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FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934
For the quarter ended June 29, 2003
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934
For the transition period from to
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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 .
-- --
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes X No .
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The number of shares outstanding of the Registrant's Common Stock as of
July 16, 2003 was 132,304,103.
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GlobespanVirata, Inc.
INDEX
Page No.
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Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of June 29, 2003 and December
31, 2002........................................................2
Condensed Consolidated Statements of Operations for the Three and Six
Months Ended June 29, 2003 and June 30, 2002....................3
Condensed Consolidated Statements of Cash Flows for the Three and Six
Months Ended June 29, 2003 and June 30, 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.......23
Item 4. Controls and Procedures..........................................23
Part II. Other Information
Item 1. Legal Proceedings................................................23
Item 6. Exhibits and Reports on Form 8-K.................................24
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
GlobespanVirata, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except share data)
June 29, December 31,
2003 2002
-------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $232,831 $183,234
Investments - marketable securities 89,169 114,065
Accounts receivable, less allowance
for doubtful accounts of $1,886
and $1,979, respectively 39,223 34,058
Inventories, net 25,910 23,932
Deferred income taxes 11,461 16,786
Prepaid expenses and other current assets 24,031 22,079
--------- ---------
Total current assets 422,625 394,154
Property and equipment, net 15,139 21,405
Facility held for sale 24,987 24,987
Intangible assets, net 26,212 39,087
Investments - marketable securities 206,657 230,758
Other assets 13,626 12,599
--------- ---------
Total assets $709,246 $722,990
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $36,653 $ 20,717
Restructuring and reorganization
liabilities 39,602 52,486
Accrued expenses and other liabilities 27,044 32,825
Payroll and benefit related liabilities 11,876 16,262
Current portion of capital lease
obligations 91 1,156
--------- ---------
Total current liabilities 115,266 123,446
Other long-term liabilities 2,990 2,904
Convertible subordinated note 130,000 130,000
Deferred income taxes 11,461 16,786
Capital lease obligations, less current
portion 6 12
--------- ---------
Total liabilities 259,723 273,148
--------- ---------
Stockholders' equity
Preferred stock - -
Common stock 146 142
Treasury stock - 13,523,530 shares (45,373) (45,373)
Stock purchase warrants 1 1
Notes receivable from stock sales (4,186) (5,231)
Additional paid in capital 1,720,192 1,711,664
Deferred stock compensation (8,260) (15,613)
Accumulated deficit (1,215,637) (1,198,939)
Accumulated other comprehensive income 2,640 3,191
--------- ---------
Total stockholders' equity 449,523 449,842
--------- ---------
Total liabilities and stockholders' equity $709,246 $722,990
========= =========
The accompanying notes are an integral part of these financial statements.
2
GlobespanVirata, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share data)
For The Three Months Ended For The Six Months Ended
June 29, June 30, June 29, June 30,
2003 2002 2003 2002
--------------- -------------- ------------- ------------
Net revenues $ 74,375 $ 45,943 $ 143,055 $ 130,347
Cost of sales 39,659 22,895 74,301 60,162
--------------- -------------- ------------- ------------
Gross profit 34,716 23,048 68,754 70,185
--------------- -------------- ------------- ------------
Operating expenses:
Research and development (including non-cash compensation 24,333 35,847 46,991 86,249
of $2,757 and $5,514 for the three and six months ended June 29,
2003, respectively, and $5,416 and $20,822 for the three and six
months ended June 30, 2002, respectively).
Selling, general and administrative (including non-cash 9,917 13,109 19,706 28,295
compensation of $919 and $1,838 for the three and six months
ended June 29, 2003, respectively and $602 and $1,425 for the
three and six months ended June 30, 2002, respectively).
Amortization of intangible assets 4,629 9,563 9,923 21,673
Restructuring and other charges 1,048 15,750 1,198 15,750
Impairment of goodwill and other acquired intangible assets - 493,620 - 493,620
--------------- -------------- ------------- ------------
Total operating expenses 39,927 567,889 77,818 645,587
--------------- -------------- ------------- ------------
Loss from operations (5,211) (544,841) (9,064) (575,402)
Interest income, net (509) (1,809) (1,195) (3,678)
--------------- -------------- ------------- ------------
Loss from continuing operations before income taxes (4,702) (543,032) (7,869) (571,724)
Provision (benefit) for income taxes 250 - (445) 260
------------ ----------- ---------- ---------
Net loss from continuing operations (4,952) (543,032) (7,424) (571,984)
Discontinued Operations
Net loss from operations of discontinued businesses (7,103) (9,204) (9,274) (12,961)
--------------- -------------- ------------- ------------
Net loss (12,055) (552,236) (16,698) (584,945)
--------------- -------------- ------------- ------------
Other comprehensive (gain) loss:
Unrealized (gain) loss on marketable securities 403 (200) 674 (34)
Foreign currency translation (gain) loss (255) (1,352) (123) (855)
--------------- -------------- ------------- ------------
Comprehensive loss $ (12,203) $ (550,684) $ (17,249) $ (584,056)
=============== ============== ============= ============
Basic and diluted loss per share:
Net loss from continuing operations $ (0.04) $ (3.85) $ (0.06) $ (4.07)
Net loss from discontinued operations (0.05) (0.07) (0.07) (0.09)
--------------- -------------- ------------- ------------
Net loss $ (0.09) $ (3.92) $ (0.13) $ (4.16)
=============== ============== ============= ============
Weighted average shares of common stock outstanding
used in computing basic and diluted loss per share 131,133 140,889 130,373 140,508
=============== ============== ============= ============
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 Six Months Ended
June 29, 2003 June 30, 2002
------------- -------------
Cash flows used in operating activities:
Net loss $ (16,698) $ (584,945)
Adjustments to reconcile net loss to cash used in operating activities:
Non-cash compensation expense 7,352 22,247
Depreciation and amortization 6,571 9,230
Amortization of intangible assets (including amortization of $1,261
related to discontinued operations for the six months ended
June 30, 2002) 9,923 22,934
Restructuring payments, net of non-cash restructuring charges (8,477) 9,916
Tax benefit related to investment credits for research in a foreign
jurisdiction (945) -
Impairment of goodwill and other acquired intangible assets - 493,620
Net loss on sale/closure of discontinued businesses 6,672 3,887
Changes in assets and liabilities, net of the effect of acquisitions
and divestitures:
Increase in accounts receivable (5,165) (9,895)
(Increase) decrease in inventory (1,978) 8,256
Increase in prepaid expenses and other assets (921) (723)
Increase in accounts payable 15,936 9,104
Decrease in accrued expenses and other liabilities (14,226) (12,964)
---------- ----------
Net cash used in operating activities (1,956) (29,333)
---------- ----------
Cash flows provided by (used in) investing activities:
Capital expenditures (896) (4,577)
Purchase of facility - (34,902)
Cash paid for accrued acquisition related costs (4,113) (4,808)
Proceeds from sale/maturities of marketable securities 171,939 260,963
Purchases of marketable securities (122,942) (227,371)
---------- ----------
Net cash provided by (used in) investing activities 43,988 (10,695)
---------- ----------
Cash flows provided by financing activities:
Proceeds received from exercise of stock options and employee stock
purchase plan 8,409 7,017
Proceeds from repayment of notes receivable 1,006 -
Repurchase of common stock - (504)
Repayments of capital lease borrowings (1,071) (2,670)
---------- ----------
Net cash provided by financing activities 8,344 3,843
---------- ----------
Effect of exchange rates on cash and cash equivalents (779) 594
---------- ----------
Net increase (decrease) in cash and cash equivalents 49,597 (35,591)
Cash and cash equivalents at beginning of period 183,234 269,586
---------- ----------
Cash and cash equivalents at end of period $ 232,831 $ 233,995
========== ==========
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 and six months ended June 29, 2003 were from product
sales. Net revenues for the three and six months ended June 30, 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
5
cash equivalents.
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 June 29, 2003 and June 30, 2002, the Company had outstanding options,
restricted stock and warrants to purchase an aggregate of 46.0 million and 39.4
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
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 and six months ended June 29, 2003 and June 30, 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 obsolete 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 June 29, 2003 and December 31, 2002 consisted of the
following:
(in thousands) June 29, 2003 December 31, 2002
------------- -----------------
Work in process $ 4,250 $ 6,796
Finished Goods 65,000 65,041
Reserve for excess and obsolete inventories (43,340) (47,905)
-------- --------
Inventories $25,910 $ 23,932
======== ========
The decrease in reserve for excess and obsolete inventories from December
31, 2002 to June 29, 2003 is primarily attributable to the sale of previously
reserved inventory.
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 June 29, 2003 and December 31, 2002 consist of
identifiable intangibles from acquired businesses over the fair value of net
assets acquired, as follows (in thousands):
(in thousands) June 29, 2003 December 31, 2002
------------- -----------------
Core technology $36,742 $39,693
Other identifiable intangibles 10,450 10,450
Accumulated amortization (20,980) (11,056)
-------- --------
Net intangible assets $26,212 $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 and six months
ended June 29, 2003 was $4.6 million and $ 9.9 million, respectively and
amortization expense related to intangible assets for the three and six months
ended June 30, 2002 was $9.6 million and $21.7 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 June 29, 2003 is as follows (in thousands):
Intangible assets, net at December 31, 2002 $39,087
Amortization for the six months ended June 29, 2003 (9,923)
Adjustment of merger related workforce accrual (294)
Tax benefit realized from acquired entity(1) (2,658)
--------
Intangible assets, net at June 29, 2003 $26,212
========
(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 six months ended
June 29, 2003 (see Note 5). As of June 29, 2003, approximately $2.0 million of
these amounts have 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". 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 For the six months ended
(in thousands) June 29, 2003 June 30, 2002 June 29, 2003 June 30, 2002
------------- ------------- ------------- -------------
Net loss, as reported $(12,055) $ (552,236) $(16,698) $ (584,945)
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (32,419) (28,808) (65,052) (57,616)
--------- ----------- --------- -----------
Pro forma net loss $(44,474) $ (581,044) $(81,750) $ (642,561)
========= =========== ========= ===========
Earnings per share basic and diluted as reported $(0.09) $ (3.92) $(0.13) $ (4.16)
========= =========== ========= ===========
Earnings per share basic and diluted pro forma $(0.34) $ (4.12) $(0.63) $ (4.57)
========= =========== ========= ===========
Employee Stock Options Accounting
The following assumptions were used to determine the pro forma impact of
accounting for stock options issued during the three and six months ended June
29, 2003 and June 30, 2002 (1) risk-free interest rate of 2.5% (2) dividend
yield of 0.0% (3) expected life of four years and (4) volatility of 94.0% and
102.0%, respectively.
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 and six
months ended June 29, 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. The Company reviews 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, the Company 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 the Company merged with and into Virata and Virata became a
wholly-owned subsidiary of the Company.
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).
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, investments -
marketable securities and trade receivables. At June 29, 2003 and December 31,
2002, five of the Company's customers accounted for $26.2 million (66.7%) and
$26.1 million (76.8%) of net accounts receivable,
8
respectively. Approximately 25.8% and 41.9% of the net accounts receivable at
June 29, 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 $48.7 million (65.4%) and
$28.6 million (62.1%) of the Company's net revenues during the three months
ended June 29, 2003 and June 30, 2002, respectively. In the three months ended
June 29, 2003 there were two customers who individually represented more than
10% of the Company's net revenues, collectively accounting for 25.0%, of the
Company's net revenues. These customers were D-Link Corporation and UTStarcom
which each accounted for 12.5% of the Company's net revenues. Ambit Microsystems
Corporation accounted for 18.7% of the Company's net revenues during the three
months ended June 30, 2002.
The Company's top ten customers accounted for $98.7 million (69.0%) and
$75.0 million (57.5%) of the Company's net revenues during the six months ended
June 29, 2003 and June 30, 2002, respectively. In the six months ended June 29,
2003 there were three customers who individually represented more than 10% of
the Company's net revenues, collectively accounting for 41.3%, of the Company's
net revenues. These customers were UTStarcom, Ambit Microsystems and D-Link
Corporation which accounted for 18.1%,13.0 and 10.2%, respectively of the
Company's net revenues. Ambit Microsystems Corporation accounted for 12.6% of
the Company's net revenues during the six months ended June 30, 2002.
The Company's sales to overseas customers are predominantly denominated in
U.S. dollars. Revenues by geographic region for the three and six months ended
June 29, 2003 and June 30, 2002 were as follows:
For the three months ended For the six months ended
(in thousands)
June 29, 2003 June 30, 2002 June 29, 2003 June 30, 2002
------------- ------------- ------------- -------------
Net revenues
Asia $62,721 $35,116 $125,220 $86,924
North America 7,289 9,930 12,323 37,224
Europe 4,240 893 5,317 6,193
Other 125 4 195 6
------- ------- -------- --------
Total $74,375 $45,943 $143,055 $130,347
======= ======= ======== ========
The Company's revenue distribution by geographic region is determined based
upon the location where its customers 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 $0.0 million during the three months ended June 29, 2003 and June 30, 2002,
respectively. The current provision recorded reflects an effective tax rate of
4.0% and 0.0% for the three months ended June 29, 2003 and June 30, 2002,
respectively. The difference between the effective rate and the statutory rate
of 35.0% relates primarily to changes in the valuation allowance.
The Company recorded a current provision for income taxes of $0.5 million
and a deferred benefit of $0.9 million during the six months ended June 29,
2003, resulting in a net tax benefit of $0.4 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 4.5%
for the six months ended June 29, 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
9
in a foreign jurisdiction. During the six months ended June 30, 2002, the
Company recorded a current provision for income taxes of $0.3 million. The
current provision recorded reflected an effective tax rate of less than 1.0% for
the six months ended June 30, 2002. The difference between the effective rate
and the statutory rate of 35.0% related 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 June 29,
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 six months ended June 29, 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 primarily consisted 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 June 29, 2003 is
as follows:
December 31, 2002 June 29, 2003
(in thousands) Liability 2003 Payments Adjustments Liability
--------- ------------- ----------- ---------
Workforce related $ 2,583 ($2,189) ($294) $ 100
Facilities charges 13,517 (1,924) - 11,593
------- -------- ------ -------
Total $16,100 ($4,113) ($294) $11,693
======= ======== ====== =======
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.
The Company reviews the above estimated costs and assumptions periodically
and reflects the effect of revisions in the period that they occur.
Restructuring Liabilities
2003 Restructuring Charges
The Company recorded restructuring and other charges during the three and
six months ended June 29, 2003 of $1.1 million and $1.2 million, respectively.
The charges primarily relate to the proposed settlement of real estate tax
liabilities associated with the facility held for sale, net of adjustments to
previously recorded workforce charges in the amount of approximately $0.5
million. The Company reviews the above estimated costs and assumptions
periodically and reflects the effects of revisions in the period that they
occur.
The table below presents the liabilities associated with the restructuring
and other charges recorded during the year
10
ended December 31, 2002 (the "2002 Restructuring Charge") as of December 31,
2002 and June 29, 2003, respectively, including payments and adjustments made
during the six months ended June 29, 2003, and the restructuring charges
recorded during the six months ended June 29, 2003 (the "2003 Restructuring
Charge"):
December 31, 2002 June 29, 2003
Restructuring 2003 Restructuring Cash Restructuring
(in thousands) Liability Charges Payments Liability
--------- ------- -------- ---------
Workforce reduction $6,794 ($489) ($5,398) $ 907
Facilities consolidation 28,818 1,687 (4,115) 26,390
Other Charges 774 - (162) 612
------- ------ -------- -------
Total Charges $36,386 $1,198 ($9,675) $27,909
======= ====== ======== =======
7. Related Party Transactions
As of June 29, 2003 and December 31, 2002, Communication Partners, L.P. or
other entities affiliated with Texas Pacific Group owned 5.4% and 11.7%,
respectively, of the Company's outstanding stock.
During the three and six months ended June 29, 2003 the Company recorded
product sales of $0.4 million and $0.5 million, respectively, related to goods
sold to Paradyne Networks. During the three and six months ended June 30, 2002
the Company recorded product sales of $0.7 million and $1.4 million,
respectively, related to goods sold to Paradyne Networks. At June 29, 2003 and
December 31, 2002 the Company had a receivable from Paradyne Networks in the
amount of $0.2 million and $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 and six months ended June 30, 2002, the Company licensed
certain technology related to subscriber line integrated circuit products from
Legerity, Inc. ("Legerity"), 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.
8. Discontinued Operations
During the three months ended June 29, 2003, management of the Company
committed to a plan and closed an international research and development
component. During the three months ended June 30, 2002, management of the
Company committed to a plan and disposed of its video compression and EmWeb
businesses (collectively with the international research and development
component, 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 or entities.
The results of discontinued operations, for the periods presented, prior to
disposition, are as follows:
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
(in thousands) June 29, 2003 June 30, 2002 June 29, 2003 June 30, 2002
------------- ------------- ------------- -------------
Net loss from operations of
discontinued businesses:
Video compression $ - $(2,366) $ - $(3,168)
EmWeb - (443) - (871)
International research and
development component (451) (2,508) (2,038) (5,035)
------- ------- ------- -------
Net loss from operations of
discontinued businesses (451) (5,317) $(2,038) $(9,074)
Net loss on sale/closure of (6,652) (3,887) (7,236) (3,887)
businesses ------- ------- ------- -------
Net loss from discontinued $(7,103) $(9,204) $(9,274) $(12,961)
operations ======== ======== ======== =========
The net loss on closure of the international research and development
component during the three and six months ended June 29, 2003, of $6.7 million
and $7.2 million respectively, was determined as follows:
Three months ended Six months ended
(in thousands) June 29, 2003 June 29, 2003
------------------ ----------------
Workforce related $1,503 2,087
Facilities related 1,000 1,000
Asset impairment 2,001 2,001
Other closing costs and charges 2,148 2,148
------ -----
Net loss on closure of international
research and development component $6,652 $7,236
====== ======
The net loss from the sale of the video compression business during the
three and six months ended June 30, 2002 of $3.9 million was determined as
follows:
(in thousands)
Purchase price:
Note receivable from Conexant Systems, Inc. $21,000
Conexant Systems, Inc. common stock and minimum
price guarantee 15,000
-------
Total purchase price 36,000
Net book value of assets and liabilities sold (5,537)
Allocation of goodwill to video compression business (32,100)
Accrued transaction costs (2,250)
-------
Net loss on sale $(3,887)
=======
Revenues related to the Discontinued Businesses, for the periods presented,
are as follows:
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
(in thousands) June 29, 2003 June 30, 2002 June 29, 2003 June 30, 2002
------------- ------------- ------------- -------------
Revenues:
Video compression $ - $2,033 $ - $4,002
EmWeb - 165 - 443
International research and
development component - - - -
----- ------- ----- ------
Total revenues $ - $2,198 $ - $4,445
===== ====== ===== ======
9. Commitments and Contingencies
In November 2001, Collegeware Asset Management, LP, on behalf of itself and
a putative class of persons who purchased the Company's 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 its 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 the Company's 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.
As previously reported, the Company has been involved in a dispute with
Texas Instruments over a group of patents (and related foreign patents) that
Texas Instruments believes are essential to certain industry standards for
implementing ADSL technology. On June 12, 2003, the Company filed a complaint
against Texas Instruments, Stanford University and its Board of Trustees, and
Stanford University OTL, LLC (collectively, the "Defendants") in the U.S.
District Court of New Jersey. The Company's complaint asserts, among other
things, that the Defendants have violated the antitrust laws by creating an
illegal patent pool, by manipulating the patent process and by abusing the
process for setting industry standards related to ADSL technology. The complaint
also asserts that the Defendants' patents relating to ADSL technology are
unenforceable, invalid and/or not infringed by the Company's products. The
Company is seeking, among other things, (i) a finding that the Defendants have
violated the federal antitrust laws and treble damages based upon such a
finding, (ii) an injunction prohibiting the Defendants from engaging in
anticompetitive practices, (iii) a declaratory judgment that the claims of the
Defendants' ADSL patents are invalid, unenforceable, void, and/or not infringed
by the Company and (iv) an injunction prohibiting the Defendants from pursuing
patent litigation against the Company and its customers.
The Company expects that the Defendants will bring a counterclaim alleging
infringement of certain of their ADSL patents. 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, it
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
the Company's 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 operations or financial
condition.
10. Subsequent Events
On July 15, 2003, the Company announced that it agreed to purchase the
Wireless Networking Product Group of Intersil Corporation ("Intersil") for
$365.0 million in cash and common stock. Pursuant to the Asset Purchase
Agreement dated
13
July 15, 2003, by and between the Company and Intersil, the Company has agreed
to pay Intersil $250.0 million in cash and $115.0 million of common stock
subject to a collar on the Company's common stock price of between $7.4375 and
$10.0625. The number of shares of common stock to be issued by the Company will
be determined when the transaction is closed. The minimum number of shares of
common stock issued by the Company will be approximately 11.429 million
(equivalent to $10.0625 per share) and the maximum number of shares will be
approximately 15.462 million (equivalent to $7.4375 per share).
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, and 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 in
this document or included in other reports and filings made with the Securities
and Exchange Commission. All forward-looking statements in this document are
based on information available to GlobespanVirata as of the date hereof and
GlobespanVirata assumes no obligation to update any such forward-looking
statements.
GlobespanVirata is a leading provider of integrated circuits, software and
system designs for broadband communication applications that enable high-speed
transmission of data, voice and video to homes and business enterprises
throughout the world. Currently, our integrated circuits, software and system
designs are primarily used in digital subscriber line, or DSL, applications,
which utilize the existing network of copper telephone wires, known as the local
loop, for high-speed transmission of data. We 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.
14
The following table presents our unaudited results from continuing
operations for the three and six months ended June 29, 2003 and June 30, 2002.
Our continuing operations are reported as a single business segment.
For the Three Months Ended For the Six Months Ended
(in millions) June 29, 2003 June 30, 2002 June 29, 2003 June 30, 2002
------------- ------------- ------------- -------------
Net revenues $74.4 $45.9 $143.1 $130.3
Cost of sales 39.7 22.9 74.3 60.1
----- ----- ------ ------
Gross profit 34.7 23.0 68.8 70.2
----- ----- ------ ------
Operating expenses:
Research and development, including non-cash
compensation of $2.7 million and $5.5 million
for the three and six months ended June 29, 2003,
respectively and $5.4 million and $20.8 million
for the three and six months ended June 30, 2002,
respectively. 24.3 35.8 47.0 86.2
Selling, general and administrative, including
non-cash compensation of $0.9 million and $1.8
million for the three and six months ended
June 29, 2003, respectively and $0.6 million
and $1.4 million for the three and six months
ended June 30, 2002, respectively. 9.9 13.1 19.7 28.3
Amortization of intangible assets 4.6 9.5 9.9 21.7
Restructuring and other charges 1.1 15.8 1.2 15.8
Impairment of goodwill and other acquired
intangible assets - 493.6 - 493.6
----- ----- ----- ------
Total operating expenses 39.9 567.8 77.8 645.6
----- ----- ----- ------
Loss from operations (5.2) (544.8) (9.0) (575.4)
Interest and other income, net (0.5) (1.8) (1.2) (3.7)
----- ----- ----- ------
Loss from continuing operations before income
taxes (4.7) (543.0) (7.8) (571.7)
Provision (benefit) for income taxes 0.2 - (0.4) 0.3
----- ----- ----- ------
Net loss from continuing operations $(4.9) $(543.0) $(7.4) $(572.0)
====== ======== ====== ========
Results of Operations for the three months ended June 29, 2003 and June 30, 2002
Net Revenues. Our net revenues increased by 61.9% to $74.4 million during
the three months ended June 29, 2003 from $45.9 million in the three months
ended June 30, 2002. The increase in net revenues was primarily due to an
increase in the number of ports sold, offset by declining average selling prices
as compared to the three months ended June 30, 2002.
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
June 29, 2003 June 30, 2002
------------- -------------
Net product revenue $70.8 $39.3
Net product revenue from previously
reserved products 3.6 6.6
Total revenue 74.4 45.9
Cost of goods sold 39.7 22.9
----- -----
Gross profit $34.7 $23.0
----- -----
Gross profit % 46.7% 50.2%
----- -----
15
Gross profit excluding revenue from
previously reserved products and
cancellation revenue (non-GAAP) $31.1 $16.4
----- -----
Gross profit % excluding revenue from
previously reserved products and
cancellation revenue (non-GAAP) 43.9% 41.7%
----- -----
Our gross profit increased by 50.9% to $34.7 million in the three months
ended June 29, 2003 from $23.0 million in the three months ended June 30, 2002.
Our gross profit percentage was 46.7% and 50.2% in the three months ended June
29, 2003 and June 30, 2002, respectively. The increase in gross profit from the
three months ended June 30, 2002 to the three months ended June 29, 2003 is
primarily attributable to higher net revenues during the three months ended June
29, 2003. The decrease in gross profit percentage can be attributed to the sale
of a higher percentage of previously reserved products during the three months
ended June 30, 2002.
Excluding revenue from the sale of previously reserved products, our gross
profit and gross profit percentage was $31.1 million and 43.9% and $16.4 million
and 41.7% for the three months ended June 29, 2003 and June 30, 2002,
respectively. The increase in gross profit percentage can be attributed to
product mix. 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.
We have approximately $2.0 million in our sales backlog for the three
months ended September 28, 2003 for products in inventory which are fully
reserved. The sale of these fully reserved 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 32.1% to $24.3 million in
the three months ended June 29, 2003 from $35.8 million in the three months
ended June 30, 2002. Included in research and development expenditures for the
three months ended June 29, 2003 and June 30, 2002 is $2.8 million and $5.4
million, respectively, of non-cash compensation. The decrease in non-cash
compensation resulted from a decline in amortization of deferred compensation
resulting from the restructuring and reorganization plans. Excluding the
non-cash compensation, research and development expenditures decreased 28.9%.
Research and development expenses represented 32.7% (29.0% excluding non-cash
compensation) and 78.0% (66.0% excluding non-cash compensation) of net revenues
for the three months ended June 29, 2003 and June 30, 2002, respectively. The
$11.5 million decrease in research and development expenses from the three
months ended June 30, 2002 to the three months ended June 29, 2003 is primarily
attributable to the impact of our restructuring and reorganization plans which
reduced variable employee costs by approximately $5.5 million and facility
related fixed costs by approximately $1.6 million. Our non-cash compensation
decreased by approximately $2.7 million. The presentation of research and
development expenses excluding non-cash compensation constitutes the
presentation of non-GAAP financial measures. We believe this presentation
provides investors with useful information about the non-cash components of our
research and development expenditures. As noted 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 24.3% to
$9.9 million in the three months ended June 29, 2003 from $13.1 million for the
three months ended June 30, 2002. Included in selling, general and
administrative expenses for the three months ended June 29, 2003 and June 30,
2002 is $0.9 million and $0.6 million, respectively, of non-cash compensation.
Excluding non-cash compensation, selling, general and administrative expenses
decreased 28.1%. Selling, general and administrative expense represented 13.3%
(12.1% excluding non-cash compensation) and 28.5% (27.2% excluding non-cash
compensation) of net revenues for the three months ended June 29, 2003 and June
30, 2002, respectively. The $3.2 million decrease in selling, general and
administrative expenses from the three months ended June 30, 2002 to the three
months ended June 29, 2003 resulted from the impact of our restructuring and
reorganization plans
16
which reduced variable employee costs by approximately $2.5 million. The
presentation of selling, general and administrative expense excluding non-cash
compensation constitutes the presentation of non-GAAP financial measures. We
believe this presentation provides investors with useful information about the
non-cash components of our selling, general and administrative expenditures. As
noted 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. We recorded restructuring and other
charges during the three months ended June 29, 2003 of $1.1 million (together
with the restructuring and other charges recorded during the three months ended
March 30, 2003, referred to as the "2003 Restructuring Charge"). The charges
primarily relate to the proposed settlement of real estate tax liabilities
associated with the facility held for sale, net of adjustments to previously
recorded charges in the amount of approximately $0.5 million. We review the
estimated costs and assumptions periodically and reflect the effects of
revisions in the period that they occur.
Impairment of goodwill and other acquired intangible assets. During the
three months ended June 30, 2002, we recorded a charge of $493.6 million to
reduce goodwill and other intangible assets, based upon the amount by which the
carrying amount of these assets exceeded their fair value. We performed the
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 as a result of events that occurred
during the three months ended June 30, 2002, including the sale of our video
compression business, significant negative industry and economic trends
affecting our operations and expected future sales, and the general decline in
the valuations of technology company stocks, including our own stock. The
assessment was performed pursuant to SFAS No. 144 and SFAS No. 142. Of the total
charge, $458.3 million related to goodwill and $35.3 million related 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. Interest income for the three months ended
June 29, 2003 was $2.5 million, offset by interest expense of $2.0 million,
resulting in net interest income of $0.5 million. Interest income for the three
months ended June 30, 2002 was $3.9 million, net of interest expense of $2.1
million, resulting in net interest income of $1.8 million. The decrease in net
interest income is attributable to the decrease in our cash and investments as
compared to June 30, 2002 and lower rates of return.
Provision (benefit) for Income Taxes. We recorded a current provision for
income taxes of $0.3 million and $0.0 million during the three months ended June
29, 2003 and June 30, 2002, respectively. The current provision recorded
reflects an effective tax rate of 4.0% and 0.0% for the three months ended June
29, 2003 and June 30, 2002, respectively. 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.
Discontinued Operations. During the three months ended June 29, 2003, we
committed to a plan and closed an international research and development
component. During the three months ended June 30, 2002, we committed to a plan
and disposed of our video compression and EmWeb businesses (collectively with
the international research and development component, 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 our
statements of operations for all periods presented, prior to the disposition of
those businesses or entities.
Results of Operations for the six months ended June 29, 2003 and June 30, 2002
Net Revenues. Our net revenues increased by 9.7% to $143.1 million during
the six months ended June 29, 2003 from $130.3 million in the six months ended
June 30, 2002. The increase in net revenues was primarily due to an increase in
the number of ports sold, offset by declining average selling prices as compared
to the six months ended June 30, 2002. Included in net revenues for the six
months ended June 30, 2002 was approximately $3.5 million of fees associated
with the resolution of previous customer purchase commitments.
17
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 six months ended
June 29, 2003 June 30, 2002
------------- -------------
Net product revenue $131.6 $118.6
Net product revenue from previously
reserved products 11.5 8.2
Cancellation revenue - 3.5
----- -----
Total revenue 143.1 130.3
Cost of goods sold 74.3 60.1
----- -----
Gross profit $68.8 $70.2
----- -----
Gross profit % 48.1% 53.9%
----- -----
Gross profit excluding revenue from
previously reserved products and
cancellation revenue (non-GAAP) $57.3 $58.4
----- -----
Gross profit % excluding revenue from
previously reserved products and
cancellation revenue (non-GAAP) 43.5% 49.2%
----- -----
Our gross profit decreased by 2.0% to $68.8 million in the six months ended
June 29, 2003 from $70.1 million in the six months ended June 30, 2002. Our
gross profit percentage was 48.1% and 53.9% in the six months ended June 29,
2003 and June 30, 2002, respectively. The decrease in gross profit from the six
months ended June 30, 2002 to the six months ended June 29, 2003 is primarily
attributable to a higher gross profit percentage on revenues during the six
months ended June 30, 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 revenue, our gross profit and gross profit percentage was $57.3
million and 43.5% and $58.4 million and 49.2% for the six months ended June 29,
2003 and June 30, 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.
Research and Development. Our research and development expenses decreased
45.5% to $47.0 million in the six months ended June 29, 2003 from $86.2 million
in the six months ended June 30, 2002. Included in research and development
expenditures for the six months ended June 29, 2003 and June 30, 2002 is $5.5
million and $20.8 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 six months ended
June 30, 2002 of approximately $8.0 million, representing the unamortized
deferred stock compensation at the time we 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 36.6%. Research and development
expenses represented 32.8% (29.0% excluding non-cash compensation) and 66.2%
(50.2% excluding non-cash compensation) of net revenues for the six months ended
June 29, 2003 and June 30, 2002, respectively. The $39.2 million decrease in
research and development expenses from the six months ended June 30, 2002 to the
six months ended June 29, 2003 is primarily attributable to the impact of our
restructuring and reorganization plans which reduced variable employee costs by
approximately $14.5 million and facility related fixed costs by approximately
$3.8 million. Our non-cash compensation decreased by approximately $15.3
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. We
believe this presentation provides investors with useful information about the
non-cash components of our research and development expenditures. As noted
above, presentation of non-GAAP financial measures are intended to supplement,
not replace, the
18
related GAAP measures.
Selling, General and Administrative. Our selling, general and
administrative expense decreased 30.4% to $19.7 million in the six months ended
June 29, 2003 from $28.3 million for the six months ended June 30, 2002.
Included in selling, general and administrative expenses for the six months
ended June 29, 2003 and June 30, 2002 is $1.8 million and $1.4 million,
respectively, of non-cash compensation. Excluding non-cash compensation,
selling, general and administrative expenses decreased 33.5%. Selling, general
and administrative expense represented 13.8% (12.5% excluding non-cash
compensation) and 21.7% (20.6% excluding non-cash compensation) of net revenues
for the six months ended June 29, 2003 and June 30, 2002, respectively. The $8.6
million decrease in selling, general and administrative expenses from the six
months ended June 30, 2002 to the six months ended June 29, 2003 resulted from
the impact of our restructuring and reorganization plans which reduced variable
employee costs by approximately $6.5 million. The presentation of selling,
general and administrative expense excluding non-cash compensation constitutes
the presentation of non-GAAP financial measures. We believe this presentation
provides investors with useful information about the non-cash components of our
selling, general and administrative expenditures. As noted 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. We recorded restructuring and other
charges during the six months ended June 29, 2003 of $1.2 million. The charges
primarily relate to the proposed settlement of real estate tax liabilities
associated with the facility held for sale, net of adjustments to previously
recorded charges in the amount of approximately $0.5 million. We review the
above estimated costs and assumptions periodically and reflect the effects of
revisions in the period that they occur.
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 table below presents the liabilities associated with the 2002
Restructuring Charge as of December 31, 2002 and June 29, 2003, respectively,
including payments and adjustments made during the six months ended June 29,
2003, and the 2003 Restructuring Charge:
December 31, 2002 June 29, 2003
Restructuring 2003 Restructuring Cash Restructuring
(in thousands) Liability Charges Payments Liability
--------- ------- -------- ---------
Workforce reduction $6,794 ($489) ($5,398) $ 907
Facilities consolidation 28,818 1,687 (4,115) 26,390
Other Charges 774 - (162) 612
------- ------ -------- -------
Total Charges $36,386 $1,198 ($9,675) $27,909
======= ====== ======== =======
Impairment of goodwill and other acquired intangible assets. During the six
months ended June 30, 2002, we recorded a charge of $493.6 million to reduce
goodwill and other intangible assets, based upon the amount by which the
carrying amount of these assets exceeded their fair value. We performed the
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 as a result of events that occurred
during the six months ended June 30, 2002, including the sale of our video
compression business, significant negative industry and economic trends
affecting our operations and expected future sales, and the general decline in
the valuations of technology company stocks, including our own stock. The
assessment was performed pursuant to SFAS No. 144 and SFAS No. 142. Of the total
charge, $458.3 million related to goodwill and $35.3 million related 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. Interest income for the six months ended
June 29, 2003 was $5.2 million, offset by interest expense of $4.0 million,
resulting in net interest income of $1.2 million. Interest income for the six
months ended June 30, 2002 was $7.8 million, net of interest expense of $4.1
million, resulting in net interest income of $3.7 million. The
19
decrease in net interest income is attributable to the decrease in our cash and
investments as compared to June 30, 2002 and lower rates of return.
Provision (benefit) for Income Taxes. We recorded a current
provision for income taxes of $0.5 million and a deferred benefit of $0.9
million during the six months ended June 29, 2003, resulting in a net tax
benefit of $0.4 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 4.5% for the six months ended June
29, 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 six
months ended June 30, 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 six months ended June 30, 2002. The difference
between the effective rate and the statutory rate of 35.0% relates primarily to
permanent differences resulting from our prior acquisitions and changes in the
valuation allowance.
Discontinued Operations. During the three months ended June 29, 2003, we
committed to a plan and closed an international research and development
component. During the three months ended June 30, 2002, we committed to a plan
and disposed of our video compression and EmWeb businesses (collectively with
the international research and development component, 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 our statements
of operations for all periods presented, prior to the disposition of those
businesses or entities.
The results of discontinued operations, for the periods presented, prior to
disposition, are as follows:
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
(in thousands) June 29, 2003 June 30, 2002 June 29, 2003 June 30, 2002
------------- ------------- ------------- -------------
Net loss from operations of
discontinued businesses:
Video compression $ - $(2,366) $ - $(3,168)
EmWeb - (443) - (871)
International research and
development component (451) (2,508) (2,038) (5,035)
----- ------- ------- -------
Net loss from operations of
discontinued businesses (451) (5,317) (2,038) (9,074)
Net loss on sale/closure of (6,652) (3,887) (7,236) (3,887)
businesses ------- ------- ------- -------
Net loss from discontinued $(7,103) $(9,204) $(9,274) $(12,961)
operations ======== ======== ======== =========
20
The net loss on closure of the international research and development
component during the three and six months ended June 29, 2003, of $6.7 million
and $7.2 million, respectively, was determined as follows:
Three months ended Six months ended
(in thousands) June 29, 2003 June 29, 2003
------------- -------------
Workforce related $1,503 2,087
Facilities related 1,000 1,000
Asset impairment 2,001 2,001
Other closing costs and charges 2,148 2,148
------ -----
Net loss on closure of international
research and development component $6,652 $7,236
====== ======
The net loss from the sale of the video compression business during the
three and six months ended June 30, 2002 of $3.9 million was determined as
follows:
(in thousands)
Purchase price:
Note receivable from Conexant Systems, Inc. $21,000
Conexant Systems, Inc. common stock and
minimum price guarantee 15,000
-------
Total purchase price 36,000
Net book value of assets and liabilities sold (5,537)
Allocation of goodwill to video compression business (32,100)
Accrued transaction costs (2,250)
-------
Net loss on sale $(3,887)
========
Revenues related to the Discontinued Businesses, for the periods presented,
are as follows:
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
(in thousands) June 29, 2003 June 30, 2002 June 29, 2003 June 30, 2002
------------- ------------- ------------- -------------
Revenues:
Video compression $ - $2,033 $ - $4,002
EmWeb - 165 - 443
International research and
development component - - - -
------- ------- ------- ------
Total revenues $ - $2,198 $ - $4,445
======= ======= ======= ======
Liquidity and Capital Resources
Total assets at June 29, 2003 were $709.2 million, a decrease of $13.7
million, or 1.9% 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 six months ended June 29, 2003, including continued amortization of
intangible assets from our acquisitions and other non-cash charges.
At June 29, 2003, we had $322.0 million in cash and cash equivalents and
short-term marketable securities and working capital of $307.3 million.
Additionally, we had $206.7 million in long-term marketable securities at June
29, 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.
21
Net cash used in operating activities was $2.0 million in the six months
ended June 29, 2003, compared to net cash used in operating activities of $29.3
million in the six months ended June 30, 2002. The net cash used in operating
activities during the six months ended June 29, 2003 was a result of net cash
provided by operations, net of working capital changes and restructuring and
other payments. The net cash used during the six months ended June 30, 2002 was
primarily due to the net loss from operations during the six months ended June
30, 2002.
Net cash provided by investing activities was $44.0 million during the six
months ended June 29, 2003. The net cash provided by investing activities was
primarily related to a net decrease of $49.0 in our short and long-term
marketable securities from December 31, 2002, net of cash paid for accrued
acquisition related costs of $4.1 million and capital expenditures of $0.9
million. Net cash used in investing activities during the six months ended June
30, 2002 was primarily related to the purchase of a facility for $34.9 million,
purchases of property and equipment of $4.6 million and cash paid for accrued
acquisition related costs of $4.8 million, offset by net proceeds on marketable
securities of $33.6 million.
Net cash provided by financing activities was $8.3 million and $3.8 million
during the six months ended June 29, 2003 and June 30, 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 six months
ended June 29, 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 June
29, 2003 are as follows:
Operating Leases
Included in
Capital Operating Restructuring and
(in thousands) Leases Leases Discontinued
------ ------ Operations
----------
Years Ended December 31,
2003 $103 $1,992 $5,551
2004 7 3,885 9,899
2005 6 3,554 8,773
2006 - 3,469 7,468
2007 - 3,545 6,237
Thereafter - 25,463 4,057
----- ------- -------
Total minimum lease payments $116 $41,908 $41,985
======= =======
Less: amount representing interest (19)
-----
Present value of net minimum lease payments 97
Less: current portion (91)
-----
Long term capital lease obligations $ 6
=====
Approximately $10.3 million of the operating lease commitments is payable
in periods beyond ten years. As of June 29, 2003, we had facility related
restructuring reserves of $37.9 million.
On July 15, 2003, we announced an agreement to purchase the Wireless
Networking Product Group of Intersil Corporation ("Intersil") for $365.0 million
in cash and common stock. Pursuant to the Asset Purchase Agreement dated July
15, 2003 by and between GlobespanVirata and Intersil, we have agreed to pay
Intersil $250.0 million in cash and $115.0 million of common stock subject to a
collar on our common stock price of between $7.4375 and $10.0625.
On May 11, 2001, we sold $130.0 million aggregate principal amount 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
22
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 June 29, 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 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 rate and the prevailing interest rate later rises, the
principal amount of our investment will probably decline. To minimize this risk
in the future, we intend to maintain our portfolio of cash equivalents and
short-term investments in a variety of securities, including commercial paper,
money market funds, government and non-government debt securities and
certificates of deposit. As of June 29, 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
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 were effective, as of June 29, 2003, in timely alerting
them to material information relating to our company (including its consolidated
subsidiaries) required to be included in our Exchange Act filings.
There have been no changes in our internal controls over financial
reporting during the fiscal quarter ended June 29, 2003 which has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
As previously reported, the Company has been involved in a dispute with
Texas Instruments over a group of patents (and related foreign patents) that
Texas Instruments believes are essential to certain industry standards for
implementing ADSL technology. On June 12, 2003, the Company filed a complaint
against Texas Instruments, Stanford University and its Board of Trustees, and
Stanford University OTL, LLC (collectively, the "Defendants") in the U.S.
District Court of New Jersey. The Company's complaint asserts, among other
things, that the Defendants have violated the antitrust laws by
23
creating an illegal patent pool, by manipulating the patent process and by
abusing the process for setting industry standards related to ADSL technology.
The complaint also asserts that the Defendants' patents relating to ADSL
technology are unenforceable, invalid and/or not infringed by the Company's
products. The Company is seeking, among other things, (i) a finding that the
Defendants have violated the federal antitrust laws and treble damages based
upon such a finding, (ii) an injunction prohibiting the Defendants from engaging
in anticompetitive practices, (iii) a declaratory judgment that the claims of
the Defendants' ADSL patents are invalid, unenforceable, void, and/or not
infringed by the Company and (iv) an injunction prohibiting the Defendants from
pursuing patent litigation against the Company and its customers.
The Company expects that the Defendants will bring a counterclaim alleging
infringement of certain of their ADSL patents. Although the Company believes
that it has strong arguments in favor of its position in this dispute, it 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, it 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 the
Company's 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 operations or financial
condition.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Number Description
31.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
The following reports were filed or furnished to the Commission:
DATE OF REPORT ITEM REPORTED ON
April 22, 2003 Press Release issued by GlobespanVirata
containing financial results of the
Company for the three months ended
March 30, 2003.
Items 2, 3, 4, and 5 are not applicable and have been omitted.
24
GLOBESPANVIRATA, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GLOBESPANVIRATA, INC.
Date: July 30, 2003 By:/s/ ROBERT MCMULLAN
------------------------
Robert McMullan
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
25