- --------------------------------------------------------------------------------
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Form 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended September 28, 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 [ ].
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 ___.
The number of shares outstanding of the Registrant's Common Stock as of
November 4, 2003 was 149,206,643.
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GlobespanVirata, Inc.
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 28, 2003 and December
31, 2002...........................................................2
Condensed Consolidated Statements of Operations for the Three and Nine
Months Ended September 28, 2003 and September 29, 2002.............3
Condensed Consolidated Statements of Cash Flows for the Three and Nine
Months Ended September 28, 2003 and September 29, 2002............4
Notes to Condensed Consolidated Financial Statements......................5
Item 2. Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations...............................17
Item 3. Quantitative and Qualitative Disclosures About Market Risk......28
Item 4. Controls and Procedures.........................................28
Part II. Other Information
Item 1. Legal Proceedings................................................29
Item 6. Exhibits and Reports on Form 8-K.................................30
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
GlobespanVirata, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except share data)
September December
28, 2003 31, 2002
--------- --------
ASSETS
Current Assets:
Cash and cash equivalents $79,929 $183,234
Investments - marketable securities 15,976 114,065
Accounts receivable, less allowance
for doubtful accounts of $1,883 and
$1,886, respectively 68,455 34,058
Inventories, net 48,325 23,932
Deferred income taxes 9,024 16,786
Prepaid expenses and other current assets 28,327 22,079
------- -------
Total current assets 250,036 394,154
Property and equipment, net 24,733 21,405
Facility held for sale 24,987 24,987
Intangible assets, net 323,734 39,087
Investments - marketable securities 167,825 230,758
------- -------
Other assets 13,518 12,599
------- -------
Total assets $804,833 $722,990
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $30,867 $20,717
Restructuring and reorganization liabilities 36,057 52,486
Accrued expenses and other liabilities 48,591 32,825
Payroll and benefit related liabilities 13,671 16,262
Current portion of capital lease obligations 5 1,156
------- -------
Total current liabilities 129,191 123,446
Other long-term liabilities 2,934 2,904
Convertible subordinated note 130,000 130,000
Deferred income taxes 9,024 16,786
Capital lease obligations, less current portion 5 12
------- -------
Total liabilities 271,154 273,148
------- -------
Stockholders' equity
Preferred stock - -
Common stock 163 142
Treasury stock - 13,523,530 shares (45,373) (45,373)
Stock purchase warrants 1 1
Notes receivable from stock sales (4,020) (5,231)
Additional paid in capital 1,832,306 1,711,664
Deferred stock compensation (4,584) (15,613)
Accumulated deficit (1,246,893) (1,198,939)
Accumulated other comprehensive income 2,079 3,191
---------- ---------
Total stockholders' equity 533,679 449,842
---------- ---------
Total liabilities and stockholders' equity $ 804,833 $ 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 Nine Months Ended
September 28, September 29, September 28, September 29,
2003 2002 2003 2002
------------- ------------- ------------ ------------
Net revenues $ 98,792 $ 47,391 $ 241,847 $ 177,738
Cost of sales 53,573 25,638 127,874 85,800
------- ------- ------- -------
Gross Profit 45,219 21,753 113,973 91,938
------- ------- ------- -------
Operating expenses:
Research and development (including non-cash 29,675 30,146 76,666 116,395
compensation of $2,757 and $8,271 for the three
and nine months ended September 28, 2003,
respectively, and $3,796 and $24,618 for
the three and nine months ended September 29,
2002, respectively).
Selling, general and administrative (including 11,892 11,382 31,598 39,677
non-cash compensation of $919 and $2,757
for the three and nine months ended September
28, 2003, respectively and $422 and $1,847
for the three and nine months ended
September 29, 2002, respectively).
IP litigation support costs 498 -- 498 --
Amortization of intangible assets 7,817 5,616 17,740 27,289
Restructuring and other charges -- 4,450 1,198 20,200
Impairment of goodwill and other acquired
intangible assets -- -- -- 493,620
In process research and development 26,000 -- 26,000 --
------ ------ ------- -------
Total operating expenses 75,882 51,594 153,700 697,181
------ ------ ------- -------
Loss from operations (30,663) (29,841) (39,727) (605,243)
Interest (income) expense, net 343 (1,337) (852) (5,015)
------ ------ ------- -------
Loss from continuing operations before income taxes (31,006) (28,504) (38,875) (600,228)
Provision (benefit) for income taxes 250 -- (195) 260
------ ------ ------ -------
Net Loss from continuing operations (31,256) (28,504) (38,680) (600,488)
Discontinued operations
Net loss from operations of discontinued businesses -- (2,712) (9,274) (15,673)
------ ------ ------ -------
Net Loss $(31,256) (31,216) (47,954) (616,161)
------- ------ ------ -------
Other comprehensive (gain) loss:
Unrealized (gain) loss on marketable securities 757 (747) 1,431 (1,522)
Foreign currency translation (gain) loss (196) (636) (319) (750)
------- ------ ------ -------
Comprehensive loss $(31,817) (29,833) (49,066) (613,889)
======== ====== ====== =======
Basic and diluted loss per share:
Net loss from continuing operations $ (0.23) $ (0.21) $ (0.29) $ (4.35)
Net loss from discontinued operations -- (0.02) (0.07) (0.11)
-------- ------- ------- -------
Net Loss $ (0.23) (0.23) (0.36) (4.46)
======== ======= ======= =======
Weighted average shares of common stock
outstanding used in computing basic and
diluted loss per share 138,496 133,701 133,097 138,134
-------- ------- ------- -------
The accompanying notes are an integral part of these financial statements.
3
GlobespanVirata, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
Nine Months Ended
-----------------------------------
September 28, September 29,
2003 2002
-----------------------------------
Cash flow used in operating activities:
Net loss $ (47,954) $ (616,161)
Adjustments to reconcile net loss to cash
used in operating activities:
Restructuring and other charges (10,713) 11,404
Tax benefit related to investment credits
for research in a foreign jurisdiction (945) -
Non-cash compensation expense 11,029 26,465
Depreciation and amortization 10,052 12,982
Amortization of intangible assets
(including amortization of $- and $1,260
related to discontinued operations for
the nine months ended September 28, 2003 and
September 29, 2002, respectively) 17,740 28,550
Impairment of goodwill and other acquired
intangible assets 493,620
Discontinued operations 6,672 -
Net loss on sale of video compression business - 3,887
In-process research and development 26,000 -
Changes in assets and liabilities, net of
the effect of acquisitions and divestitures:
Increase in accounts receivable (34,397) (7,213)
Decrease in inventory 10,913 6,595
Increase in prepaids and other assets (3,432) (1,927)
Increase (decrease) in accounts payable 10,150 (3,349)
Decrease in accrued expenses and other liabilities (13,238) (17,423)
-------- --------
Net cash used in operating activities (18,123) (62,570)
-------- --------
Cash flow provided by (used in) investing activities:
Purchases of property and equipment (1,642) (4,866)
Cash paid for acquisition of Wireless Group (249,925) -
Purchase of facility - (34,902)
Cash paid for accrued acquisition related costs (5,422) (8,705)
Cash received from the sale of the video
compression business - 21,000
Proceeds from sale/maturity of marketable securities 317,740 434,102
Purchases of marketable securities (156,718) (394,020)
--------- ---------
Net cash provided by (used in) investing activities (95,967) 12,609
--------- ---------
Cash flow provided by (used in) financing activities:
Proceeds from issuance of convertible subordinated
notes, net of offering costs - -
Proceeds received from exercise of stock options
and employee stock purchase plan 12,133 7,708
Proceeds from repayment of notes receivable 1,211 -
Repurchase of common stock - (39,711)
Repayments of capital lease obligations (1,158) (3,217)
--------- --------
Net cash provided by (used in) financing activities 12,186 (35,220)
--------- --------
Effect of exchange rates on cash and cash equivalents (1,401) (38)
--------- --------
Net decrease in cash and cash equivalents (103,305) (85,219)
Cash and cash equivalents at beginning of period 183,234 269,586
--------- --------
Cash and cash equivalents at end of period $ 79,929 $184,367
========= =========
Supplemental non-cash disclosures - Refer to Note 3
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 ("GlobespanVirata" or the "Company") is a leading provider
of integrated circuits and software for broadband communications solutions for
consumer, enterprise, personal computer and service provider markets.
GlobespanVirata delivers complete system-level high-speed, cost-effective and
flexible DSL and wireless networking chip sets, software and reference designs
to leading global manufacturers of broadband access and wireless networking
equipment. The Company's products include broadband system-level solutions for
modems, routers, residential gateways, and DSLAMs, as well as a wide variety of
wireless networking chip sets and reference designs that are enabling a new
generation of wireless connectivity in notebooks, PDAs, digital cameras, MP3
players and other handheld networking appliances.
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, including the results
of acquired businesses from their effective dates (See Note 3). All intercompany
transactions and balances are eliminated in consolidation.
5
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 nine months ended September 28, 2003 were from
product sales.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with an
original maturity of ninety days or less to be cash equivalents.
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 September 28, 2003 and September 29, 2002, the Company had
outstanding options, restricted stock and warrants to purchase an aggregate of
44.3 million and 44.8 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 nine months ended September 28, 2003 and
September 29, 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.
6
Inventories at September 28, 2003 and December 31, 2002 consisted of the
following:
(in thousands) September 28, 2003 December 31, 2002
------------------ -----------------
Work in process $20,189 $6,796
Finished Goods 68,449 65,041
Reserve for excess and
obsolete inventories (40,313) (47,905)
-------- --------
Inventories $48,325 $23,932
========= ========
The decrease in reserve for excess and obsolete inventories from December
31, 2002 to September 28, 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 to the carrying values or
estimated useful lives of fixed or intangible assets in accordance with the
provisions of SFAS No. 144.
Intangibles Assets (See Note 3)
Intangible assets at September 28, 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) September 28, 2003 December 31, 2002
------------------ -----------------
Goodwill $187,239 $ -
Core technology 110,741 39,693
Other identifiable intangibles 54,550 10,450
Accumulated amortization
- core technology (23,858) (9,518)
Accumulated amortization - other (4,938) (1,538)
======= =======
Net intangible assets $323,734 $39,087
======== =======
The intangible assets acquired are being amortized over periods ranging
from two years to five years. Amortization expense related to intangible assets
for the three and nine months ended September 28, 2003 was $7.8 million and
$17.7 million, respectively and amortization expense related to intangible
assets for the three and nine months ended September 29, 2002 was $5.6 million
and $27.3 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.
7
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 nine months ended September 28,
2003 (see Note 5). As of September 28, 2003, approximately $2.7 million of these
amounts have been collected, approximately $0.4 million is recorded on the
Company's balance sheet as a current asset and approximately $0.5 million is
recorded on the Company's balance sheet as a non-current asset based upon
expected collection dates.
A reconciliation of the Company's goodwill from December 31, 2002 to
September 28, 2003 is as follows (in thousands):
Goodwill at December 31, 2002 $ -
WLAN Group acquisition 187,239
-------
Goodwill at September 28, 2003 $187,239
========
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:
For the three months ended For the nine months ended
(in thousands) September 28, September 29, September 28, September 29,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net loss, as reported $(31,256) $ (31,216) $(47,954) $ (616,161)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards, net
of related tax effects (32,541) (28,808) (97,593) (86,424)
Pro forma net loss $(63,797) $ (60,024) $(145,547) $ (702,585)
========= ========= ========== ===========
Earnings per share basic and diluted as reported $(0.23) $ (0.23) $(0.36) $ (4.46)
========= ========= ========== ===========
Earnings per share basic and diluted pro forma $(0.46) $ (0.45) $(1.09) $ (5.09)
========= ========= ========= ===========
The following assumptions were used to determine the pro forma impact of
accounting for stock options issued during the three and nine months ended
September 28, 2003 and September 29, 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
8
records a related provision for estimated warranty costs at the date of sale.
Such warranty costs have been immaterial to date.
Restructuring and Other Charges
We have recorded restructuring and other charges during the nine months
ended September 28, 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.
Advertising
Cooperative advertising obligations are accrued and the costs expensed at
the same time the related revenue is recognized. Cooperative advertising
expenses are recorded as marketing, general and administrative expense to the
extent the cash paid does not exceed the fair value of the advertising benefit
received. Any excess of cash paid over the fair value of the advertising benefit
received is recorded as a reduction of revenue.
Reclassifications
Certain reclassifications have been made to conform prior year amounts to
the current year presentation.
3. Acquisitions
On August 28, 2003, the Company acquired certain technology and employees
of the Wireless Networking Products Group ("WLAN Group") of Intersil Corporation
("Intersil"). The WLAN Group is a leading supplier of high-speed wireless
networking solutions, with the industry's longest history of WLAN development
and deployment. The Company paid Intersil $250.0 million in cash and issued
15,462,185 shares of common stock valued at $107.3 million.
The following is a summary of the consideration paid for the WLAN Group:
Cash $250.0
Fair value of common stock issued 107.3
Transaction costs 9.0
-----
Total purchase price $366.3
======
Pursuant to the terms of the asset purchase agreement, the Company and
Intersil must agree on a post-closing purchase price adjustment based on changes
in working capital of the WLAN Group, as defined. This post-closing purchase
price adjustment is expected to be finalized during the fourth quarter of 2003
or the first quarter of 2004.
In connection with the acquisition of the WLAN Group, the Company and
Intersil entered into a transition services agreement, pursuant to which
Intersil will continue to provide certain administrative services to the WLAN
Group. The Company will pay Intersil approximately $1.0 million on a quarterly
basis for these services. The Company has accrued $0.4 million as of September
28, 2003 related to the
9
transition services agreement. The Company expects to discontinue use of the
administrative services pursuant to the transition services agreement during the
fourth quarter of 2003.
The assets and liabilities of the WLAN Group were recorded at their
estimated fair market value at the dates of the acquisition. The allocations
were as follows:
Inventory $ 35.3
Prepaid and other assets 2.5
Property and equipment 11.4
Identifiable intangible assets 118.1
Goodwill 187.2
-----
Subtotal 354.5
In process research and development 26.0
Liabilities assumed (14.2)
------
Total purchase price $366.3
======
The assets and liabilities recorded in connection with the purchase price
allocations for the WLAN Group are based on preliminary estimates of fair
values. Actual adjustments will be based on final values for tangible and
intangible assets acquired and liabilities assumed and the post-closing purchase
price adjustment.
The acquisition of the WLAN Group was accounted for as a purchase and has
been included in the Company's results of operations from the closing date. The
excess of purchase price over the fair value of net assets acquired, reflected
as identifiable intangible assets is being amortized on a straight-line basis
over periods ranging from three to five years. As a result of the implementation
of SFAS 142, entitled, "Goodwill and Other Intangible Assets," the excess of
purchase price over the fair value of net assets acquired reflected as goodwill
is no longer amortized on the statement of operations.
The amount allocated to in process research and development ("IPR&D") of
$26.0 million was expensed upon the acquisition of the WLAN Group, as it was
determined that the underlying projects had not reached technical feasibility,
had no alternative future use and successful development was uncertain. In the
allocation of the acquisition purchase price to IPR&D, consideration was given
to the following for the projects under development at the time of the
acquisition:
- the present value of the forecasted cash flows and income that were
expected to result from the project;
- the status of the project;
- completion costs;
- project risks;
- the value of core technology; and
- the stage of completion of the project.
In valuing core technology, the relative allocations to core technology and
IPR&D were consistent with the relative contribution of the projects. The
determination of the value of IPR&D was based on efforts completed as of the
date of the acquisition. The IPR&D projects were approximately 25% complete as
of the acquisition date and are expected to be completed by the fourth quarter
of 2004.
The following unaudited pro forma information represents a summary of the
results of operations as if the acquisition of the WLAN Group occurred on
January 1, 2003 and 2002, respectively.
10
For the nine months ended For the nine months ended
September 28, 2003 September 28, 2002
Revenue $363.4 $ 353.6
Net loss $(95.0) $(649.9)
Net loss per common share $(0.65) $ (4.23)
The pro forma results are based on various assumptions and are not
necessarily indicative of what would have occurred had these transactions been
consummated on January 1, 2003 and 2002, respectively.
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 September 28, 2003 and December
31, 2002, five of the Company's customers accounted for $33.1 million (48.4%)
and $26.1 million (76.8%) of net accounts receivable, respectively.
Approximately 15.7% and 41.9% of the net accounts receivable at September 28,
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 transactions have been
nominal for all periods presented.
The Company's top ten customers accounted for $55.8 million (56.5%) and
$30.3 million (62.0%) of the Company's net revenues during the three months
ended September 28, 2003 and September 29, 2002, respectively. In the three
months ended September 28, 2003 there were two customers who individually
represented more than 10% of the Company's net revenues, collectively accounting
for 20.5%, of the Company's net revenues. These customers were D-Link
Corporation and Ambit Microsystems which accounted for 10.3% and 10.2%,
respectively, of the Company's net revenues. In the three months ended September
29, 2002 there were two customers who individually represented more than 10% of
the Company's net revenues, collectively accounting for 28.9%, of the Company's
net revenues. These customers were Ambit Microsystems Corporation and D-Link
Corporation which accounted for 16.5% and 12.4%, respectively, of the Company's
net revenues.
The Company's top ten customers accounted for $148.7 million (61.5%) and
$99.4 million (55.9%) of the Company's net revenues during the nine months ended
September 28, 2003 and September 29, 2002, respectively. In the nine months
ended September 28, 2003 there were three customers who individually represented
more than 10% of the Company's net revenues, collectively accounting for 36.1%,
of the Company's net revenues. These customers were UTStarcom, Ambit
Microsystems, and D-Link Corporation which accounted for 14.0%, 11.9 and 10.2%,
respectively of the Company's net revenues. Ambit Microsystems Corporation
accounted for 13.6% of the Company's net revenues during the nine months ended
September 29, 2002.
The Company's sales to overseas customers are predominantly denominated in
U.S. dollars. Revenues by geographic region for the three and nine months ended
September 28, 2003 and September 29, 2002 were as follows:
11
(in thousands) For the three months ended For the nine months ended
September September September September
28, 2003 29, 2002 28, 2003 29, 2002
-------- -------- -------- --------
Net revenues
Asia $81,845 $41,849 $207,065 $128,773
North America 11,429 3,396 23,752 40,621
Europe 5,512 2,103 10,829 8,297
Other 6 43 201 47
-------- ------- -------- --------
Total $98,792 $47,391 $241,847 $177,738
======== ======= ======== ========
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 September 28, 2003 and September
29, 2002, respectively. The current provision recorded reflects an effective tax
rate of 0.8% and 0.0% for the three months ended September 28, 2003 and
September 29, 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 $0.7 million
and a deferred benefit of $0.9 million during the nine months ended September
28, 2003, resulting in a net tax benefit of $0.2 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 0.5%
for the nine months ended September 28, 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 nine months ended September 29, 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 nine months ended September 29, 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 September
28, 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 nine months ended September 28, 2003 have been
recorded on the Company's balance sheets as other current and non-current
assets.
6. Restructuring and Reorganization Liabilities
The restructuring and reorganization liabilities reflect the remaining
balances associated with the Company's reorganization plan, which resulted from
the Company's merger with Virata Corporation ("Virata") in December of 2001, and
other restructuring charges recorded by the Company during the years ended
December 31, 2002 and the nine months ended September 28, 2003.
The following table summarizes the status of the Company's restructuring
and reorganization
12
liabilities as of and for the nine months ended September 28, 2003:
2003
December 31, Restructuring Virata Merger September
2002 Charges and Cash Related 28, 2003
(in thousands) Liability Adjustments Payments Adjustments Liability
--------- ----------- -------- ----------- ---------
Workforce reduction $9,377 ($489) ($8,159) ($294) $ 435
Facilities
consolidation 42,335 1,687 (9,012) - 35,010
Other 774 - (162) - 612
------- ----- ------- ------- -------
Total $52,486 $1,198 ($17,333) ($294) $36,057
======= ====== ========= ======= ========
The Company recorded restructuring and other charges during the nine months
ended September 28, 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 workforce charges in
the amount of approximately $0.5 million.
The Company reviews the above estimated costs and assumptions periodically
and reflects the effect of revisions in the period that they occur. Revisions to
estimated liabilities which arose as a result of the merger with Virata are
reflected as a reduction of intangible assets and revisions to estimated
liabilities that arose as a result of restructuring charges are reflected in the
restructuring and other charges line item on the Company's statements of
operations.
7. Related Party Transactions
As of September 28, 2003 and December 31, 2002, Communication Partners,
L.P. or other entities affiliated with Texas Pacific Group owned 4.6% and 11.7%,
respectively, of the Company's outstanding stock.
During the three and nine months ended September 28, 2003 the Company
recorded product sales of $0.3 million and $0.8 million, respectively, related
to goods sold to Paradyne Networks. During the three and nine months ended
September 29, 2002 the Company recorded product sales of $0.2 million and $1.6
million, respectively, related to goods sold to Paradyne Networks. At September
28, 2003 and December 31, 2002 the Company had a receivable from Paradyne
Networks in the amount of $0.2 million and $0.1 million.
During the three and nine months ended September 29, 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 nine months ended September 28, 2003, management of the Company
committed to a
13
plan and closed an international research and development component. During
the nine months ended September 29, 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:
Nine months Nine months
Ended Ended
(in thousands) September 28, 2003 September 29, 2002
------------------ ------------------
Net loss from operations of
discontinued businesses:
Video compression $ - $(3,168)
EmWeb - (871)
International research and
development component (2,038) (7,747)
------- -------
Net loss from operations of
discontinued businesses $ (2,038) $(11,786)
Net loss on sale/closure of
businesses (7,236) (3,887)
------- -------
Net loss from discontinued
operations $(9,274) $(15,673)
======== =========
14
The net loss on closure of the international research and development
component during the nine months ended September 28, 2003, of $7.2 million was
determined as follows:
Nine months ended
(in thousands) September 28, 2003
------------------
Workforce related $2,087
Facilities related 1,000
Asset impairment 2,001
Other closing costs and charges 2,148
-----
Net loss on closure of international
research and development component $7,236
======
The net loss from the sale of the video compression business during the
nine months ended September 29, 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:
Nine months Nine months
Ended Ended
(in thousands) September 28, September 29,
2003 2002
------------ ------------
Revenues:
Video compression $- $ 4,002
EmWeb - 443
International research and development component - -
====== ======
Total revenues $- $ 4,445
====== ======
9. Commitments and Contingencies
Texas Instruments, Inc. 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
15
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. On August 11, 2003 and
September 9, 2003, the Defendants answered the complaint, denied the Company's
claims and filed counterclaims against the Company alleging that the Company has
infringed certain of their ADSL patents. In addition to other relief, the
Defendants are seeking to collect damages from alleged past infringement and to
enjoin the Company from continuing to use the Defendant's 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 certain 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.
Agere Systems, Inc. On October 17, 2002, Agere Systems, Inc. ("Agere")
filed suit against Intersil in the District Court of Delaware. Agere alleges
that Intersil infringes certain of its U.S. patents. Intersil has counterclaimed
against Agere for infringement of certain patents, some of which are now owned
by the Company and licensed to Intersil for purposes of the suit. The parties
have filed a stipulated order adding the Company as a party to the suit. On July
22, 2003, Agere filed a separate suit against Intersil in the District Court of
Delaware alleging that Intersil infringes certain additional U.S. Patents. The
Company expects that it will be named as a defendant in the action. The Company
has the benefit of an indemnity from Intersil limiting its liability for
monetary damages related to these suits, but the possibility exists that the
court could issue an injunction against future affected sales of certain of the
Company's wireless products. The Company believes that the above litigation will
not have a material adverse effect on its business, financial condition, and
results of operations.
On October 30, 2002, Intersil and certain of its affiliated companies filed
a suit against Agere in the United States District Court for the District of
Philadelphia alleging that Agere misappropriated certain Medium Access Control
Wireless Local Area Network ("WLAN") technology. Intersil's action seeks an
injunction to prevent Agere, either alone or in cooperation with others, from
developing, making, and/or selling products that use Intersil's technology.
Agere has made similar counterclaims against Intersil and its affiliated
companies. As a result of its acquisition of the WLAN Group from Intersil and of
its Choice-Intersil Microsystems, Inc. subsidiary, which is a party to this
suit, the Company has become involved in this suit. The Company has the benefit
of an indemnity from Intersil limiting its liability for monetary damages, but
the possibility exists that the court could issue an injunction against future
affected sales of certain of the Company's wireless products. The Company
believes that the above litigation will not have a material adverse effect on
its business, financial condition, and results of operations.
IPO Litigation. 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 16
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
16
2000 (In re: Initial Public Offering Securities Litigation, No. 21 MC 92 (SAS)).
In June 2003, the issuers and plaintiffs reached a tentative settlement
agreement that would, among other things, result in the dismissal with prejudice
of all claims against the issuers and their officers and directors in this
litigation. The Company believes that it has sufficient insurance coverage to
cover the maximum amount that it may be responsible for under the proposed
settlement. A special committee of disinterested directors appointed by the
board of directors received and analyzed the settlement proposal and determined
that, subject to final documentation, the settlement proposal should be
accepted. Although the Company has approved this settlement proposal in
principle, it remains subject to a number of conditions, including approval by
the Court. In the event that the parties do not reach agreement on the final
settlement, the Company believes that its officers and/or directors have
meritorious defenses to the plaintiffs' claims and those defendants will defend
themselves vigorously.
The Company is also subject to various other inquiries or claims in
connection with intellectual property rights. These claims have been referred to
counsel, and they are in various stages of evaluation and negotiation. If it
appears necessary or desirable, 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 November 3, 2003, the Company and Conexant Systems, Inc. ("Conexant")
signed a definitive agreement to merge. Under the terms of the merger agreement,
shareholders of the Company will receive 1.198 shares of Conexant common stock
for each share of stock of the Company. Based on the fully diluted share counts
for the two companies as of market close on Friday, October 31, 2003, current
Conexant shareholders will own 62.75 percent and current shareholders of the
Company will own 37.25 percent of the combined company's shares. The transaction
is subject to customary closing conditions, including shareholder and regulatory
approvals, and is expected to be completed in the first quarter of calendar
2004.
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, risks related to GlobespanVirata's ability to
successfully integrate the WLAN Group into its existing business, the synergies
between the WLAN Group and GlobespanVirata, GlobespanVirata's ability to sell
and support the acquired Intersil WLAN Group products and to integrate those
Intersil employees it hires, customer implementation plans, risks of price
competition among DSL and WLAN chip set suppliers, risks of customer loss or
decreases in purchases by significant customers, the potential adverse effects
of our restructuring and reorganization efforts, risks of dependence upon third
party suppliers, 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 and WLAN chip
17
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, the successful completion of the proposed merger with
Conexant Systems, Inc. and the subsequent integration of the two companies, the
uncertainties of litigation and other risk factors described in this document,
in the "Risk Factors" contained in GlobespanVirata's Annual Report on Form 10-K
for the year ended December 31, 2002, 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.
We are a leading provider of integrated circuits and software for broadband
communications solutions for consumer, enterprise, personal computer and service
provider markets. We deliver complete system-level high-speed, cost-effective
and flexible DSL and wireless networking chip sets, software and reference
designs to leading global manufacturers of broadband access and wireless
networking equipment. Our products include broadband system-level solutions for
modems, routers, residential gateways, and DSLAMs, as well as a wide variety of
wireless networking chip sets and reference designs that are enabling a new
generation of wireless connectivity in notebooks, PDAs, digital cameras, MP3
players and other handheld networking appliances.
Recent Developments
On August 28, 2003, we acquired certain technology and employees of the
WLAN Group of Intersil Corporation ("Intersil"). The WLAN Group is a leading
supplier of high-speed wireless networking solutions, with the industry's
longest history of WLAN development and deployment. We paid Intersil $250.0
million in cash and issued 15,462,185 shares of common stock valued at $107.3
million. The acquisition of the WLAN Group was accounted for as a purchase and
has been included in our results of operations from the closing date.
On November 3, 2003, we signed a definitive agreement to merge with
Conexant Systems, Inc. Under the terms of the merger agreement, our shareholders
will receive 1.198 shares of Conexant common stock for each share of our common
stock. Based on the fully diluted share counts for the two companies as of
market close on Friday, October 31, 2003, current Conexant shareholders will own
62.75 percent and our current shareholders will own 37.25 percent of the
combined companies shares. The transaction is subject to customary closing
conditions, including shareholder and regulatory approvals, and is expected to
be completed in the first quarter of calendar 2004.
The following table presents our unaudited results from continuing
operations for the three and nine months ended September 28, 2003 and September
29, 2002. Our continuing operations are reported as a single business segment.
18
For the three months ended For the three months ended
(in millions) September 28 September 29 September 28, September 29
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net revenues $98.8 $47.4 $241.9 $177.7
Cost of sales 53.6 25.6 127.9 85.8
----- ----- ------ ------
Gross profit 45.2 21.8 114.0 91.9
----- ----- ------ ------
Operating expenses:
Research and development, including 29.7 30.1 76.7 116.3
non-cash compensation of $2.8
million and $8.3 million for the
three and nine months ended
September 28, 2003, respectively,
and $3.8 million and $24.6 million
for the three and nine months ended
September 29, 2002, respectively.
Selling, general and administrative, 11.9 11.4 31.6 39.7
including non-cash compensation of
$0.9 million and $2.8 million for
the three and nine months ended
September 28, 2003, respectively and
$0.4 million and $1.8 million for the
three and nine months ended September
29, 2002, respectively.
Amortization of intangible assets 7.8 5.6 17.7 27.3
Patent defense costs 0.5 - 0.5 -
Restructuring and other charges - 4.5 1.2 20.2
Impairment of goodwill and other
acquired intangible assets - - - 493.6
In-process research and development 26.0 - 26.0 -
---- ----- ----- -----
Total operating expenses 75.9 51.6 153.7 697.1
---- ----- ------ -----
Loss from operations (30.7) (29.8) (39.7) (605.2)
Interest and other income, net 0.3 (1.3) (0.8) (5.0)
----- ----- ----- -----
Loss from continuing operations
before income taxes (31.0) (28.5) (38.9) (600.2)
Provision (benefit) for income taxes 0.3 - (0.2) 0.3
----- ----- ----- ------
Net loss from continuing operations $(31.3) $(28.5) $(38.7) $(600.5)
======= ======= ======= ========
Results of operations for the three months ended September 28, 2003 and
September 29, 2002
Net Revenues. Our net revenues increased by 108.5% to $98.8 million during
the three months ended September 28, 2003 from $47.4 million in the three months
ended September 29, 2002. The increase in net revenues was primarily due to an
increase in the number of ports sold and revenues from our recently acquired
WLAN Group, which added $21.6 million of revenue from the date of acquisition.
The results of the WLAN Group since August 28, 2003 do not purport to be
indicative of results that may be obtained for any future period. These
increases were partially offset by declining average selling prices as compared
to the three months ended September 29, 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.
19
For the three months ended
September 28, 2003 September 29, 2002
------------------ ------------------
Net revenue $95.6 $36.8
Net revenue from previously 3.2 10.6
reserved products ----- -----
Total revenue 98.8 47.4
Cost of goods sold 53.6 25.6
----- -----
Gross profit $45.2 $21.8
----- -----
Gross profit % 45.8% 46.0%
----- -----
Gross profit excluding revenue from
previously reserved products and
cancellation revenue (non-GAAP) $42.0 $11.2
----- -----
Gross profit % excluding revenue from
previously reserved products and
cancellation revenue (non-GAAP) 43.9% 30.4%
----- -----
Our gross profit increased by 107.3% to $45.2 million in the three months
ended September 28, 2003 from $21.8 million in the three months ended September
29, 2002. Our gross profit percentage was 45.8% and 46.0% in the three months
ended September 28, 2003 and September 29, 2002, respectively. The increase in
gross profit from the three months ended September 29, 2002 to the three months
ended September 28, 2003 is primarily attributable to higher net revenues during
the three months ended September 28, 2003. The decrease in gross profit
percentage can be attributed to the sale of previously reserved products during
the three months ended September 29, 2002.
Excluding revenue from the sale of previously reserved products, our gross
profit and gross profit percentage was $42.0 million and 43.9% and $11.2 million
and 30.4% for the three months ended September 28, 2003 and September 29, 2002,
respectively. The increase in gross profit percentage can be attributed to
product mix and improvement in product costs. 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 ending December 31, 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 1.3% to $29.7 million in
the three months ended September 28, 2003 from $30.1 million in the three months
ended September 29, 2002. Included in research and development expenditures for
the three months ended September 28, 2003 and September 29, 2002 is $2.8 million
and $3.8 million, respectively, of non-cash compensation. The decrease in
non-cash compensation resulted from a decline in amortization of deferred
compensation resulting from our restructuring and reorganization plans.
Excluding the non-cash compensation, research and development expenditures
increased $0.6 million or 2.3%. The increase in research and development
expenses from the three months ended September 29, 2002 to the three months
ended September 28, 2003 is primarily attributable to an increase in variable
employee costs. Research and development expenses represented 30.1% (27.2%
excluding non-cash compensation) and 63.5% (55.5% excluding non-cash
compensation) of net revenues for the three months ended September 28, 2003 and
September 29, 2002, respectively. The presentation of research and development
20
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. We
expect our research and development expenses to increase as a result of the
acquisition of the WLAN Group.
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 increased 4.4% to
$11.9 million in the three months ended September 28, 2003 from $11.4 million
for the three months ended September 29, 2002. Included in selling, general and
administrative expenses for the three months ended September 28, 2003 and
September 29, 2002 is $0.9 million and $0.4 million, respectively, of non-cash
compensation. Excluding non-cash compensation, selling, general and
administrative expenses for the three months ended September 28, 2003 was
comparable to the three months ended September 29, 2002. Selling, general and
administrative expense represented 12.0% (11.1% excluding non-cash compensation)
and 24.1% (23.2% excluding non-cash compensation) of net revenues for the three
months ended September 28, 2003 and September 29, 2002, respectively. 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. We expect our selling,
general and administrative expenses to increase as a result of the acquisition
of the WLAN Group.
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 increase in dollar amount of amortization
expense is the result of the amortization of intangible assets resulting from
the acquisition of the WLAN Group. We expect the amortization of intangible
assets to increase as a result of the acquisition of the WLAN Group.
In process research and development. The amount allocated to in process
research and development ("IPR&D") of $26.0 million was expensed upon the
acquisition of the WLAN Group, as it was determined that the underlying projects
had not reached technical feasibility, had no alternative future use and
successful development was uncertain. In the allocation of the acquisition
purchase price to IPR&D, consideration was given to the following for the
projects under development at the time of the acquisition:
- - the present value of the forecasted cash flows and income that were
expected to result from the project;
- - the status of the project;
- - completion costs;
- - project risks;
- - the value of core technology; and
- - the stage of completion of the project.
In valuing core technology, the relative allocations to core technology and
IPR&D were consistent with the relative contribution of the projects. The
determination of the value of IPR&D was based on efforts completed as of the
date of the acquisition. The IPR&D projects were approximately 25% complete as
of the acquisition date and are expected to be completed by the fourth quarter
of 2004.
Interest and Other Income, Net. Interest income for the three months ended
September 28, 2003 was $1.7 million, offset by interest expense of $2.0 million,
resulting in net interest expense of $0.3 million. Interest income for the three
months ended September 29, 2002 was $3.4 million, net of interest expense of
$2.1 million, resulting in net interest income of $1.3 million. The decrease in
net interest income is attributable to the decrease in our cash and investments
as compared to September 29, 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
September 28, 2003 and September 29, 2002, respectively. The current provision
recorded reflects an effective tax rate of 0.8% and 0.0% for the three months
ended September 28, 2003 and September 29, 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.
21
Results of Operations for the nine months ended September 28, 2003 and
September 29, 2002
Net Revenues. Our net revenues increased by 36.1% to $241.8 million during
the nine months ended September 28, 2003 from $177.7 million in the nine months
ended September 29, 2002. The increase in net revenues was primarily due to an
increase in the number of ports sold and revenue from our recently acquired WLAN
Group partially offset by declining average selling prices as compared to the
nine months ended September 29, 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 nine months ended
September 28, 2003 September 29, 2002
------------------ ------------------
Net revenue $227.0 $158.9
Net revenue from previously
reserved products 14.8 18.8
----- -----
Total revenue 241.8 177.7
Cost of goods sold 127.9 85.8
----- -----
Gross profit $113.9 $91.9
----- -----
Gross profit % 47.1% 51.7%
----- -----
Gross profit excluding revenue from
previously reserved products (non-GAAP) $99.1 $73.1
----- -----
Gross profit % excluding revenue from
previously reserved products (non-GAAP) 43.7% 46.0%
----- -----
Our gross profit increased by 23.9% to $113.9 million in the nine months
ended September 28, 2003 from $91.9 million in the nine months ended September
29, 2002. Our gross profit percentage was 47.1% and 51.7% in the nine months
ended September 28, 2003 and September 29, 2002, respectively. The increase in
gross profit from the nine months ended September 29, 2002 to the nine months
ended September 28, 2003 is primarily attributable to higher net revenues during
the nine months ended September 28, 2003. The decrease in gross profit
percentage can be attributed to the sale of previously reserved products during
the nine months ended September 29, 2002 and a decrease in the average selling
price of our products, which exceeded product cost reductions.
Excluding revenue from the sale of previously reserved products, our gross
profit and gross profit percentage was $99.1 million and 43.7% and $73.1 million
and 46.0% for the nine months ended September 28, 2003 and September 29, 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 34.1%
to $76.7 million in the nine months ended September 28, 2003 from $116.4 million
in the nine months ended September 29, 2002. Included in research and
development expenditures for the nine months ended September 28, 2003
22
and September 29, 2002 is $8.3 million and $24.6 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 Technology, which resulted in a non-cash charge
during the nine months ended September 29, 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 $23.4
million or 25.5%. The $23.3 million decrease in research and development
expenses from the nine months ended September 29, 2002 to the nine months ended
September 28, 2003 is primarily attributable to the impact of our restructuring
and reorganization plans which reduced variable employee costs by approximately
$13.0 million and facility related fixed costs by approximately $4.0 million.
Research and development expenses represented 31.7% (28.3% excluding non-cash
compensation) and 65.5% (51.7% excluding non-cash compensation) of net revenues
for the nine months ended September 28, 2003 and September 29, 2002,
respectively. 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. We expect our
research and development expenses to increase as a result of the acquisition of
the WLAN Group.
Selling, General and Administrative. Our selling, general and
administrative expense decreased 20.4% to $31.6 million in the nine months ended
September 28, 2003 from $39.7 million for the nine months ended September 29,
2002. Included in selling, general and administrative expenses for the nine
months ended September 28, 2003 and September 29, 2002 is $2.8 million and $1.8
million, respectively, of non-cash compensation. Excluding non-cash
compensation, selling, general and administrative expenses decreased $9.0
million or 24.0%. The $9.0 million decrease in selling, general and
administrative expenses from the nine months ended September 29, 2002 to the
nine months ended September 28, 2003 resulted from the impact of our
restructuring and reorganization plans which reduced variable employee costs by
approximately $6.3 million. Selling, general and administrative expense
represented 13.1% (11.9% excluding non-cash compensation) and 22.3% (21.3%
excluding non-cash compensation) of net revenues for the nine months ended
September 28, 2003 and September 29, 2002, respectively. 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. We expect our selling, general and
administrative expenses to increase as a result of the acquisition of the WLAN
Group.
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 attributable to the lower base of amortizable
intangible assets due to the intangible asset impairment charge that was
recorded during the three months ended September 29, 2002. We expect our
amortization of intangible assets to increase as a result of the acquisition of
the WLAN Group.
Restructuring and Other Charges. We recorded restructuring and other
charges during the nine months ended September 28, 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.
23
The table below presents the liabilities associated with the 2002
Restructuring Charge as of December 31, 2002 and September 28, 2003,
respectively, including payments and adjustments made during the nine months
ended September 28, 2003, and the 2003 Restructuring Charge:
December 31, 2002 2003 Restructuring 2003 September 28, 2003
(in thousands) Restructuring Charges and Cash Restructuring
Liability Adjustments Payments Liability
----------------- ------------------ -------- ------------------
Workforce reduction $6,794 ($489) ($5,870) $ 435
Facilities consolidation 28,818 1,687 (5,879) 24,626
Other Charges 774 - (162) 612
------ ------ -------- -------
Total Charges $36,386 $1,198 ($11,911) $25,673
======= ====== ======== =======
Impairment of goodwill and other acquired intangible assets. During the nine
months ended September 29, 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 nine months ended September 29, 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.
In process research and development. The amount allocated to in process
research and development ("IPR&D") of $26.0 million was expensed upon
acquisition, as it was determined that the underlying projects had not reached
technical feasibility, had no alternative future use and successful development
was uncertain. In the allocation of the acquisition purchase price to IPR&D,
consideration was given to the following for the projects under development at
the time of the acquisition:
- - the present value of the forecasted cash flows and income that were
expected to result from the project;
- - the status of the project;
- - completion costs;
- - project risks;
- - the value of core technology; and
- - the stage of completion of the project.
In valuing core technology, the relative allocations to core technology and
IPR&D were consistent with the relative contribution of the projects. The
determination of the value of IPR&D was based on efforts completed as of the
date of the acquisition. The IPR&D projects were approximately 25% complete as
of the acquisition date and are expected to be completed by the fourth quarter
of 2004.
Interest and Other Income, Net. Interest income for the nine months ended
September 28, 2003 was $6.9 million, offset by interest expense of $6.0 million,
resulting in net interest income of $0.9 million. Interest income for the nine
months ended September 29, 2002 was $11.2 million, net of interest expense of
$6.2 million, resulting in net interest income of $5.0 million. The decrease in
net interest income is attributable to the decrease in our cash and investments
as compared to September 29, 2002 and lower rates of return.
Provision (benefit) for Income Taxes. We recorded a current provision for
income taxes of $0.7 million and a deferred benefit of $0.9 million during the
nine months ended September 28, 2003, resulting in a net tax benefit of $0.2
million. The deferred benefit resulted from the recognition of credits for
investment in
24
research in a foreign jurisdiction. The net benefit recorded reflects an
effective tax rate of 0.5% for the nine months ended September 28, 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 nine months ended
September 29, 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 nine months ended September 29, 2002. The difference between
the effective rate and the statutory rate of 35.0% relates primarily to
permanent differences resulting from our prior acquisitions and changes in the
valuation allowance.
Discontinued Operations. During the nine months ended September 28, 2003, we
committed to a plan and closed an international research and development
component. During the nine months ended September 29, 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 SFA0S 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:
Nine months Nine months
Ended Ended
September 28, 2003 September 29, 2002
------------------ ------------------
Net loss from operations of
discontinued businesses:
Video compression $ - $(3,168)
EmWeb - (871)
International research and
development component (2,038) (7,747)
------- -------
Net loss from operations of $ (2,038) $(11,786)
discontinued businesses ========= =========
Net loss on sale/closure of (7,236) (3,887)
Businesses ------- -------
Net loss from discontinued $(9,274) $(15,673)
Operations ========= =========
The net loss on closure of the international research and development
component during the nine months ended September 28, 2003 of $7.2 million was
determined as follows:
Nine months ended
(in thousands) September 28, 2003
------------------
Workforce related 2,087
Facilities related 1,000
Asset impairment 2,001
Other closing costs and charges 2,148
-----
Net loss on closure of international
research and development component $7,236
======
25
The net loss from the sale of the video compression business during the
nine months ended September 29, 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:
Nine months Nine months
Ended Ended
September 28, September 29,
2003 2002
---- ----
Revenues:
Video compression $ - $ 4,002
EmWeb - 443
International research and development component - -
Total revenues $ - $ 4,445
======= ========
Liquidity and Capital Resources
Total assets at September 28, 2003 were $804.8 million, an increase of
$81.8 million, or 11.3% from December 31, 2002 total assets of $723.0 million.
The increase from December 31, 2002 is primarily a result of the goodwill and
other intangible assets resulting from the purchase price allocation of the WLAN
Group acquisition, net of the loss incurred during the nine months ended
September 28, 2003, including continued amortization of intangible assets from
our acquisitions and other non-cash charges.
At September 28, 2003, we had $95.9 million in cash and cash equivalents
and short-term marketable securities and working capital of $120.8 million.
Additionally, we had $167.8 million in long-term marketable securities at
September 28, 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 used in operating activities was $18.1 million in the nine months
ended September 28, 2003, compared to net cash used in operating activities of
$62.6 million in the nine months ended September 29, 2002. The net cash used in
operating activities during the nine months ended September 28, 2003 was a
26
result of working capital changes and restructuring and other payments,
partially offset by cash provided from operations. The net cash used during the
nine months ended September 29, 2002 was primarily due to the net loss from
operations during the nine months ended September 29, 2002.
Net cash used in investing activities was $96.0 million during the nine months
ended September 28, 2003. The net cash used in investing activities was
primarily related to the cash paid for the acquisition of the WLAN Group of
$249.9 million, cash paid for accrued acquisition related costs of $5.4 million,
and capital expenditures of $1.6 million, offset by net proceeds on marketable
securities of $161.0 million. Net cash used in investing activities during the
nine months ended September 29, 2002 was primarily related to the purchase of a
facility held for sale of $34.9 million, purchases of property and equipment of
$4.9 million and cash paid for accrued acquisition related costs of $8.7
million, offset by net proceeds on marketable securities of $40.1 million and
cash received from the sale of the video compression business of $21.0 million.
Net cash provided by (used in) financing activities was $12.2 million and
$(35.2) million during the nine months ended September 28, 2003 and September
29, 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 nine months ended September 28, 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
September 28, 2003 are as follows:
Operating Leases
Included in
Capital Operating Restructuring and
(in thousands) Leases Leases Discontinued
------ ------ Operations
------------------
Years Ended December 31,
2003 $1 $1,289 $2,865
2004 6 4,707 10,298
2005 4 3,554 9,171
2006 - 3,469 7,867
2007 - 3,545 6,403
Thereafter - 25,463 4,057
------ ------ -----
Total minimum lease payments $11 $42,027 $40,661
======= =======
Less: amount representing interest (1)
---
Present value of net minimum lease payments 10
Less: current portion (5)
---
Long term capital lease obligations $5
==
Approximately $10.3 million of the operating lease commitments is payable
in periods beyond ten years. As of September 28, 2003, we had facility related
restructuring reserves of $35.0 million.
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.
27
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 September 28, 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 September 28, 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 September 28, 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.
Although we do not consider any actions that we have taken to be corrective
actions with regard to
28
significant deficiencies and material weaknesses which
are required to be disclosed, we have taken, and expect to continue to take,
steps to manage and improve our operations that may directly or indirectly
affect our internal controls over financial reporting. For example, we acquired
the WLAN Group on August 28, 2003 and continue to take steps to more fully
integrate this acquired business. Intersil provided certain administrative
support related to the WLAN Group since the date of the acquisition under a
transition services agreement, including its maintenance of a general ledger for
certain activities of this group through September 28, 2003.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Texas Instruments, Inc. 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. On August 11, 2003 and September 9, 2003, the Defendants
answered the complaint, denied the Company's claims and filed counterclaims
against the Company alleging that the Company has infringed certain of their
ADSL patents. In addition to other relief, the Defendants are seeking to collect
damages from alleged past infringement and to enjoin the Company from continuing
to use the Defendant's 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 certain 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.
Agere Systems, Inc. On October 17, 2002, Agere Systems, Inc. ("Agere")
filed suit against Intersil in the District Court of Delaware. Agere alleges
that Intersil infringes certain of its U.S. patents. Intersil has counterclaimed
against Agere for infringement of certain patents, some of which are now owned
by the Company and licensed to Intersil for purposes of the suit. The parties
have filed a stipulated order adding the Company as a party to the suit. On July
22, 2003, Agere filed a separate suit against Intersil in the District Court of
Delaware alleging that Intersil infringes certain additional U.S. Patents. The
Company expects that it will be named as a defendant in the action. The Company
has the benefit of an indemnity from Intersil limiting its liability for
monetary damages related to these suits, but the possibility exists that the
court could issue an injunction against future affected sales of certain of the
Company's wireless products. The Company believes that the above litigation will
not have a material adverse effect on its business, financial condition, and
results of operations.
On October 30, 2002, Intersil and certain of its affiliated companies filed
a suit against Agere in the United States District Court for the District of
Philadelphia alleging that Agere misappropriated certain Medium Access Control
Wireless Local Area Network ("WLAN") technology. Intersil's action seeks an
injunction to prevent Agere, either alone or in cooperation with others, from
developing, making, and/or selling products that use Intersil's technology.
Agere has made similar counterclaims against Intersil and its affiliated
companies. As a result of its acquisition of the WLAN Group from Intersil and of
29
its Choice-Intersil Microsystems, Inc. subsidiary, which is a party to this
suit, the Company has become involved in this suit. The Company has the benefit
of an indemnity from Intersil limiting its liability for monetary damages, but
the possibility exists that the court could issue an injunction against future
affected sales of certain of the Company's wireless products. The Company
believes that the above litigation will not have a material adverse effect on
its business, financial condition, and results of operations.
IPO Litigation. 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)). In June
2003, the issuers and plaintiffs reached a tentative settlement agreement that
would, among other things, result in the dismissal with prejudice of all claims
against the issuers and their officers and directors in this litigation. The
Company believes that it has sufficient insurance coverage to cover the maximum
amount that it may be responsible for under the proposed settlement. A special
committee of disinterested directors appointed by the board of directors
received and analyzed the settlement proposal and determined that, subject to
final documentation, the settlement proposal should be accepted. Although the
Company has approved this settlement proposal in principle, it remains subject
to a number of conditions, including approval by the Court. In the event that
the parties do not reach agreement on the final settlement, the Company believes
that its officers and/or directors have meritorious defenses to the plaintiffs'
claims and those defendants will defend themselves vigorously.
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.
30
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 Company filed four reports on Form 8-K and one report on Form 8-K/A
during the quarter ended September 28, 2003. Information regarding the date of
such reports and items reported on is as follows:
Date of Report Item Reported On
July 15, 2003 The announcement of the Company's
agreement to purchase the Wireless Networking
Product Group of Intersil Corporation.
July 21, 2003 Press release containing financial results of the
Company for the three and six months ended
June 29, 2003.
July 25, 2003 Filing to amend a previously filed Form 8-K to
include the Asset Purchase Agreement between the
Company and Intersil Corporation as an exhibit.
August 28, 2003 The consummation of the Company's acquisition of
the Wireless Networking Product Group of Intersil
Corporation.
September 12, 2003 The announcement of changes to the Company's
board of directors.
Items 2, 3, 4, and 5 are not applicable and have been omitted.
31
GLOBESPANVIRATA, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GLOBESPANVIRATA, INC.
Date: November 12, 2003 By: /s/ Robert McMullan
-------------------------
Robert McMullan
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Exhibit 31.1
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 report;
3. Based on my knowledge, the financial statements, and other
financial information included in this 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 report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the registrant and we have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
(b) [Intentionally Omitted]
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and present in this report our conclusions
about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal
quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect,
the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting, 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 and material weaknesses in the design
or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability
to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: November 12, 2003
/s/ Armando Geday
--------------------
Armando Geday
Chief Executive Officer
Exhibit 31.2
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 report;
3. Based on my knowledge, the financial statements, and other
financial information included in this 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 report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the registrant and we have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
(b) [Intentionally Omitted]
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and present in this report our conclusions
about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to
materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting, 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 and material weaknesses in the design
or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability
to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: November 12, 2003
/s/ Robert McMullan
-------------------
Robert McMullan
Chief Financial Officer
Exhibit 32.1
GLOBESPANVIRATA, INC.
Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of
Section 1350, Chapter 63 of Title 18, United States Code)
In connection with the filing of the Quarterly Report of GlobespanVirata,
Inc., a Delaware corporation (the "Company"), for the period ending September
28, 2003, as filed with the Securities and Exchange Commission on the date
hereof (the "Report"), the undersigned officer does hereby certify, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of
Section 1350, Chapter 63 of Title 18, United States Code), that:
1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: November 12, 2003 /s/ Armando Geday
-------------------------------------
Armando Geday
President and Chief Executive Officer
Date: November 12, 2003 /s/ Robert McMullan
-------------------------------------
Robert McMullan
Chief Financial Officer