current provision for income taxes of $0.3 million. The
current provision recorded reflects an effective tax rate of less than 1.0% for
the three months ended March 31, 2002. The difference between the effective rate
and the statutory rate of 35.0% relates primarily to permanent differences
resulting from our prior acquisitions and changes in the valuation allowance.
The Company has provided a valuation allowance on certain of its deferred tax
assets because of uncertainty regarding their realizability. As of March 30,
2003 and December 31, 2002, deferred tax assets are offset either by deferred
tax liabilities
9
or a valuation allowance. The investment in research tax credits recognized
during the three months ended March 30, 2003 have been recorded on the Company's
balance sheets as other current and non-current assets.
6. 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 estimated costs related to the Virata facilities consolidation and the
related impact on the Virata outstanding real estate leases and Virata
relocations and workforce reductions from December 31, 2002 to March 30, 2003 is
as follows:
December 31, 2002 2003 Payments March 30, 2003
(in thousands) Liability ------------- Liability
--------- ---------
Workforce related $2,583 ($1,854) $729
Facilities charges 13,517 (867) 12,650
------ ----- ------
Total $16,100 ($2,721) $13,379
======= ======== =======
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 was based upon estimates of the relocation costs or the
severance and fringe benefits for the affected employees.
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 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
2003 restructuring charges
As a result of the Company's continued efforts to reduce its operating cost
structure, the Company recorded restructuring and other charges during the three
months ended March 30, 2003 of $0.7 million. These charges were recorded in
accordance with the provisions of SFAS No. 146, entitled "Accounting for Costs
Associated with Exit or Disposal Activities", which was effective as of January
1, 2003. The charges recorded during the three months ended March 30, 2003 were
primarily related to one-time workforce reduction benefits at an international
research and development site. The Company may record additional restructuring
charges during the three months ended June 29, 2003 as a result of the potential
closure of this site. If the facility is closed, the additional restructuring
charges would consist of one-time workforce reduction benefits and costs
associated with a non-cancelable lease commitment.
The table below presents the liabilities associated with the restructuring
and other charges recorded during the year ended December 31, 2002 (the "2002
Restructuring Charge") as of December 31, 2002 and March 30, 2003, respectively,
including payments and adjustments made during the three months ended March 30,
2003, and the restructuring charges recorded during the three months ended March
30, 2003 (the "2003 Restructuring Charge"):
10
December 31, 2002 March 30, 2003
Restructuring 2003 Restructuring Cash Restructuring
(in thousands) Liability Charges Payments Liability
--------- ------- -------- ---------
Workforce reduction $6,794 $620 ($5,686) $1,728
Facilities consolidation 28,818 114 (2,162) 26,770
Other Charges 774 - (162) 612
------- --- ------- -------
Total Charges $36,386 $734 ($8,010) $29,110
======= ==== ======== =======
7. Stock Based Compensation
The following table summarizes stock options granted, exercised and
forfeited (in thousands) for the period from December 31, 2002 to March 30,
2003:
Weighted
Average
Options Purchase Price
------- --------------
Balance at December
31, 2002 44,141 $16.93
Granted 2,842 $ 3.83
Exercised (524) $ 1.24
Forfeited (1,290) $25.37
------- -------
Balance at March 45,169 $16.08
30, 2003 ======= =======
The following table summarizes information about outstanding stock options
(in thousands) as of March 30, 2003:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted-
Average Weighted Weighted
Outstanding Remaining Average Exercisable Average
at March Contractual Exercise at March Exercise
Actual Ranges of Exercise Prices 30, 2003 Life Price 30, 2003 Price
- -------------------------------- -------- ---- ----- -------- -----
$0.01 - $9.99 22,990 7.4 $4.75 9,095 $5.56
$10.00 - 19.83 14,508 7.1 $13.42 7,883 $13.83
$20.13 - 29.06 2,440 3.3 $23.14 2,313 $23.10
$30.19 - 39.61 1,390 6.7 $31.89 1,040 $31.88
$40.63 - 48.29 485 6.6 $44.66 412 $44.44
$50.13 - 59.00 61 6.2 $54.78 41 $54.87
$60.88 - $69.5 969 6.8 $63.58 712 $63.56
$72.06 - 79.75 530 5.9 $75.33 418 $75.29
$80.00 - 89.44 216 6.7 $83.07 161 $83.08
$90.00 - 98.06 225 5.9 $94.52 196 $94.72
$100.00 - 107.81 363 6.3 $102.20 250 $102.14
$110.0 - $119.56 808 6.2 $115.16 554 $115.24
$120.56 - 129.81 129 6.5 $125.69 91 $125.54
$130.38 - 139.130 50 7.2 $133.90 35 $133.93
$141.63 - 146.00 5 6.5 $146.00 4 $146.00
--------------------------------------------------------------------------------------------
$0.01 - 146.00 45,169 7.0 $16.08 23,205 $20.75
====== === ====== ====== ======
11
Employee Stock Options Accounting
The following assumptions were used to determine the pro forma impact of
accounting for stock options issued during the three months ended March 30, 2003
(1) risk-free interest rate of 2.5%, respectively; (2) dividend yield of 0.00%;
(3) expected life of four years and (4) volatility of 102.0%.
8. Related Party Transactions
As of March 30, 2003 and December 31, 2002, Communication Partners, L.P. or
other entities affiliated with Texas Pacific Group owned 11.6% and 11.7%,
respectively, of the Company's outstanding stock.
During the three months ended March 30, 2003 and March 31, 2002 the Company
recorded product sales of $0.1 million and $0.7 million, respectively, related
to goods sold to Paradyne Networks. At March 30, 2003 and December 31, 2002 the
Company had a receivable from Paradyne Networks in the amount of $0.1 million.
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.
During the three months ended March 31, 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 in exchange for $0.8 million. 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.
9. Discontinued Operations
During the three months ended June 30, 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 have been presented separately in the
Company's statements of operations for all periods presented, prior to the
disposition of those businesses.
The results of discontinued operations, for the periods presented, prior to
disposition, are as follows:
Three Months
Ended
March 31, 2002
--------------
Net loss from operations of discontinued businesses:
Video compression $ (802)
EmWeb (428)
--------
Net loss from discontinued operations $ (1,230)
=========
Revenues related to the Discontinued Businesses, for the periods presented,
are as follows:
12
Three Months
Ended
March 31, 2002
--------------
Revenues:
Video compression $1,969
EmWeb 278
--------------
Total revenues $2,247
=============
10. Commitments and Contingencies.
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, 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 this dispute 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 its products
stopped by an injunction, which could have a material adverse effect on our
business, financial condition and results of operations.
We are 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, 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 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 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 operation or
financial condition.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information in this discussion contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934, as amended. Such statements are based
upon current expectations that involve risks and uncertainties. Any statements
contained herein that are not statements of historical fact may be deemed to be
forward-looking statements. For example, the words "believes," "anticipates,"
"plans," "expects," "intends" and similar expressions are intended to identify
forward-looking statements. GlobespanVirata's actual results and the timing of
certain events may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, the general economic slowdown and slowdown in spending
in the telecommunications industry, price competition among DSL chip set
suppliers, risks of customer loss or decreases in purchases by significant
customers, the potential adverse effects of our restructuring and reorganization
efforts, dependence upon third-party technology, risks that our failure to
achieve design wins with certain manufacturers could be a barrier to future
sales to such manufacturers, risks associated with incurring substantial product
development expenses prior to incurring any net revenues from the sale of such
products, risks due to rapid changes in the market for DSL chip sets, market
acceptance of new products, ability of leading equipment manufacturers to
incorporate our products into their own, ability of telecommunications service
providers to market and sell DSL services, uncertainties concerning the impact
of competitive products and technologies, difficulties transitioning our wafers
to smaller geometry process technologies, risks due to limited protection of our
intellectual property, uncertainties concerning continued service of our key
employees, risk of operating in international markets and general market,
economic regulatory and business conditions and other risk factors described
herein or included in other reports and filings made with the Securities and
Exchange Commission. All forward-looking statements in this document are based
on information available to GlobespanVirata as of the date hereof and
GlobespanVirata assumes no obligation to update any such forward-looking
statements.
GlobespanVirata, Inc. 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.
The following table presents our unaudited results from continuing
operations for the three months ended March 30, 2003 and March 31, 2002. Our
continuing operations are reported as a single business segment.
14
For the Three Months Ended
(in millions) March 30, 2003 March 31, 2002
------------------------------
Net revenues $68.7 $84.4
Cost of sales 34.7 37.3
------------------------------
Gross profit 34.0 47.1
------------------------------
Operating expenses:
Research and development, including
non-cash compensation of $2.8
million and $15.4 for the three
months ended March 30, 2003 and
March 31, 2002, respectively. 24.2 52.9
Selling, general and administrative,
including non-cash compensation $0.9
million and $0.8 million for the
three months ended March 30, 2003
and March 31, 2002, respectively. 9.8 15.2
Restructuring and other charges 0.7 -
Amortization of intangible assets 5.3 12.1
------------------------------
Total operating expenses 40.0 80.2
------------------------------
Loss from operations (6.0) (33.1)
Interest and other income, net (0.7) (1.9)
-------------------------------
Loss from continuing operations (5.3) (31.2)
before income taxes
Provision (benefit) for income taxes (0.7) 0.3
-------------------------------
Net loss from continuing operations $(4.6) $(31.5)
===============================
Results of Operations for the three months ended March 30, 2003 and March 31,
2002
Net Revenues. Our net revenues decreased by 18.6% to $68.7 million during
the three months ended March 30, 2003 from $84.4 million in the three months
ended March 31, 2002. The decrease in net revenues was primarily due to
declining average selling prices as compared to the three months ended March 31,
2002. Included in net revenues for the three months ended March 31, 2002 was
approximately $3.5 million of fees associated with the resolution of previous
customer purchase commitments.
Cost of Sales and Gross Profit.
The following table presents gross profit and gross profit percentage
including and excluding the impact of revenue from previously reserved products
and cancellation revenue for the periods presented. Gross profit and gross
profit percentage excluding the impact of such revenue are non-GAAP financial
measures. We have included such information because such information is not
readily obtainable from the other financial information provided and because
management believes such information provides useful information about our gross
profit margin for our non-reserved products. The presentation of any non-GAAP
financial measures in this report are intended to supplement, not replace the
related GAAP measures.
For the three months ended
March 30, 2003 March 31, 2002
-------------- --------------
Net product revenue $60.8 $79.3
Net product revenue from previously
reserved products $7.9 $1.6
Cancellation revenue - $3.5
----- -----
Total revenue $68.7 $84.4
Cost of goods sold $34.7 $37.3
----- -----
Gross profit $34.0 $47.1
----- -----
Gross profit % 49.5% 55.8%
----- -----
Gross profit excluding revenue from
previously reserved products and
cancellation revenue $26.1 $42.0
----- -----
Gross profit % excluding revenue from
previously reserved products and
cancellation revenue 43.0% 53.0%
----- -----
Our gross profit decreased by 27.8% to $34.0 million in the three months
ended March 30, 2003 from $47.1 million in the three months ended March 31,
2002. Our gross profit percentage was 49.5% and 55.8% in the three months ended
March 30, 2003 and March 31 2002, respectively. The decrease in gross profit
from the three months ended March 31, 2002 to the three months ended March 30,
2003 is primarily attributable to higher net revenues and gross profit
percentage during the three months ended March 31, 2002. The decrease in gross
profit percentage can be attributed to a decrease in the average selling price
of our products, which exceeded product cost reductions.
Excluding revenue from the sale of previously reserved products and
cancellation revenues, our gross profit and gross profit percentage was $26.1
million and 43.0% and $42.0 million and 53.0% for the three months ended March
30, 2003 and March 31, 2002, respectively. We expect the gross profit percentage
may decrease in the future due to anticipated reductions in average selling
prices, and changes in product and customer mix.
15
We have approximately $4.0 million in our sales backlog for the three
months ended June 29, 2003 for products in inventory which are fully reserved.
The sale of these products will increase 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, including non-cash compensation.
Non-cash compensation is a result of the exchange of our common stock for common
stock held by employee principals of an acquired entity and the grant of stock
options at less than fair market value to certain employees and in conjunction
with the completion of our mergers and acquisitions. Research and development
expenditures also include related supplies, license fees for acquired
technologies used in research and development, equipment expenses and
depreciation and amortization.
Our research and development expenses decreased 54.2% to $24.2 million in
the three months ended March 30, 2003 from $52.9 million in the three months
ended March 31, 2002. Included in research and development expenditures for the
three months ended March 30, 2003 and March 31, 2002 is $2.8 million and $15.4
million, respectively, of non-cash compensation. The decrease in non-cash
compensation resulted from (i) an agreement to accelerate vesting of the
remaining unvested shares issued to certain principals of Ficon Technologies,
which resulted in a non-cash charge during the three months ended March 31, 2002
of approximately $8.0 million, representing the unamortized deferred stock
compensation at the time the Company agreed to the acceleration and (ii) a
decline in amortization of deferred compensation resulting from the
restructuring and reorganization plans. Excluding the non-cash compensation,
research and development expenditures decreased 42.7%. Research and development
expenses represented 35.3% (31.3% excluding non-cash compensation) and 62.7%
(44.4% excluding non-cash compensation) of net revenues for the three months
ended March 30, 2003 and March 31, 2002, respectively. The $28.7 million
decrease in research and development expenses from the three months ended March
31, 2002 to the three months ended March 30, 2003 is primarily attributable to
the impact of our restructuring and reorganization plans which reduced variable
employee costs by approximately $10.0 million and facility related fixed costs
by approximately $2.0 million. Our non-cash compensation decreased by
approximately $12.5 million, including the $8.0 million non-cash charge
described above. The presentation of research and development expenses
excluding non-cash compensation constitutes the presentation of non-GAAP
financial measures, however, we believe this presentation provides investors
with useful information about the non-cash components of our research and
development expenditures. As above, presentation of non-GAAP financial measures
are intended to supplement, not replace the related GAAP measures.
Selling, General and Administrative. Selling, general and administrative
expense is primarily comprised of salaries and related expenses for sales,
general and administrative personnel as well as general non-personnel related
expenses. Our selling, general and administrative expense decreased 35.5% to
$9.8 million in the three months ended March 30, 2003 from $15.2 million for the
three months ended March 31, 2002. Included in selling, general and
administrative expenses for the three months ended March 30, 2003 and March 31,
2002 is $0.9 million and $0.8 million, respectively, of non-cash compensation.
Excluding non-cash compensation, selling, general and administrative expenses
decreased 38.2%. Selling, general and administrative expense represented 14.3%
(12.9% excluding non-cash compensation) and 18.0% (17.1% excluding non-cash
compensation) of net revenues for the three months ended March 30, 2003 and
March 31, 2002, respectively. The $5.4 million decrease in selling, general and
administrative expenses from the three months ended March 31, 2002 to the three
months ended March 30, 2003 resulted from the impact of our restructuring and
reorganization plans which reduced variable employee costs by approximately $4.0
million. The presentation of selling, general and administrative expense
excluding non-cash compensation constitutes the presentation of non-GAAP
financial measures, however, we believe this presentation provides investors
with useful information about the non-cash components of our selling, general
and administrative expenditures. As above, presentation of non-GAAP financial
measures are intended to supplement, not replace the related GAAP measures.
Amortization of Intangible Assets. As a result of our acquisitions, we have
recorded intangible assets which are being amortized on a straight-line basis
over their estimated useful lives. The decrease in dollar amount and percentage
of amortization expense is the result of the lower base of amortizable
intangible assets as a result of the intangible asset impairment charge that was
recorded during the three months ended June 30, 2002.
Restructuring and Other Charges. As a result of our continued efforts to
reduce our operating cost structure, we recorded restructuring and other charges
during the three months ended March 30, 2003 of $0.7 million (the "2003
Restructuring Charge"). These charges were recorded in accordance with the
provisions of SFAS No. 146, entitled "Accounting for Costs Associated with Exit
or Disposal Activities", which was effective as of January 1, 2003. The charges
recorded during the three months ended March 30, 2003 were primarily related to
one-time workforce reduction benefits at a foreign research and development
site. We may record additional restructuring charges during the three months
ended June 29, 2003 as a result of the potential closure of this site. If the
facility is closed, additional restructuring charges would consist of one-time
workforce reduction benefits and costs associated with a non-cancelable lease
commitment.
16
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 (the "2002 Restructuring Charge"), in accordance with
the provisions of EITF No. 94-3 and SFAS No. 144. The details of these charges
are described in Note 7 to the financial statements.
The table below presents the liabilities associated with the 2002
Restructuring Charge as of December 31, 2002 and March 30, 2003, respectively,
including payments and adjustments made during the three months ended March 30,
2003, and the 2003 Restructuring Charge:
December 31, 2002 March 30, 2003
Restructuring 2003 Restructuring Cash Restructuring
(in thousands) Liability Charges Payments Liability
--------- ------- -------- ---------
Workforce reduction $ 6,794 $ 620 ($5,686) $ 1,728
Facilities consolidation 28,818 114 (2,162) 26,770
Other Charges 774 - (162) 612
------- ------- -------- -------
Total Charges $36,386 $ 734 ($8,010) $29,110
======= ======= ======= =======
Interest and Other Income, Net. Interest income for the three months ended
March 30 2003 was $2.7 million, offset by interest expense of $2.0 million,
resulting in net interest income of $0.7 million. Interest income for the three
months ended March 31, 2002 was $3.9 million, net of interest expense of $2.0
million, resulting in net interest income of $1.9 million. The decrease in net
interest income is attributable to the decrease in our cash and investments as
compared to March 31, 2002 and lower rates of return.
Provision (benefit) for Income Taxes. The net income tax benefit of $0.7
million recorded during the three months ended March 30, 2003 consists of a
current provision of $0.3 million and a deferred benefit of $1.0 million. The
deferred benefit resulted from the recognition of credits for investment in
research in a foreign jurisdiction. The net benefit recorded reflects an
effective tax rate of less than 13.0% for the three months ended March 30, 2003.
The primary differences between the effective rate and the statutory rate of
35.0% relate to changes in the valuation allowance and the recognition of
credits for investment in research in a foreign jurisdiction. During the three
months ended March 31, 2002, we recorded a current provision for income taxes of
$0.3 million. The current provision recorded reflects an effective tax rate of
less than 1.0% for the three months ended March 31, 2002. The difference between
the effective rate and the statutory rate of 35.0% relates primarily to
permanent differences resulting from our prior acquisitions and changes in the
valuation allowance. We have provided a valuation allowance on certain of our
deferred tax assets because of uncertainty regarding their realizability. As of
March 30, 2003 and December 31, 2002, deferred tax assets are offset either by
deferred tax liabilities or a valuation allowance. The investment in research
tax credits recognized during the three months ended March 30, 2003 have been
recorded on our balance sheets as other current and non-current assets.
Liquidity and Capital Resources
Total assets at March 30, 2003 were $711.6 million, a decrease of $11.4
million, or 1.6% from December 31, 2002 total assets of $723.0 million. The
decrease from December 31, 2002 is primarily a result of the loss incurred
during the three months ended March 30, 2003, including continued amortization
of intangible assets from our acquisitions and other non-cash charges.
At March 30, 2003, we had $335.6 million in cash and cash equivalents and
short-term marketable securities and working capital of $313.3 million.
Additionally, we had $197.7 million in long-term marketable securities at March
30, 2003. At December 31, 2002, we had $297.3 million in cash and cash
equivalents and short-term marketable securities and working capital of $270.7
million. Additionally, we had $230.8 million of long-term marketable securities
at December 31, 2002.
Net cash provided by operating activities was $6.6 million in the three
months ended March 30, 2003, compared to net cash used in operating activities
of $23.6 million in the three months ended March 31, 2002. The net cash provided
by operating activities during the three months ended March 30, 2003 was
primarily due to cash flows from operations and favorable changes in working
capital of $13.9 million, net of restructuring and other charges of $7.3
million. The net cash used during the three months ended March 31, 2002 was
primarily due to unfavorable changes in working capital.
Net cash provided by investing activities was $7.6 million during the three
months ended March 30, 2003. The net cash provided by investing activities was
primarily related to a net decrease in our short and long-term marketable
securities from December 31, 2002. Net cash used in investing activities during
the three months ended March 31, 2002 was primarily
17
related to the purchase of a facility held for sale of $34.9 million, purchases
of property and equipment of $2.3 million and cash paid for accrued acquisition
related costs of $1.4 million, offset by net proceeds on marketable securities
of $34.2 million.
Net cash provided by financing activities was $2.2 million and $2.1 million
during the three months ended March 30, 2003 and March 31, 2002, respectively,
primarily consisting of proceeds from the issuance of common stock through the
employee stock purchase plan and the exercise of stock options for both periods
presented and the repayment of an employee note receivable during the three
months ended March 30, 2003, net of payments related to capital leases.
We lease certain facilities for office and research and development
activities under agreements that expire at various dates through 2021. Minimum
required future lease payments under our capital and operating leases at March
30, 2003 are as follows:
Operating Leases
Included in
Capital Operating Restructuring
(in thousands) Leases Leases Plans
------ ------ -----
Years Ended December 31,
2003 $ 727 $3,032 $8,362
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 $ 740 $42,131 $43,506
======= =======
Less: amount representing interest (36)
----
Present value of net minimum lease payments 704
Less: current portion (696)
-----
Long term capital lease obligations $ 8
=======
Approximately $10.3 million of the operating lease commitments is payable
in periods beyond ten years. As of March 30, 2003, we had facility related
restructuring reserves of $39.4 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 have a maturity date of
May 15, 2006. Interest on the notes is payable semi-annually.
Holders of these notes may convert the notes into shares of our 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 March 30, 2003, we could purchase up to an additional $54.6 million
of our common stock under our previously announced $100.0 million stock buyback
program, which was authorized in June 2002. Additional purchases of our common
stock may be made from time to time in the open market or in privately
negotiated transactions, depending on
18
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 believe that our current cash and investments together with internally
generated funds, will be adequate to satisfy our anticipated working capital and
capital expenditure needs for at least one year. While we do not currently
anticipate the need to raise additional funds in the foreseeable future, we may
seek to acquire or invest in additional businesses, products or technologies
which may require us to use our cash and investments. If, as a result of
acquisitions or investments in additional businesses, products or technologies,
we are required to raise additional funds, we cannot be certain that we will be
able to obtain additional financing on favorable terms, if at all.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The primary objective of our investment activities is to preserve principal
while at the same time maximizing the income we receive from our investments
without significantly increasing risk. Some of the securities that we may invest
in may be subject to market risk. This means that a change in prevailing
interest rates may cause the principal amount of the investment to fluctuate.
For example, if we hold a security that was issued with a fixed interest rate at
the then-prevailing
19
rate and the prevailing interest rate later rises, the principal amount of our
investment will probably decline. To minimize this risk in the future, we intend
to maintain our portfolio of cash equivalents and short-term investments in a
variety of securities, including commercial paper, money market funds,
government and non-government debt securities and certificates of deposit. As of
March 30, 2003, substantially all of our short-term investments were in money
market funds, certificates of deposit, or high-quality commercial paper. Long
term securities are primarily comprised of AA or better corporate bonds and U.S.
Government backed securities.
Item 4. Controls and Procedures
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.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Number Description
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
Date of Report Item Reported On
January 30, 2003 Press Release issued by GlobespanVirata containing
financial results of the Company for the three and
twelve months ended December 31, 2002.
Items 1, 2, 3, 4, and 5 are not applicable and have been omitted.
20
GLOBESPANVIRATA, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GLOBESPANVIRATA, INC.
/s/ ROBERT MCMULLAN
Date: April 29, 2003 By:
--------------------------
Robert McMullan
Vice President and Chief Financial
Officer
(Principal Financial and Accounting
Officer)
21
I, Armando Geday, certify that:
1. I have reviewed this quarterly report on Form 10-Q of GlobespanVirata, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure control
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls.
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: April 29, 2003
/s/ ARMANDO GEDAY
------------------
Armando Geday
Chief Executive Officer
22
I, Robert McMullan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of GlobespanVirata, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure control and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
d) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls.
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: April 29, 2003
/s/ ROBERT MCMULLAN
------------------
Robert McMullan
Chief Financial Officer
23