<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
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 30, 1999
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
GlobeSpan, 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) Yes [X] No [ ], and (2) has been
subject to such filing requirements for the past 90 days. Yes [ ]No [X] .
The number of shares outstanding of the Registrant's Common Stock as of
November 4, 1999 was 19,290,468.
================================================================================
<PAGE> 2
GLOBESPAN, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Part I. Financial Information ........................................... i
Item 1. Condensed Balance Sheets as of September 30, 1999 and
December 31, 1998 ....................................... 1
Condensed Statements of Operations for the Three Months and
Nine Months Ended September 30, 1999 and 1998 ................... 2
Condensed Statements of Cash Flows for the Nine Months Ended
September 30, 1999 and 1998 ..................................... 3
Notes to Financial Statements ................................... 4
Item 2. Management's discussion and Analysis of Financial
Condition and Results of Operations ..................... 6
Part II Other Information ............................................... 22
Item 1. Legal Proceedings ....................................... 22
Item 2. Changes in Securities and Use of Proceeds ............... 22
Item 3. Defaults Upon Senior Securities ......................... 23
Item 4. Submission of Matters to a Vote of Security Holders ..... 23
Item 5. Other Information ....................................... 23
Item 6. Exhibits and Reports on Form 8-K ........................ 23
Signature ............................................................... 26
Exhibit Index ........................................................... 27
</TABLE>
i
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
GLOBESPAN, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 46,184 $ 12
Accounts receivable, less allowance for doubtful account
of $111 and $61, respectively ....................................... 6,466 3,823
Accounts receivable from affiliates ................................... 351 73
Inventories ........................................................... 5,184 912
Prepaid income taxes .................................................. 1,093 1,178
Prepaid expenses and other current assets ............................. 1,283 564
-------- --------
Total current assets ............................................. 60,561 6,562
Property and equipment, net ................................................ 6,070 6,680
Other assets ............................................................... 1,678 188
-------- --------
Total assets ........................................................ $ 68,309 $ 13,430
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under line of credit ....................................... $ 2 $ 2,466
Accounts payable ...................................................... 4,109 2,131
Accounts payable to affiliates ........................................ 80 327
Accrued expenses and other liabilities ................................ 5,260 1,482
Payroll and benefit related liabilities ............................... 4,316 2,519
Current portion of capital lease obligations .......................... 932 292
-------- --------
Total current liabilities ........................................ 14,699 9,217
Subordinated note payable to Communication Partners, L.P. ................. -- 5,000
Capital lease obligations, less current portion ........................... 477 506
-------- --------
Total liabilities .................................................... 15,176 14,723
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, par value $0.001; 10,000,000 shares
authorized; none issued and outstanding ............................. -- --
Common stock, par value $0.001; 100,000,000 shares authorized;
19,290,468 and 12,265,265 shares issued and outstanding, respectively 19 12
Stock purchase warrant ................................................ -- 3,654
Additional paid-in capital ............................................ 74,872 3,629
Notes receivable from stock sales ..................................... (7,420) (725)
Deferred stock compensation ........................................... (59) (76)
Accumulated deficit ................................................... (14,279) (7,787)
-------- --------
Total stockholders' equity (deficit) .............................. 53,133 (1,293)
-------- --------
Total liabilities and stockholders' equity (deficit) ............. $ 68,309 $ 13,430
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 4
GLOBESPAN, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
For three months For nine months
ended September 30, ended September 30,
------------------------------- -------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenues .............................. $ 17,032 $ 7,765 $ 35,107 $ 23,016
Cost of sales ........................... 6,584 2,328 12,721 6,488
Cost of sales related to
termination charge .................... -- -- 1,119 --
------------ ------------ ------------ ------------
Gross profit .............................. 10,448 5,437 21,267 16,528
------------ ------------ ------------ ------------
Operating Expenses
Research and development ................ 6,931 5,020 17,805 12,555
Selling, general and administrative ..... 4,328 3,022 10,206 7,021
Amortization and other .................. -- 83 -- 583
------------ ------------ ------------ ------------
Total operating expenses .................. 11,259 8,125 28,011 20,159
------------ ------------ ------------ ------------
Loss from operations ...................... (811) (2,688) (6,744) (3,631)
Interest (expense) income, net .......... 553 (48) 253 (20)
------------ ------------ ------------ ------------
Loss before income taxes .................. (258) (2,736) (6,491) (3,651)
Income tax (benefit) .................... -- (1,008) -- (1,261)
------------ ------------ ------------ ------------
Net loss .................................. $ (258) $ (1,728) $ (6,491) $ (2,390)
Preferred stock deemed dividend
and accretion ........................... -- -- (3,466) --
------------ ------------ ------------ ------------
Net loss attributable to
common stockholders ..................... $ (258) $ (1,728) $ (9,957) $ (2,390)
============ ============ ============ ============
Basic and diluted net loss per
share attributable to common
shareholders ............................ $ (0.01) $ (0.15) $ (0.68) $ (0.20)
============ ============ ============ ============
Weighted average shares of
common stock outstanding
used in computing basic
and diluted net loss per share .......... 18,465,506 11,908,676 14,650,418 11,840,487
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 5
GLOBESPAN, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOW (USED IN) OPERATING ACTIVITIES
Net loss ................................................................ $ (6,491) $ (2,390)
Adjustments to reconcile net loss to cash (used in) operating activities:
Provision for bad debts ............................................. 50 12
Provision for inventory obsolescence ................................ -- 95
Amortization and depreciation ....................................... 2,492 2,158
Changes in assets and liabilities:
(Increase) decrease in accounts receivables ....................... (2,971) 2,412
(Increase) in inventories ......................................... (4,272) (1,154)
(Increase) in prepaid expenses and other assets ................... (2,244) (2,656)
Increase (decrease) in accounts payable ........................... 1,731 (155)
Increase in accrued expenses and other
current liabilities ............................................... 5,575 1,570
-------- --------
Net cash (used in) operating activities ............................. (6,130) (108)
-------- --------
CASH FLOWS (USED IN) INVESTING ACTIVITIES:
Capital expenditures .................................................... (799) (3,693)
-------- --------
Net cash (used in) investing activities ............................. (799) (3,693)
-------- --------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
(Repayments of) proceeds from borrowings under subordinated note payable (5,000) 2,014
(Repayments of) proceeds from borrowings under line of credit ........... (2,464) 964
Proceeds from issuance of common stock, net ............................. 49,750 42
Proceeds from issuance of preferred stock, net .......................... 11,150 --
Proceeds from repayment of notes receivable ............................. -- --
Repayments of capital lease obligations ................................. (335) (19)
-------- --------
Net cash provided by financing activities ........................... 53,101 3,001
-------- --------
Net increase (decrease) in cash and cash equivalents .................... 46,172 (800)
Cash and cash equivalents at beginning of period ........................ 12 875
-------- --------
Cash and cash equivalents at end of period .............................. $ 46,184 $ 75
======== ========
Supplemental noncash financing activities:
Notes receivable from sale of stock ..................................... 6,695 375
======== ========
Forgiveness of subordinated note payable ................................ 100 --
======== ========
Capital Lease Borrowings ................................................ 611 200
======== ========
</TABLE>
See Note 1 regarding conversion of Series A preferred stock into common
stock.
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 6
GLOBESPAN, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
GlobeSpan, Inc. ("GlobeSpan" or the "Company") is a leading worldwide
developer of advanced digital subscriber line (DSL) integrated circuits which
enable high-speed data transmission over the existing network of copper
telephone wires known as the local loop. GlobeSpan sells integrated circuits as
chip sets to manufacturers of DSL equipment for incorporation into products
which are sold to telecommunications service providers and end users.
In June 1999, GlobeSpan completed an initial public offering of 3,250,000
shares of common stock resulting in net proceeds, after deducting underwriting
commissions, of approximately $45.3 million. The underwriters' additional 15%
over-allotment option (487,500 shares of common stock) exercised in July 1999
resulted in net proceeds, after deducting underwriting commissions, of $6.8
million. The net proceeds of the initial public offering were used to retire
approximately $5.0 million of subordinated long-term debt to Communication
Partners, L.P., a related party, to loan Mr. Geday, president and CEO,
approximately $2.2 million in connection with the early exercise of his options
to purchase GlobeSpan common stock and the payment of the resulting withholding
taxes, and for working capital. Upon the closing of the initial public offering,
all outstanding shares of Series A preferred stock, issued in May 1999 for $12.0
million, converted into shares of common stock on a one for one basis. In
addition, the outstanding warrant to purchase common stock issued to Lucent
Technologies was net exercised for 724,500 shares of common stock.
Unaudited Interim Financial Statement
The accompanying unaudited financial statements have been prepared by
GlobeSpan 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, 1998 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 GlobeSpan's Registration Statement on Form S-1, as amended, filed
with the Securities and Exchange Commission on June 23, 1999 (the "Registration
Statement"). Results for the interim periods are not necessarily indicative of
results for the entire fiscal year.
Reverse Stock Split
The Board of Directors effected a one-for-three reverse stock split
concurrent with the initial public offering effective June 21, 1999. The Board
of Directors also approved the adjustment of par value to $0.001 per share. The
share information in the accompanying financial statements has been
retroactively restated to reflect the effect of this reverse stock split for all
periods presented.
Earnings Per Share
The Company has adopted Statement of Financial Accounting Standards No.
128, Earnings per Share ("FAS 128"), which requires the presentation of basic
earnings per share ("Basic EPS") and diluted earnings per share ("Diluted EPS")
by all entities that have publicly traded common stock or potential common
stock. FAS 128 also requires the presentation of earnings per share by an entity
that has made a filing or is in the process of filing with a regulatory agency
in preparation for the sale of those securities in a public market. Basic EPS is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding during the period. Diluted EPS gives
effect to all dilutive potential common shares outstanding during the period.
The computation of Diluted EPS does not assume conversion, exercise or
contingent exercise of securities that would have an anti-dilutive effect on
earnings. The dilutive effect of the outstanding stock warrants and options was
computed using the treasury stock method.
As of September 30, 1999 and 1998, the Company had outstanding options and
warrants to purchase an aggregate of 2,311,384 and 1,908,208 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.
4
<PAGE> 7
Revenue Concentration
Three customers accounted for 48.9%, 9.3% and 4.9% of net revenues in the
three months ended September 30, 1999 . For the three months ended September 30,
1998, three customers accounted for 47.2%, 10.5% and 6.8% of net revenues,
respectively. For the nine months ended September 30, 1999 three customers
accounted for 46.1%, 7.7% and 7.2% of net revenues. In 1998, three customers
accounted for 44.2%, 17.0% and 11.2% of net revenues.
Revenues by geographic region for the three months ended September 30,
1999 and 1998 and for the nine months ended September 30, 1999 and 1998 were as
follows:
<TABLE>
<CAPTION>
For three months For nine months
ended September 30, ended September 30,
----------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues:
United States $ 7,022 $ 5,443 $ 18,417 $ 16,804
Europe 1,215 1,098 3,676 3,315
Mexico/Latin America 3,267 -- 4,726 71
Asia 5,540 867 8,156 2,380
Australia (12) 357 132 446
-------- -------- -------- --------
$ 17,032 $ 7,765 $ 35,107 $ 23,016
======== ======== ======== ========
</TABLE>
2. RELATED PARTY TRANSACTIONS
In March 1999, the Company and Paradyne Corporation agreed to terminate
the Cooperative Development Agreement. In connection with such termination
agreement, the Company agreed to pay Paradyne an aggregate of $1.5 million, less
the amounts previously paid of approximately $0.3 million (or approximately $1.2
million) to terminate the July discount pricing arrangement with Paradyne
Corporation. Such payment was made in July 1999 and was charged to cost of sales
during the three months ended March 31, 1999. In addition, GlobeSpan and
Paradyne Corporation as part of the Termination Agreement affirmed that the
earlier technology license provisions of the Cooperative Development Agreement
were never implemented. In conjunction with the signing of the Termination
Agreement, GlobeSpan and Paradyne Corporation also entered into a four-year
Supply Agreement which gave Paradyne Corporation preferential pricing and other
terms in connection with the sale by GlobeSpan of products to Paradyne
Corporation. In addition, under the terms of the Supply Agreement, GlobeSpan is
required to honor Paradyne Corporation's orders for GlobeSpan's products in
quantities at least consistent with Paradyne Corporation's past ordering
practices and must afford Paradyne Corporation at least the same priority for
Paradyne Corporation's orders as GlobeSpan affords its other similarly situated
customers. GlobeSpan also granted Paradyne Corporation a standard customer
immunity under GlobeSpan's intellectual property rights with respect to any of
Paradyne Corporation's products which incorporate GlobeSpan's products. Net
revenues for the three months ended September 30, 1999 and 1998 were $1.6
million and $0.2 million, respectively, and for the nine months ended September
30, 1999 and 1998 were $2.7 million and $0.7 million, respectively.
3. LOAN TO OFFICER
On June 16, 1999, the Company loaned approximately $2.2 million to Armando
Geday, its president and CEO, in connection with the purchase of approximately
489,060 shares of the Company's common stock and the payment of withholding
taxes for the income realized on the exercise of the underlying stock options.
The note is a full recourse note to the borrower, is collateralized by the
stock, bears interest at the rate of 5.37% per annum and is payable upon the
earlier of the fifth anniversary of the note, or 30 days following the
termination of employment.
4. PREFERRED STOCK DEEMED DIVIDEND AND ACCRETION
On May 6, 1999, the Company completed the sale of an aggregate 1,461,454
shares of Series A preferred stock and warrants to purchase an aggregate 300,000
shares of common stock for gross proceeds of $12.0 million. Since the issuance
included a non-detachable conversion feature to common stock at the initial
public offering of the Company, that was "in-the-money" at the date of issuance
and was immediately exercisable, the Company recognized a one-time charge of
5
<PAGE> 8
approximately $3.5 million for the beneficial conversion feature attributable to
the common shareholders and accretion charges in the three months ended June 30,
1999. See Note 1 of Notes to Financial Statements.
5. TERMINATION OF BANKAMERICA BUSINESS CREDIT LINE OF CREDIT
Effective September 30, 1999, a termination agreement and mutual release
was signed by BankAmerica Business Credit and the Company with regard to a $5.0
million revolving line of credit (the "Credit Line"), which bore interest at the
bank's prime rate plus 1.5%. As of September 30, 1999, there was no outstanding
balance under this credit line. The Credit Line contained certain financial
covenants and restrictions as to various matters including our ability to pay
cash dividends or to effect mergers or acquisitions, incur certain other
indebtedness or to make certain investments without the bank's prior approval.
The Company was in compliance with such financial covenants and restrictions at
the time of termination of the agreement. Borrowings under the Credit Line were
collateralized by substantially all of the Company's assets. The Credit Line was
scheduled to expire in May 2003.
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 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. GlobeSpan's actual results and the timing of certain
events may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such a discrepancy include,
but are not limited to, those discussed in "Other Factors Affecting Operating
Results, Liquidity and Capital Resources" below, as well as Risk Factors
included in the Registration Statement. All forward-looking statements in this
document are based on information available to GlobeSpan as of the date hereof
and GlobeSpan assumes no obligation to update any such forward-looking
statements.
<TABLE>
<CAPTION>
For Three Months For Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net revenues ................................... 100.0% 100.0% 100.0% 100.0%
------------------------------------------------
Cost of sales .................................. 38.7 30.0 36.2 28.2
Cost of sales related to termination charge .... -- -- 3.2 --
------------------------------------------------
Gross profit ................................ 61.3 70.0 60.6 71.8
------------------------------------------------
Operating expenses
Research and development .................... 40.7 64.6 50.7 54.5
Selling, general and administrative ......... 25.4 38.9 29.1 30.5
Amortization and other ...................... -- 1.1 -- 2.5
------------------------------------------------
Total operating expenses ............... 66.1 104.6 79.8 87.6
------------------------------------------------
Loss from operations ........................... (4.8) (34.6) (19.2) (15.8)
Interest income (expense), net ................. 3.2 (0.6) 0.7 (0.1)
------------------------------------------------
Loss before income taxes ....................... (1.5) (35.2) (18.5) (15.9)
(Benefit) for income taxes ..................... -- (13.0) -- (5.5)
------------------------------------------------
Net loss ....................................... (1.5)% (22.3)% (18.5)% (10.4)%
================================================
</TABLE>
6
<PAGE> 9
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Net Revenues Our net revenues were $17.0 million and $7.8 million in the
three months ended September 30, 1999 and 1998, respectively. This amount
represents an increase of 119.3%. This increase in net revenues was primarily
due to the increases in unit volume shipments to existing customers, expansion
of our customer base and the introduction of new products. Net revenues from
international customers represented 58.8% and 29.9% of our net revenues in the
three months ended September 30, 1999 and 1998, respectively. Net revenues from
international customers increased as a percentage of net revenues as a result of
greater shipments to existing customers in the Asian pacific rim, as well as the
use of outside manufacturers located in the Asian pacific rim and Mexico by
domestic customers. We expect that revenues generated from international
customers will continue to account for a significant percentage of our net
revenues.
Cost of Sales and Gross Profit. Our gross profit was $10.4 million and
$5.4 million in the three months ended September 30, 1999 and 1998,
respectively. This amount represents an increase of 92.2%. Our gross margin was
61.3% and 70.0% in the three months ended September 30, 1999 and 1998,
respectively. The decrease in gross margin was due to lower average selling
prices and product mix. The increase in gross profit dollars was the result of
higher unit sales. We expect that gross margin may decrease due to a number of
factors, including pressures on average selling prices, product mix, and
customer mix.
Research and Development. Our research and development expenses were $6.9
million and $5.0 million in the three months ended September 30, 1999 and 1998,
respectively. This amount represents an increase of 38.1%. Research and
development expense represented 40.7% and 64.6% of net revenues for the three
months ended September 30, 1999 and 1998, respectively. The increase in dollars
resulted from an increase in development efforts in advance of anticipated
revenues from such efforts. In addition, we added new personnel and related
support and incurred higher amounts of non-recurring engineering expenses
related to new products. Our research and development expense may increase due
to planned increases in personnel, prototyping costs and depreciation resulting
from increased capital investment.
Selling, General and Administrative. Our selling, general and
administrative expense was $4.3 million and $3.0 million in the three months
ended September 30, 1999 and 1998, respectively. This amount represents an
increase of 43.2%. Selling, general and administrative expense represented 25.4%
and 38.9% of net revenues for the three months ended September 30, 1999 and
1998, respectively. The increase in dollars resulted from the addition of sales,
marketing and administrative personnel and related expenses, increased
commissions and administrative costs. Our selling, general and administrative
expense may increase due to higher commissions and administrative costs.
Amortization and Other. Amortization of patents was provided on a
straight-line basis commencing in August 1996 through July 1998. Our expense for
amortization of patents was $0.1 million in the three months ended September 30,
1998.
Other income (expense), net. Interest income for the three months ended
September 30, 1999 was $0.6 million. Interest expense for the three months ended
September 30, 1998 was immaterial. The increased interest income resulted from
investment of proceeds from the Company's initial public offering.
Income Taxes. We use the asset and liability method of accounting for
income taxes prescribed by Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (see Note 8 of Notes to Financial Statements). We
recorded an income tax benefit during the three months ended September 30, 1998
primarily reflecting a loss carryback. Since we generated a loss in the three
months ended September 30, 1999 and had a loss carryforward for the year ended
December 31, 1998, we did not record an income tax benefit for the three months
ended September 30, 1999.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Net Revenues Our net revenues were $35.1 million and $23.0 million in the
nine months ended September 30, 1999 and 1998, respectively. This amount
represents an increase of 52.5%. This increase in revenues was primarily due to
the increases in unit volume shipments to existing customers, expansion of our
customer base and the introduction of new products. Net revenues from
international customers represented 47.5% and 27.2% of our net revenues in the
nine months ended September 30, 1999 and 1998, respectively. Net revenues from
international customers increased as a percentage of net revenues as a result of
greater shipments to existing customers in the Asian pacific rim as well as the
use of outside
7
<PAGE> 10
manufacturers located in the Asian pacific rim and Mexico by domestic customers.
We expect that revenues generated from international customers will continue to
account for a significant percentage of our net revenues.
Cost of Sales and Gross Profit. Our gross profit was $21.3 million and
$16.5 million in the nine months ended September 30, 1999 and 1998,
respectively. This amount represents an increase of 28.7%. Our gross margin was
60.6%, and 71.8% in the nine months ended September 30, 1999 and 1998,
respectively. The decrease in gross margin was related to a charge incurred in
March 1999 for the termination of a royalty agreement, lower average selling
prices and product mix. Without this termination charge, our gross margin would
have been 63.8% in the nine months ended September 30, 1999. We expect that
gross margin may decrease due to a number of factors, including, but not limited
to pressures on average selling prices, product mix and customer mix.
Research and Development. Our research and development expenses were $17.8
million and $12.6 million in the nine months ended September 30, 1999 and 1998,
respectively. This amount represents an increase of 41.8%. Research and
development expense represented 50.7% and 54.5% of net revenues for the nine
months ended September 30, 1999 and 1998, respectively. The increase in dollars
resulted from an increase in development efforts in advance of anticipated
revenue from such efforts. In particular, we added new personnel and related
support and incurred higher amounts of non-recurring engineering expenses
related to new products. Our research and development expense may increase due
to planned increases in personnel, prototyping costs and depreciation resulting
from increased capital investment.
Selling, General and Administrative. Our selling, general and
administrative expenses were $10.2 million and $7.0 million in the nine months
ended September 30, 1999 and 1998, respectively. This amount represents an
increase of 45.4%. Selling, general and administrative expense represented 29.1%
and 30.5% of net revenues for the nine months ended September 30, 1999 and 1998,
respectively. The increases in dollars resulted from the addition of sales,
marketing and administrative personnel and related expenses, increased
commissions and administrative costs. Our selling, general and administrative
expense may increase due to higher commissions and administrative costs.
Amortization and Other. Amortization of patents was provided on a
straight-line basis commencing in August 1996 through July 1998. Our expense for
amortization of patents was $0.6 million in the nine months ended September 30,
1998.
Other income (expense), net. Interest income for the nine months ended
September 30, 1999 was $0.3 million. Interest expense for the nine months ended
September 30, 1999 was immaterial. The increased interest income resulted from
investment of proceeds from the Company's initial public offering.
Income Taxes. We use the liability method of accounting for income taxes
prescribed by Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" (see Note 8 of Notes to Financial Statements). We recorded an
income tax benefit for the three months ended June 30, 1998 primarily reflecting
a loss carryback. Since we generated a loss in the nine months ended September
30, 1999 and had a loss carryforward for the year ended December 31, 1998, we
did not record an income tax benefit for the nine months ended September 30,
1999.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations from initial capital, borrowings on our
lines of credit and the recent sale of Series A preferred stock and common stock
through our initial public offering on June 23, 1999. As of September 30, 1999,
we had working capital of approximately $45.9 million and $46.2 million in cash
and cash equivalents.
Net cash used in operating activities was $6.1 million in the nine months
ended September 30, 1999. Net cash used in operating activities was $0.1 million
in the nine months ended September 30, 1998. The increase in 1999 from 1998 was
primarily due to greater net loss.
Net cash used in investing activities was $0.8 million and $3.7 million in
nine months ended September 30, 1999 and 1998, respectively, and related
primarily to lower capital expenditures to date. We may increase our capital
expenditures in 1999.
Cash provided from financing activities was $53.1 million in the nine
months ended September 30, 1999, and was provided by the net proceeds of sales
of preferred and common shares of $11.1 million and $49.8 million, respectively.
8
<PAGE> 11
Cash provided from financing activities was $3.0 million in the nine months
ended September 30, 1998, and was provided by borrowings under a Credit Line and
Subordinated Note. Effective September 30, 1999 a termination agreement and
mutual release was signed by BankAmerica Business Credit and the Company with
regard to a $5.0 million revolving line of credit (the "Credit Line") which bore
interest at the bank's prime rate plus 1.5%. As of September 30, 1999 there was
no outstanding balance under this credit line. The Credit Line contained certain
financial covenants and restrictions as to various matters including our ability
to pay cash dividends or to effect mergers or acquisitions, incur certain other
indebtedness or to make certain investments without the bank's prior approval.
We were in compliance with such financial covenants and restrictions at the time
of termination of the agreement. As of September 30, 1999 we had a subordinated
borrowings line from Communication Partners, L.P. (the "Subordinated Line") of
up to $10.0 million bearing interest at prime rate plus 1.0%. As of September
30, 1999 there was no outstanding balance under this subordinated line. Five
million dollars of the Subordinated Line expires on March 31, 2000 and $5.0
million in May 2003. We have no plans to borrow under the Subordinated Line at
this time. We used a portion of the proceeds of the initial public offering to
repay all outstanding indebtedness under both the Credit Line and the
Subordinated Line.
We currently anticipate that the net proceeds from our initial public
offering, together with our current cash, cash equivalents, and the Subordinated
Line, will be sufficient to meet our anticipated cash needs for working capital
and capital expenditures for at least the next 12 months. Thereafter, cash
generated from operations, if any, may not be sufficient to satisfy our
liquidity requirements. We may therefore need to sell additional equity or raise
funds by other means. Any additional financings, if needed, might not be
available on reasonable terms or at all. Failure to raise capital when needed
could seriously harm our business and operating results. If additional funds are
raised through the issuance of equity securities, the percentage of ownership of
our stockholders would be reduced. Furthermore, these equity securities might
have rights, preferences or privileges senior to our common stock.
YEAR 2000 ISSUE
The "Year 2000 Issue" refers generally to the problems that some software
may have in determining the correct century of the year. Many existing
electronic systems, including computer systems, use only the last two digits to
refer to a year. Therefore, these systems may recognize a date using "00" as
1900 rather than the year 2000. If not corrected, these electronic systems could
fail or create erroneous results when addressing dates on and after January 1,
2000.
In assessing the effect of the Year 2000 Issue on GlobeSpan, we determined
that we need to evaluate four general areas:
- Supplier relationships;
- Internal infrastructure;
- Products sold to customers; and
- Other third-party relationship.
Supplier Relationships. We are a "fabless" semiconductor company and
therefore rely on third party manufacturers to manufacture our chip sets. To
date, Lucent Technologies manufactures substantially all our chip sets. If
Lucent Technologies is affected by the Year 2000 Issue, our supply of chip sets
could be delayed or eliminated. Any disruption in our supply of chip sets from
Lucent Technologies would seriously harm our business, financial condition and
results of operations. We are currently seeking assurances from Lucent
Technologies that their manufacturing of our chip sets will be unaffected by the
Year 2000 Issue but have not received such assurances to date.
Internal Infrastructure. The Year 2000 Issue could also affect our
internal systems, including both our information technology and non-information
technology systems. We have initiated an assessment of our material internal
information technology systems, including third-party software and hardware
technology. Based upon representations received from these third-party software
and hardware suppliers, we do not believe that our material internal information
technology systems will be affected by the Year 2000 Issue. We have also
initiated an assessment of our non-information technology internal systems, such
as our test facility. Based on our preliminary assessment, we do not believe
that our material non-information technology internal systems will be affected
by the Year 2000 Issue. However, we may experience serious
9
<PAGE> 12
unanticipated problems and costs caused by undetected errors or defects in the
technology used in our internal information technology and non-information
technology systems.
Products Sold to Customers. Our chip sets and DSL reference design guides
do not contain two digit date codes and therefore are generally unaffected by
the Year 2000 Issue. However, once shipped, our chip sets are incorporated into
system and board-level products which we do not develop. The performance of our
chip sets could be affected if a Year 2000 Issue exists in a different component
of customer's product. We have not, and will not, assess the existence of these
potential problems in our customers' products.
We do not currently have any information concerning the Year 2000
compliance status of our customers. Our current or future customers may incur
significant expenses to achieve Year 2000 compliance. If our customers are not
Year 2000 compliant, they may experience significant costs to remedy problems,
or they may face litigation costs. In either case, Year 2000 issues could reduce
or eliminate the budgets that current or potential customers could have for
purchases of our products and services. As a result, our business, results of
operations or financial condition could be materially adversely affected.
Other Third-Party Relationships. We rely on outside vendors for utilities
and telecommunication services as well as climate control, building access and
other infrastructure services. We are not capable of independently evaluating
the Year 2000 compliance of the systems utilized to supply these services. We
cannot assure you that these suppliers will resolve any or all Year 2000 Issues
with these systems before the occurrence of a material disruption to our
business. Any failure of these third parties to resolve Year 2000 Issues with
their systems in a timely manner could have a material adverse effect on our
business, financial condition or results of operations.
We have not developed a contingency plan to address situations that may
result if we are unable to achieve Year 2000 readiness of our critical
operations, and we do not plan to do so in the future. Any investigations we
have undertaken with respect to Year 2000 Issues have been funded from available
cash, and these costs have not been separately accounted for. To date, these
costs have not been significant.
OTHER FACTORS AFFECTING OPERATING RESULTS, LIQUIDITY AND CAPITAL RESOURCES
We Have Only Been Operating as an Independent Company Since August 1996, and
This Limited Operating History Makes It Difficult to Evaluate Our Prospects
We have only been operating as an independent company since August 1996,
and we only began shipping chip sets in volume in January 1997. We have not had
a long history of generating significant revenues. Many of our chip sets have
only recently been introduced. As a result of our limited operating history, we
have limited historical financial data that can be used in evaluating our
business and its prospects and in projecting future operating results. You must
consider our prospects in light of the risks, expenses and difficulties we might
encounter because we are at an early stage of development in a new and rapidly
evolving market.
Our Quarterly Operating Results Will Fluctuate Because of Many Factors, and May
Cause Our Stock Price to Fluctuate
Our revenues and operating results have varied in the past and are likely
to vary in the future from quarter to quarter. As a result, we believe that
period-to-period comparisons of our operating results are not necessarily
meaningful. Investors should not rely on the results of any one quarter or
series of quarters as an indication of our future performance.
It is likely that in some future quarter or quarters our operating results
will be below the expectations of public market analysts or investors. In such
event, the market price of our common stock may decline significantly.
These variations in our operating results will likely to be caused by
factors related to the operation of our business, including:
- Variations in the timing and size of chip set orders from, and
shipments to, our existing and new customers;
- Loss of a significant customer, or a significant decrease in purchases
by significant customers, such as Cisco Systems or Paradyne
Corporation;
10
<PAGE> 13
- The mix of chip sets shipped with different gross margins, including
the impact of volume purchases from our large customers at discounted
average selling prices;
- The availability of foundry capacity and the expense of having our
chip sets manufactured by Lucent Technologies or other foundries in
the future;
- The timing and size of expenses, including operating expenses and
expenses of developing new products and product enhancements; and
- Our ability to attract and retain key personnel.
These variations will also be caused by factors related to the development
of the DSL market and the competition we face from other DSL chip set suppliers,
including:
- The timing and rate of deployment of DSL services by
telecommunications service providers;
- The timing and rate of deployment of alternative high-speed data
transmission technologies, such as cable modems and high-speed
wireless data transmission;
- Anticipated decreases in per unit prices as competition among DSL chip
set suppliers increases; and
- The level of market penetration of our chips sets relative to those of
our competitors.
These variations will also be caused by other factors affecting our
business, many of which are substantially outside of the control of our
management, including:
- Costs associated with future litigation, including litigation relating
to the use or ownership of intellectual property;
- Acquisition costs or other non-recurring charges in connection with
the acquisition of companies, products or technologies;
- Foreign currency and exchange rate fluctuations which may make our
dollar-denominated products more expensive in foreign markets or could
expose us to currency rate fluctuation risks if our sales become
denominated in foreign currencies; and
- General global economic conditions which could adversely affect sales
to our customers.
We Expect that Price Competition Among DSL Chip Set Suppliers and Volume
Purchases by Large Customers Will Reduce Our Gross Margins in the Future
We expect that price competition among DSL chip set suppliers and volume
purchases of our chip sets at discounted prices will reduce our gross margins in
the future. We anticipate that average per unit selling prices of DSL chip sets
will continue to decline as product technologies mature. Since we do not
manufacture our own products, we may be unable to reduce our manufacturing costs
in response to declining average per unit selling prices. Many of our
competitors are larger with greater resources and therefore may be able to
achieve greater economies of scale and would be less vulnerable to price
competition.
Further, we expect that average per unit selling prices of our chip sets
will decrease in the future due to volume discounts to our large customers.
These declines in average per unit selling prices will generally lead to
declines in gross margins for these products.
We Have a History of Losses, and We Expect to Incur Losses in the Future
Our failure to significantly increase our revenues would result in
continuing losses. We incurred net losses of $0.8 million in the five months
ended December 31, 1996, earned net income of $0.8 million in 1997 and incurred
net losses of
11
<PAGE> 14
$7.8 million in 1998 and $7.5 million in the nine months ended September 30,
1999. We expect to incur net losses for the foreseeable future, and these losses
may be substantial. Further, we expect to incur substantial negative cash flow
in the future. Because of continuing substantial capital expenditures and
product development, sales, marketing and administrative expenses, we will need
to generate significant quarterly revenues to achieve profitability and positive
cash flow. Even if we do achieve profitability and positive cash flow, we may
not be able to sustain or increase profitability or cash flow on a quarterly or
annual basis.
The Loss of One or More of Our Key Customers Would Result in a Loss of a
Significant Amount of Our Revenues
A relatively small number of customers account for a large percentage of
our net revenues. Our business will be seriously harmed if we do not generate as
much revenue as we expect from these customers, or experience a loss of any of
our significant customers, particularly Cisco Systems, or suffer a substantial
reduction in orders from such customers. In the five months ended December 31,
1996, the years ended December 31, 1997 and 1998 and the nine months ended
September 30, 1999, our customers who individually represented at least five
percent of our net revenues accounted for 85.5%, 72.6%, 70.1% and 61.0%,
respectively, of our net revenues. In 1996, our top three customers were Lucent
Technologies, LG Information & Communications and Ascom Hasler AG, which
accounted for 27.2%, 15.9% and 12.0% of our net revenues, respectively. In 1997,
our top three customers were LG Information & Communications, Ascom Hasler AG
and Westell Technologies, which accounted for 21.4%, 12.5% and 9.6% of our net
revenues, respectively. In 1998, our top three customers were Cisco Systems, NEC
Corporation and Ascom Hasler AG, which accounted for 48.3%, 12.6% and 9.2% of
our net revenues, respectively. In the nine months ended September 30, 1999, our
top three customers were Cisco Systems, Paradyne Corporation, and Ascom Hasler
AG, which accounted for 46.1%, 7.7% and 7.2% of our net revenues, respectively.
We do not have purchase contracts with any of our customers that obligate them
to continue to purchase our products and these customers could cease purchasing
our products at any time. Furthermore, it is possible that DSL equipment
manufacturers, such as Cisco Systems, Paradyne Corporation, and Ascom Hasler AG,
may design and develop internally, or acquire, their own chip set technology,
rather than continue to purchase chip sets from third parties such as us. We
expect that sales of our products to relatively few customers will continue to
account for a significant portion of our net revenues for the foreseeable
future.
Because of Our Long Product Development Process and Sales Cycle, We May Incur
Substantial Expenses Before We Earn Associated Net Revenues and May Not
Ultimately Sell a Large Volume of Our Products
We develop products based on forecasts of demand and incur substantial
product development expenditures prior to generating associated revenues. We
sell our products based on individual purchase orders. Our customers are not
obligated by long-term contracts to purchase our chip sets. In addition, we do
not receive orders for our chip sets during the period that potential customers
test and evaluate our chip sets. This test and evaluation period typically lasts
from three to six months or longer, and volume production of the DSL equipment
manufacturer's product that incorporates our chip sets typically does not begin
until this test and evaluation period has been completed. In addition, we do not
have a substantial non-cancelable backlog of orders and our customers can
generally cancel or reschedule orders upon short notice. As a result, a
significant period of time may lapse between our product development and sales
efforts and our realization of revenues from volume ordering of our products by
our customers, or we may never realize revenues from our efforts. Furthermore,
achieving a design win with a customer does not necessarily mean that this
customer will order large volumes of our products. A design win is not a binding
commitment by a customer to purchase our products. Rather, it is a decision by a
customer to use our products in the design process of that customer's products.
A customer can choose at any time to discontinue using our products in that
customer's designs or product development efforts. If our products are chosen to
be incorporated into a customer's products, we may still not realize significant
revenues from that customer if that customer's products are not commercially
successful.
If We Do Not Achieve Design Wins with Key Equipment Manufacturers, We May Be
Unable to Secure Design Wins from These Customers in the Future
Once a DSL equipment manufacturer has designed a supplier's chip set into
its products, the DSL equipment manufacturer may be reluctant to change its
source of chip sets due to the significant costs associated with qualifying a
new supplier. Accordingly, the failure to achieve design wins with key DSL
equipment manufacturers who have chosen a competitor's chip set could create
barriers to future sales opportunities with such DSL equipment manufacturers.
Rapid Changes in the Market for DSL Chip Sets May Render Our Chip Sets Obsolete
or Unmarketable
12
<PAGE> 15
The market for chip sets for DSL products is characterized by:
- Intense competition;
- Rapid technological change;
- Frequent new product introductions by our competitors;
- Changes in customer demands; and
- Evolving industry standards.
Any of these factors could make our products obsolete or unmarketable. To
compete, we must innovate and introduce new products. If we fail to successfully
introduce new products on a timely and cost-effective basis that meet customer
requirements and are compatible with evolving industry standards, then our
business, financial condition and results of operations will be seriously
harmed.
For example, DSL products utilize different coding techniques to transmit
data reliably over copper telephone wires. These coding techniques, or line
codes, include two bits per quadrant (2BIQ), carrierless amplitude phase
modulation (CAP), discrete multitone modulation (DMT) and pulse amplitude
modulation (PAM). To date, most large volume DSL service deployments have used
the 2BIQ and CAP line codes. Recently, U.S. and international standards bodies
have defined additional standards specifications which incorporate the DMT and
PAM line codes for DSL applications. Although we have recently introduced
products based on these standards, the majority of our product revenues to date
have come from the sale of chip sets that use the CAP line code.
Lucent Technologies Granted to Us Intellectual Property Rights that Are Subject
to Restrictions, and the Scope, or Disputes About the Scope, of These
Restrictions Could Harm Our Ability to Sell Our Products
Upon our formation, Lucent Technologies granted to us a number of
intellectual property rights. All of these rights are subject to various
restrictions and/or conditions. We believe that we currently have all the
intellectual property rights from Lucent Technologies that we need to continue
to conduct our business. We also believe that we are exercising the rights
granted to us by Lucent Technologies within the scope of the applicable
restrictions and/or conditions. Nevertheless, the provisions of the agreement
describing the scope of the license and immunity rights and restrictions are
ambiguous and Lucent Technologies might not agree with our interpretations. If
Lucent Technologies adopts a conflicting interpretation or otherwise asserts
that we do not have the rights we think we have, we will need to defend
ourselves or negotiate for additional rights. It is even possible that we could
be prevented from selling some of our products that depend on these rights or
immunities. In any case, the process of negotiation or defense would be
time-consuming and expensive, and whether or not it is successful would have a
negative impact on our ability to conduct our business.
Lucent Technologies Manufactures Substantially All of Our Chip Sets, and Any
Disruption in this Relationship Could Prevent Us from Selling Our Products
We do not own or operate a semiconductor fabrication facility. We depend
on Lucent Technologies to timely deliver to us sufficient quantities of
fully-assembled and tested chip sets on a turnkey basis. We have had a series of
manufacturing arrangements with Lucent Technologies, the latest of which became
effective in March 1999. This agreement, however, does not guarantee that Lucent
Technologies will adequately fill our orders for current chip sets (either in
quantity or timing), or that we will be able to negotiate mutually satisfactory
terms for manufacturing our future chip sets. Any disruption in availability of
our products would have a serious adverse impact on our business. If we are
required for any reason to seek a new manufacturer of our chip sets, a new
manufacturer of our chip sets may not be available and in any event switching to
a new manufacturer would require six months or more and would involve
significant expense and disruption to our business. From time to time there are
shortages in worldwide foundry capacity. Such shortages, if they occur, could
make it more difficult for us to find a new manufacturer of our chip sets if our
relationship with Lucent Technologies is terminated for any reason.
If We Are Required to Seek a New Manufacturer of Our Chip Sets, We Will Be
Required to Modify Our Products Which Will Be Costly and Will Require Our
Customers to Redesign their Products
13
<PAGE> 16
Each of our DSL products contains two chips: a digital signal processing
chip and an analog front end chip. Lucent Technologies manufactures both the
digital signal processing chip and the analog front end chip. Our chip sets
utilize certain circuits owned by Lucent Technologies, and we do not have a
license to these circuits. Although we have independently designed functionally
equivalent circuits, we have not established a manufacturing source for chip
sets that use these replacement circuits, and such chip sets have never been
produced. Further, replacing our chip sets that use circuits owned by Lucent
Technologies with newly designed products that use our own replacement circuits
may in turn require our customers to redesign or re-qualify their products in
certain respects. Establishing additional sources for manufacturing our products
independent of the circuits owned by Lucent Technologies would be expensive and
disruptive to our business.
We Could Become Involved in Disputes with Lucent Technologies, and any Such
Dispute Would Be Costly and Time Consuming and Could Be Resolved Adversely to Us
Although we do not currently anticipate any dispute with Lucent
Technologies, because Lucent Technologies is a source of our intellectual
property, the principal manufacturer of our chip sets, a significant
stockholder, a competitor and a potential customer, we could in the future
become involved in disputes with Lucent Technologies. This risk is heightened by
the ambiguity inherent in the divestiture agreements among Lucent Technologies,
Paradyne Corporation and us. We cannot be certain that we would prevail in any
such dispute and, regardless of whether we prevail, any such dispute would be
expensive and time-consuming and would harm our business. Further, because we
rely on Lucent Technologies, we may be reluctant to enforce our rights in any
such dispute. For example, we recently sent Lucent Technologies a letter that
inquired whether Lucent Technologies was misappropriating our intellectual
property in connection with the development of a competing DSL chip set. In
response to discussions with Lucent Technologies about this letter, we have
decided not to pursue any claim against Lucent Technologies in connection with
past acts relating to digital subscriber loop analog chip (DSLAC) technology.
Lucent Technologies also has a warrant to purchase our common stock which
provides that we shall not enter into any transaction directly or indirectly,
with or for the benefit of any related party other than transactions entered
into on a basis no less favorable to us than would be obtainable in a comparable
arms' length transaction with a third party that is not a related party. We have
entered into several transactions with Paradyne Corporation and Communication
Partners, L.P., who are related parties, and we can not assure you that Lucent
Technologies would conclude that all of these transactions were on terms
obtainable in a comparable arms' length transaction.
The Nature of Our Relationship with, and Substantial Dependence on, Lucent
Technologies May Provide Lucent Technologies with an Advantage as a Competitor
of Ours
Lucent Technologies is a competitor of ours. Additionally, Lucent
Technologies is a source of our intellectual property, the principal
manufacturer of our chip sets and a significant stockholder of ours. Upon our
formation, Lucent Technologies retained a license to use all patents that were
assigned to us, including in products that compete with our chip sets. Lucent
Technologies' ability to compete with us could be enhanced by this license.
Furthermore, our substantial dependence on Lucent Technologies could provide
Lucent Technologies with the ability to more effectively compete with us.
We May Be Required to Obtain Licenses on Adverse Terms to -Sell Industry
Standard Compliant Chip Sets
We have received correspondence, including a proposed licensing agreement,
from Amati Corporation (which was recently acquired by Texas Instruments)
stating that they believe that they own a number of patents that are required to
be compliant with the American National Standards Institute (ANSI) standard
specification T1.413. This industry standard is based on the DMT line code. We
have introduced products that we believe are compliant with this industry
standard, and we may be required to obtain a license to these Amati Corporation
patents. We are currently evaluating the patents and proposed licensing terms.
If these patents are valid and essential to the implementation of products that
are compliant with this industry standard, then Amati Corporation may be
required to offer us a license on commercially reasonable, non-discriminatory
terms. Because there are currently no established terms for such a license, we
may be unable to agree with Amati Corporation on acceptable license terms. If
these patents are valid, but not essential to the implementation of products
that are compliant with this industry standard, and they apply to our products
and we do not modify our products so they become non-infringing, then Amati
Corporation would not be obligated to offer us a license on reasonable terms or
at all. If we are not able to agree on license terms and as a result fail to
obtain a required license, then we could be sued and potentially be liable for
substantial monetary damages or have the sale of our products stopped by an
injunction. We could also be subject to similar claims like the Amati
Corporation claim by third parties in the future.
14
<PAGE> 17
Third-Party Claims Regarding Intellectual Property Matters Could Cause Us to
Stop Selling Our Products or Pay Monetary Damages
There is a significant risk that third parties, including current and
potential competitors, will claim that our products, or our customers' products,
infringe on their intellectual property rights. The owners of such intellectual
property rights may bring infringement claims against us. Any such litigation,
whether or not determined in our favor or settled by us, would be costly and
divert the attention of our management and technical personnel. For example, on
February 5, 1997 we received an inquiry from Telecommunications Research
Laboratories as to whether our product lines in the area of rate adaptive
digital subscriber loop technology may be infringing any of the claims of U.S.
patent no. 5,023,869 held by Telecommunications Research Laboratories. Upon
review of such patent, we responded in a letter dated March 11, 1997 that our
products based on rate adaptive digital subscriber loop technology do not
infringe any claims of patent no. 5,023,869. Inquiries with respect to the
coverage of our intellectual property, such as the Telecommunications Research
Laboratories' inquiry, could develop into litigation. Further, one of our
customers received a letter dated March 22, 1996 from Telebit Corporation (which
was subsequently acquired by Cisco Systems) claiming that it owns patents it
believes are essential to, and useful in the manufacture, use and sale of
products complying with the American National Standards Institute ASDSL standard
T1.413-1995. We examined the merits of Telebit Corporation's claims in light of
our then current products that used the CAP line code, but we have not reviewed
the merits of the claim with respect to our recently introduced chip sets that
use the DMT line code. In the event of an adverse ruling for an intellectual
property infringement claim, we could be required to obtain a license or pay
substantial damages or have the sale of our products stopped by an injunction.
In addition, if a customer of our chip sets cannot acquire a required license on
commercially reasonable terms, that customer may choose not to use our chip
sets. We have obligations to indemnify our customers under some circumstances
for infringement of third-party intellectual property rights. From time to time
we receive letters from customers inquiring as to the scope of these indemnity
rights; for example, in June 1999, we received a letter from Paradyne
Corporation (a customer and affiliated company), informing us that Paradyne had
received a letter from a third-party suggesting that some of the third-party's
patents may be infringed by Paradyne products. We evaluate all letters of this
nature to determine whether we have an indemnity obligation and take appropriate
steps. For example, our preliminary review of the letter from Paradyne and the
claims made by the third-party suggests that the third-party's patents, if
infringed, would be infringed by technology used by our suppliers (with whom we
have reciprocal indemnity agreements) and not by our technology, and, therefore,
there is no material risk to us; we will continue our review of this (and all
other) claims, and take additional steps, if appropriate. If any claims from
third-parties required us to indemnify customers (including Paradyne) under our
agreements, the costs could be substantial and our business could be harmed.
Despite Our Efforts to Protect Our Intellectual Property, Third Parties May Gain
Access to Our Proprietary Technology and Use It to Compete with Us
Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy aspects of our products or obtain and use
information that we regard as proprietary. For example, in June 1998, we filed
suit against three former employees who recently began employment with one of
our competitors.
We rely primarily on a combination of patents, copyrights, trademarks,
trade secret laws, contractual provisions, licenses and maskwork protection
under the Federal Semiconductor Chip Protection Act of 1984 to protect our
intellectual property. In particular, we rely on these measures to protect our
intellectual property because, as a fabless semiconductor company, we have third
parties, including competitors such as Lucent Technologies, manufacture our chip
sets. We also enter into confidentiality agreements with our employees,
consultants and customers and seek to control access to, and distribution of,
our other proprietary information. There is no guarantee that such safeguards
will protect our intellectual property and other valuable competitive
information.
In connection with our private placement of Series A preferred stock to
Intel Corporation, we agreed not to sue Intel Corporation for any violation by
it of our patent rights. This agreement terminates if Intel Corporation sues us
for any infringement by us of its patent rights. This agreement not to sue could
enable Intel Corporation to compete more effectively against us.
Our Efforts to Protect Our Intellectual Property May Be Less Effective in Some
Foreign Countries Where Intellectual Property Rights Are Not Well Protected by
Law or Enforcement
The laws of some foreign countries do not protect our proprietary rights
to as great an extent as do the laws of the
15
<PAGE> 18
United States, and many U.S. companies have encountered substantial infringement
problems in such countries, some of which are countries in which we have sold
and continue to sell products. There is a risk that our means of protecting our
proprietary rights may not be adequate. For example, our competitors may
independently develop similar technology, duplicate our products or design
around our patents or our other intellectual property rights. If we fail to
adequately protect our intellectual property, it would be easier for our
competitors to sell competing products.
Our Industry Is Highly Competitive, and We Cannot Assure You that We Will Be
Able to Effectively Compete
The DSL chip set market is intensely competitive. We expect competition to
intensify as current competitors expand their product offerings and new
competitors enter the market. We believe that we must compete on the basis of a
variety of factors, including:
- Time to market;
- Functionality;
- Conformity to industry standards;
- Performance;
- Price;
- Breadth of product lines;
- Product migration plans; and
- Technical support.
We believe our principal competitors include Alcatel, Analog Devices,
Centillium Technology Corporation, Conexant Systems, Level One Communications,
Lucent Technologies, MetaLink, Motorola and Texas Instruments. In addition to
these competitors, there have been growing numbers of announcements by other
integrated circuit companies that they intend to enter the DSL chip set market.
Many of our competitors have greater name recognition, their own
manufacturing capabilities, significantly greater financial and technical
resources, and the sales, marketing and distribution strengths that are normally
associated with large multinational companies. These competitors may also have
pre-existing relationships with our customers or potential customers. These
competitors may compete effectively with us because of the above-listed factors
and because they more quickly introduce new technologies, more rapidly or
effectively address customer requirements or devote greater resources to the
promotion and sale of their products than we do. Further, in the event of a
manufacturing capacity shortage, these competitors may be able to manufacture
products when we are unable to do so.
Further, many of our customers face competition from companies, such as
Orckit Communications and PairGain Technologies, which design their own chip
sets. Because these companies do not purchase all of their chip sets from
suppliers such as us, if these competitors displace our customers in the DSL
equipment market, our customers would no longer need our products.
Other Technologies for the High-Speed Data Transmission Market Will Compete
Effectively with DSL Services
DSL services are competing with a variety of different high-speed data
transmission technologies, including cable modems, satellite and other wireless
technologies. Many of these technologies will compete effectively with DSL
services. All of our chip sets are deployed in networks that use standard copper
telephone wires. Copper telephone wires have physical properties that limit the
speed and distance over which data can be transmitted. In general, data
transmission rates over copper telephone wires are slower over longer distances
and faster over shorter distances. If any technology that is competing with DSL
technology is more reliable, faster, less expensive, reaches more customers or
has other advantages over DSL technology, then the demand for our chip sets and
our revenues and gross margins may decrease.
16
<PAGE> 19
Our Executive Officers and Key Personnel Are Critical to Our Business, and These
Officers and Personnel May Not Remain with Us in the Future
We depend upon the continuing contributions of our key management, sales,
customer support and product development personnel. The loss of such personnel
could seriously harm us. Only Armando Geday, our President and Chief Executive
Officer, is subject to an employment agreement; however, we cannot be sure that
we can retain Mr. Geday's services. In addition, we have not obtained key-man
life insurance on any of our executive officers or key employees. Because DSL
technology is specialized and complex, we need to recruit and train qualified
technical personnel. However, there are many employers competing to hire
qualified technical personnel and we have had difficulty attracting and
retaining such personnel. We expect to continue to have difficulty hiring and
retaining qualified personnel. Further, our competitors have recruited our
employees and may do so in the future.
If Leading DSL Equipment Manufacturers Do Not Incorporate Our Chip Sets in
Successful Products, Sales of Our Products Will Significantly Decline
We rely upon DSL equipment manufacturers, such as Cisco Systems and
Paradyne Corporation, to design our chip sets into their DSL products. We
further rely on these products to be successful, and if they are not, we will
not sell our chip sets in volume quantities. Accordingly, we must correctly
anticipate the price, performance and functionality requirements of these DSL
equipment - manufacturers. We must also successfully develop products that meet
these requirements and make such products available on a timely basis and in
sufficient quantities. Further, if there is consolidation in the DSL equipment
manufacturing industry, or if a small number of DSL equipment manufacturers
otherwise dominate the market for DSL equipment, then our success will depend
upon our ability to establish and maintain relationships with these market
leaders. If we do not anticipate trends in the DSL market and meet the
requirements of DSL equipment manufacturers, or if we do not successfully
establish and maintain relationships with leading DSL equipment manufacturers,
then our business, financial condition and results of operations will be
seriously harmed.
Substantial Sales of Our Chip Sets Will Not Occur Unless Telecommunications
Service Providers Initiate Substantial Deployment of DSL Services
The success of our products is dependent upon the decision by
telecommunications service providers to deploy DSL technologies and the timing
of the deployment. Factors that will impact such deployment include:
- A prolonged approval process, including laboratory tests, technical
trials, marketing trials, initial commercial deployment and full
commercial deployment;
- The development of a viable business model for DSL services, including
the capability to market, sell, install and maintain DSL services;
- Cost constraints, such as installation costs and space and power
requirements at the telecommunications service provider's central
office;
- Varying and uncertain conditions of the local loop, including the size
and length of the copper wire, electrical interference and
interference with existing voice and data telecommunications services;
- Challenges of interoperability among DSL equipment manufacturers'
products;
- Evolving industry standards for DSL technologies; and
- Government regulation.
Although a number of telecommunications service providers have commenced
commercial deployment of DSL services using DSL products that incorporate our
chip sets, if these telecommunications service providers do not expand their
deployment of DSL services, or if additional telecommunications service
providers do not offer DSL services on a timely basis, then our business,
financial condition and results of operations will be seriously harmed.
The Recent Rapid Expansion in Our Operations Has Placed a Strain on Our
Management and Personnel and Other Resources
17
<PAGE> 20
The recent rapid expansion in our operations has placed a strain on our
management and personnel and other resources. If we do not successfully manage
our business, financial condition and results of operations will be seriously
harmed. Further, from December 31, 1997 to September 30, 1999, we increased from
93 to 186 total employees. This growth has placed and will continue to place a
significant strain upon our management, operating and financial systems and
other resources. To accommodate this expansion of operations, we must continue
to implement and improve information systems, procedures and controls and
expand, train, motivate and manage our work force.
Sales to Customers Based Outside of the United States Have Accounted for a
Significant Portion of Our Revenues, Which Exposes Us to Inherent Risks of
International Business
The following table shows the percentage of our net revenues which we
derived from sales to customers based outside of the United States for the time
periods indicated:
<TABLE>
<CAPTION>
Time Period Percentage of Net Revenues
----------- --------------------------
<S> <C>
Five Months Ended December 31, 1996 40.0%
Year Ended December 31, 1997 49.2%
Year Ended December 31, 1998 32.6%
Nine Months Ended September 30, 1999 47.5%
</TABLE>
We expect that sales to such international customers will continue to
account for a significant portion of our net revenues for the foreseeable
future. Accordingly, we are subject to risks inherent in our international
business activities, including:
- Unexpected changes in regulatory requirements;
- Tariffs and other trade barriers, including current and future import
and export restrictions;
- Difficulties in collecting accounts receivables;
- Difficulties in staffing and managing international operations;
- Potentially adverse tax consequences, including restrictions on the
repatriation of earnings;
- The burdens of complying with a wide variety of foreign laws
(particularly with respect to intellectual property) and license
requirements;
- The risks related to international political instability and to the
recent global economic turbulence and adverse economic circumstances
in Asia;
- Risks that changes in foreign currency exchange rates will make our
products comparatively more expensive;
- Risks that although our product sales are currently denominated in
U.S. dollars, if we denominate product sales in foreign currencies in
the future, then we will experience risk of loss due to fluctuations
in the value of foreign currencies;
- Difficulties in protecting intellectual property rights in certain
foreign countries; and
- Limited ability to enforce agreements and other rights in certain
foreign countries.
In the year ended December 31, 1998 and the nine months ended September
30, 1999, 9.4% and 23.1%, respectively, of our net revenues were derived from
customers based in Asian countries. Because of the continuing economic
instability in Asia, sales of our chip sets to customers in this region may be
adversely affected.
If We Deliver Products with Defects, Our Credibility Will Be Harmed, and the
Sales and Market Acceptance of Our Products Will Decrease
Our products are complex and have contained errors, defects and bugs when
introduced. If we deliver products with
18
<PAGE> 21
errors, defects or bugs, our credibility and the market acceptance and sales of
our products could be harmed. Further, if our products contain errors, defects
and bugs, then we may be required to expend significant capital and resources to
alleviate such problems. Defects could also lead to product liability as a
result of product liability lawsuits against us or against our customers. We
have agreed to indemnify our customers in some circumstances against liability
from defects in our products. A successful product liability claim could
seriously harm our business, financial condition and results of operations.
We Will Continue to Be Controlled by a Principal Stockholder, Which May Have the
Effect of Preventing or Delaying a Change of Control of Our Company, and the
Interests of the Principal Stockholder May Not Always Coincide with Those of Our
Stockholders
Our executive officers and directors and their affiliates own, in the
aggregate, approximately 63.4% of our outstanding common stock.
Entities affiliated with Texas Pacific Group own approximately 45.0% of
GlobeSpan and are able to exercise control over GlobeSpan subject to the
fiduciary duties of its representatives on the board of directors under Delaware
law. The interests of Texas Pacific Group, may not always coincide with our
interests or the interests of other stockholders. Texas Pacific Group, through
its representatives on the board of directors, could cause us to enter into
transactions or agreements which we would not otherwise consider absent Texas
Pacific Group's influence.
Our current board of directors consists of Ms. Connor and Messrs. Coulter,
Deb, Epley, Faggin, Geday, Geeslin and Stanton. Our board of directors has also
created an Executive Committee consisting of Messrs. Coulter, Deb, Epley and
Geday. Of the current members of the board of directors and the Executive
Committee, Messrs. Epley, Geeslin and Stanton are also currently directors of,
and have direct or indirect equity interests in, Paradyne Corporation, which is
a customer of ours. In addition, Dipanjan Deb, a director of GlobeSpan, is
employed by the Texas Pacific Group. Accordingly, our continuing supplier
relationship with Paradyne Corporation, and any other potential business
dealings between Paradyne Corporation and us, could create conflicts of interest
for the GlobeSpan directors.
We have waived in our amended and restated certificate of incorporation
the application to us of section 203 of the Delaware General Corporation Law.
Section 203 of the Delaware General Corporation Law is a statute that generally
prohibits an "interested stockholder" from engaging in a "business combination"
with a corporation for three years following the time this person became an
interested stockholder. An "interested stockholder" is defined generally as a
person owning 15% or more of a corporation's voting stock or an affiliate or
associate of that person. A "business combination" is defined to include a
variety of transactions, including mergers and sales of 10% or more of a
corporation's assets. A business combination with an interested stockholder is
allowed, however, if the business combination is approved by at least 66.6% of
the shares held by the corporation's disinterested stockholders. By waiving
Section 203, it will be easier for us to enter into transactions with our
significant stockholders, including Texas Pacific Group, without giving our
disinterested stockholders the opportunity to approve the transaction.
Although We Are Not Primarily a Supplier of Software, Our Operations Could Be
Affected by Year 2000 Issues, Particularly if Year 2000 Issues Affect Lucent
Technologies
The "Year 2000 Issue" refers generally to the problems that some software
may have in determining the correct century of the year. Many existing
electronic systems, including computer systems, use only the last two digits to
refer to a year. Therefore, these systems may recognize a date using "00" as
1900 rather than the year 2000. If not corrected, these electronic systems could
fail or create erroneous results when addressing dates on and after January 1,
2000.
In assessing the effect of the Year 2000 Issue on GlobeSpan, we determined
that we need to evaluate four general areas:
- Supplier relationships;
- Internal infrastructure;
- Products sold to customers; and
19
<PAGE> 22
- Other third-party relationships.
Supplier Relationships. We are a "fabless" semiconductor company and
therefore rely on third party manufacturers to manufacture our chip sets. To
date, Lucent Technologies manufactures substantially all of our chip sets. If
Lucent Technologies is affected by the Year 2000 Issue, our supply of chip sets
could be delayed or eliminated. Any disruption in our supply of chip sets from
Lucent Technologies would seriously harm our business, financial condition and
results of operations. We are currently seeking assurances from Lucent
Technologies that their manufacturing of our chip sets will be unaffected by the
Year 2000 Issue but have not received such assurances to date.
Internal Infrastructure. The Year 2000 Issue could also affect our
internal systems, including both our information technology and non-information
technology systems. We have initiated an assessment of our material internal
information technology systems, including third-party software and hardware
technology. Based upon representations received from these third-party software
and hardware suppliers, we do not believe that our material internal information
technology systems will be affected by the Year 2000 Issue. We have also
initiated an assessment of our non-information technology internal systems, such
as our test facility. Based on our preliminary assessment, we do not believe
that our material non-information technology internal systems will be affected
by the Year 2000 Issue. However, we may experience serious unanticipated
problems and costs caused by undetected errors or defects in the technology used
in our internal information technology and non-information technology systems.
Products Sold to Customers . Our chip sets and DSL reference design guides
do not contain two digit date codes and therefore are generally unaffected by
the Year 2000 Issue. However, once shipped, our chip sets are incorporated into
system and board-level products which we do not develop. The performance of our
chip sets could be affected if a Year 2000 Issue exists in a different component
of a customer's product. We have not, and will not, assess the existence of
these potential problems in our customers' products.
We do not currently have any information concerning the Year 2000
compliance status of our customers. Our current or future customers may incur
significant expenses to achieve Year 2000 compliance. If our customers are not
Year 2000 compliant, they may experience significant costs to remedy problems,
or they may face litigation costs. In either case, Year 2000 issues could reduce
or eliminate the budgets that current or potential customers could have for
purchases of our products and services. As a result, our business, results of
operations or financial condition could be materially adversely affected.
Other Third-Party Relationships. We rely on outside vendors for utilities
and telecommunication services as well as climate control, building access and
other infrastructure services. We are not capable of independently evaluating
the Year 2000 compliance of the systems utilized to supply these services. We
cannot assure you that these suppliers will resolve any or all Year 2000 Issues
with these systems before the occurrence of a material disruption to our
business. Any failure of these third parties to resolve Year 2000 Issues with
their systems in a timely manner could have a material adverse effect on our
business, financial condition or results of operations.
We have not developed a contingency plan to address situations that may
result if we are unable to achieve Year 2000 readiness of our critical
operations, and we do not plan to do so in the future. Any investigations we
have undertaken with respect to Year 2000 Issues have been funded from available
cash, and these costs have not been separately accounted for. To date, these
costs have not been significant.
We Have Certain Antitakeover Defenses that Could Delay or Prevent an Acquisition
of Our Company
Certain provisions of our certificate of incorporation and bylaws and the
provisions of Delaware law could have the effect of delaying, deferring or
preventing an acquisition of GlobeSpan. For example, we have authorized but
unissued shares of preferred stock which could be used to fend off a takeover
attempt, our stockholders may not take actions by written consent, our
stockholders are limited in their ability to make proposals at stockholder
meetings and our directors may be removed only for cause and upon the
affirmative vote of at least 80% of our outstanding voting shares.
We May Need to Raise Additional Capital Which Might Not Be Available or
Which, if Available, Would Be on Terms Adverse to Our Recent Public Offering
We expect the net proceeds from our recent public offering, our current
cash and cash equivalents and cash from
20
<PAGE> 23
commercial borrowing availability under credit facilities will meet our working
capital and capital expenditure needs for at least one year. After that, we may
need to raise additional funds, and we cannot be certain that we will be able to
obtain additional financing on favorable terms, if at all. We may also require
additional capital for the acquisition of businesses, products and technologies
that are complementary to ours. Further, if we issue equity securities, the
ownership percentage of our stockholders would be reduced, and the new equity
securities may have rights, preferences or privileges senior to those existing
holders of our common stock. If we cannot raise needed funds on acceptable
terms, we may not be able to develop or enhance our products, take advantage of
future opportunities or respond to competitive pressures or unanticipated
requirements, which could seriously harm our business, operating results and
financial condition.
Our Stock Price May Be Volatile or Thinly Traded, Which Might Make it Difficult
for Stockholders to Sell Their Shares
The market price of our common stock will likely fluctuate significantly
in response to the following factors, some of which are beyond our control:
- Variations in our quarterly operating results;
- Changes in financial estimates of our revenues and operating results
by securities analysts;
- Changes in market valuations of integrated circuit companies;
- Announcements by us of significant contracts, acquisitions, strategic
partnerships, joint ventures or capital commitments;
- Loss of our decrease in sales to a major customer or failure to
complete significant transactions;
- Loss or reduction in manufacturing capacity from Lucent Technologies;
- Additions or departures of key personnel;
- Future sales of our common stock;
- Stock market price and volume fluctuations attributable to
inconsistent trading volume levels of our stock;
- Commencement of or involvement in litigation; and
- Announcements by us or our competitors of key design wins and product
introductions.
We Could Be Subject to Class Action Litigation Due to Stock Price Volatility,
Which, if It Occurs, Will Distract Management and Result in Substantial Costs,
and Could Result in Judgments Against Us
In the past, securities class action litigation has often been brought
against companies following periods of volatility in the market price of their
securities. We may be the target of similar litigation in the future. Securities
litigation could result in substantial costs and divert management's attention
and resources, which could cause serious harm to our business, financial
condition and results of operations.
21
<PAGE> 24
PART II. OTHER INFORMATION
GLOBESPAN, INC.
ITEM 1. LEGAL PROCEEDINGS.
In June 1998, we filed suit against Hanan Herzberg, Selvaraj Seetharaman
and Xiao-Feng Qi in the Superior Court of New Jersey seeking compensatory
damages, costs and attorneys' fees and injunctive relief based on allegations of
misappropriation of trade secrets. In April 1998, the defendants terminated
their employment with our company and subsequently began employment with Level
One Communications, a competitor in the DSL industry. No counterclaim has been
asserted against us. On June 16, 1999, the Superior Court of New Jersey issued a
final judgment in favor of GlobeSpan and against the defendants, ordering
injunctive and other relief against the defendants. We anticipate that
defendants may seek to appeal the Court's judgment. Due to the nature of
litigation, we cannot ascertain whether the judgment would be upheld on appeal.
We believe that this matter will not have a material adverse effect on our
results of operations or financial condition. However, this litigation could be
time consuming and costly, and there can be no assurance that we will
necessarily prevail given the inherent uncertainties in litigation.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
In May 1999, the Company designated 1,461,454 shares of preferred stock as
Series A Preferred Stock ("Series A Stock"). The Series A Stock was convertible,
at the option of the holder, into shares of common stock at any time after the
date of issuance at a conversion rate of $8.211 per share and automatically
converted upon consummation of the Company's initial public offering.
On May 6, 1999, the Company completed the sale of an aggregate 1,461,454
shares of Series A Stock and warrants to purchase an aggregate 300,000 shares of
common stock for gross proceeds of $12.0 million to Cisco Systems, Inc. and
Intel Corporation (the "Series A Investors"). The warrants issued to the Series
A Investors are exercisable for a five year term and at exercise prices equal to
the initial public offering price of $15.00 for the first 75,000 shares, $18.75
for the second 75,000 shares, $22.50 for the third 75,000 shares and $26.25 for
the last 75,000 shares.
The Company granted Cisco Systems, Inc. a right to require the Company to
repurchase its Series A Stock and warrants at cost, at any time after September
30, 1999, if by such date, the Company and the investor have not signed a
definitive development agreement, as defined, or if the second Series A Investor
gives the Company notice of its intention to exercise its right, as described
below. This right terminated upon consummation of the initial public offering.
The Company granted Intel Corporation a right to require the Company to
repurchase its Series A Stock and warrants at cost, at any time after the first
Series A Investor has given notice to the Company of its intention to exercise
its right as described above or December 31, 1999, if the Company has not
completed its initial public offering. This right terminated upon consummation
of the initial public offering. In addition, the Company has agreed not to
assert any patent right against Intel Corporation as long as Intel Corporation
maintains an investment in the Company of at least 1% of its capital stock.
The effective date of the Registration Statement for the Company's initial
public offering, filed on Form S-1 under the Securities Act of 1933 (File No.
333-75173), was June 22, 1999. The class of securities registered was Common
Stock. The offering commenced on June 23, 1999. The managing underwriters for
the offering were BancBoston Robertson Stephens Inc., Donaldson, Lufkin and
Jenrette Securities Corporation, SG Cowen Securities Corporation and Thomas
Weisel Partners LLC.
Pursuant to the Registration Statement, the Company sold 3,737,500 shares
of its Common Stock, including over-allotment, for an aggregate offering price
of approximately $56.1 million.
The Company incurred expenses of approximately $6.6 million, of which $3.9
million represented underwriting discounts and commissions and approximately
$2.7 million represented other expenses related to the offering. The net
offering proceeds to the Company after total expenses was $49.5 million.
22
<PAGE> 25
We used $5.0 million of the net proceeds to repay our subordinated note
payable to Communications Partners, L.P., and plan to use the balance for
general corporate purposes, including working capital. The remaining net
proceeds have been invested in cash, cash equivalents and short term
investments. The use of the proceeds from the offering does not represent a
material change in the use of proceeds described in the prospectus.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--- -----------
<S> <C>
3.1 Form of Restated Certificate of Incorporation of the Registrant -
incorporated herein by reference to Exhibit 3.2 to the Company's
Registration Statement on Form S-1 (File No. 333-75173).
3.2 Amended and Restated Bylaws of the Registrant - incorporated
herein by reference to Exhibit 3.4 to the Company's Registration
Statement on Form S-1 (File No. 333-75173).
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 Form of Registrant's Common Stock certificate - incorporated
herein by reference to Exhibit 4.2 to the Company's Registration
Statement on Form S-1 (File No. 333-75173).
4.3 Investors' Rights Agreement dated May 6, 1999 - incorporated
herein by reference to Exhibit 10.19 to the Company's Registration
Statement on Form S-1 (File No. 333-75173).
4.4 Warrant for the purchase of Common Stock made by the Registrant
and held by Cisco Systems, Inc., dated May 6, 1999 - incorporated
herein by reference to Exhibit 10.20 to the Company's Registration
Statement on Form S-1 (File No. 333-75173).
4.5 Warrant for the purchase of Common Stock made by the Registrant
and held by Cisco Systems, Inc., dated May 6, 1999 - incorporated
herein by reference to Exhibit 10.21 to the Company's Registration
Statement on Form S-1 (File No. 333-75173).
10.1 Form of Indemnification Agreement entered into by the Registrant
with each of its directors and executive officers - incorporated
herein by reference to Exhibit 10.1 to the Company's Registration
Statement on Form S-1 (File No. 333-75173).
10.2 1999 Equity Incentive Plan - incorporated herein by reference to
Exhibit 10.2 to the Company's Registration Statement on Form S-1
(File No. 333-75173).
10.3 Employee Stock Purchase Plan - incorporated herein by reference to
Exhibit 10.3 to the Company's Registration Statement on Form S-1
(File No. 333-75173).
10.4 1999 Director Stock Plan - incorporated herein by reference to
Exhibit 10.4 to the Company's Registration Statement on Form S-1
(File No. 333-75173).
10.5 Business Loan Agreement between BankAmerica Business Credit and
Registrant, dated May 14, 1998 - incorporated herein by reference
to Exhibit 10.5 to the Company's Registration Statement on Form
S-1 (File No. 333-75173).
10.6 Real Property Lease between Paradyne Corporation and Shav
Associates, dated October 8, 1996 - incorporated herein by
reference to Exhibit 10.7 to the Company's Registration Statement
on Form S-1 (File No. 333-75173).
</TABLE>
23
<PAGE> 26
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--- -----------
<S> <C>
10.7 Real Property Sublease by and between Registrant and Paradyne
Corporation, dated December 10, 1997 - incorporated herein by
reference to Exhibit 10.8 to the Company's Registration Statement
on Form S-1 (File No. 333-75173).
10.8 Amendment to Real Property Sublease by Registrant and Paradyne
Corporation, dated January 1, 1999 - incorporated herein by
reference to Exhibit 10.9 to the Company's Registration Statement
on Form S-1 (File No. 333-75173).
10.9 Termination Agreement between Registrant and Paradyne Corporation,
dated December 31, 1998 - incorporated herein by reference to
Exhibit 10.10 to the Company's Registration Statement on Form S-1
(File No. 333-75173).
10.10 Subordinated Promissory Note between Registrant and Communication
Partners, L.P., dated December 15, 1998 - incorporated herein by
reference to Exhibit 10.11 to the Company's Registration Statement
on Form S-1 (File No. 333-75173).
10.11 Employment Agreement between Registrant and Armando Geday, dated
April 1, 1997 incorporated herein by reference to Exhibit 10.12 to
the Company's Registration Statement on Form S-1 (File No.
333-75173).
10.12 Employment Agreement between Registrant and Thomas Epley, dated
August 29, 1997 incorporated herein by reference to Exhibit 10.13
to the Company's Registration Statement on Form S-1 (File No.
333-75173).
10.13+ Agreement for the Manufacture and Sale of ASIC Products between
Registrant and Lucent Technologies Inc. Microelectronics, dated
March 23, 1999 - incorporated herein by reference to Exhibit 10.14
to the Company's Registration Statement on Form S-1 (File No.
333-75173).
10.14 Intellectual Property Agreement among Registrant, Lucent
Technologies Inc. and Paradyne Corporation, dated July 31, 1996 -
incorporated herein by reference to Exhibit 10.15 to the Company's
Registration Statement on Form S-1 (File No. 333-75173).
10.15 Tax Matters Agreement between Registrant and Paradyne Corporation,
dated July 31, 1996 - incorporated herein by reference to Exhibit
10.16 to the Company's Registration Statement on Form S-1 (File
No. 333-75173).
10.16+ Product Supply Agreement between Registrant and Paradyne
Corporation dated March 16, 1999 - incorporated herein by
reference to Exhibit 10.17 to the Company's Registration Statement
on Form S-1 (File No. 333-75173).
10.17 AT&T Trademark and Patent Agreement between Registrant, AT&T Corp.
and Paradyne Corporation, dated July 31, 1996 - incorporated
herein by reference to Exhibit 10.18 to the Company's Registration
Statement on Form S-1 (File No. 333-75173).
10.18 Investors' Rights Agreement between Registrant, Intel Corporation,
Cisco Systems, Inc. and Communication Partners, L.P., dated May 6,
1999 - incorporated herein by reference to Exhibit 10.19 to the
Company's Registration Statement on Form S-1 (File No. 333-75173).
10.19 Warrant for the purchase of Common Stock made by the Registrant
and held by Cisco Systems, Inc., dated May 6, 1999 - incorporated
herein by reference to Exhibit 10.20 to the Company's Registration
Statement on Form S-1 (File No. 333-75173).
10.20 Warrant for the purchase of Common Stock made by the Registrant
and held by Cisco Systems, Inc., dated May 6, 1999 - incorporated
herein by reference to Exhibit 10.21 to the Company's Registration
Statement on Form S-1 (File No. 333-75173).
10.21 Covenant Not to Sue between Registrant and Intel Corporation,
dated May 6, 1999 incorporated herein by reference to Exhibit
10.22 to the Company's Registration Statement on Form S-1 (File
No. 333-75173).
27.1 Financial Data Schedule for EDGAR Filing.
</TABLE>
+ Certain portions of this exhibit have been granted confidential
treatment by the Commission. The omitted portions have been separately filed
with the Commission.
24
<PAGE> 27
(b) Reports on Form 8-K.
None.
25
<PAGE> 28
GLOBESPAN, 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.
GLOBESPAN, INC.
Date: November 10, 1999 By: /s/ Robert McMullan
------------------------------------
Robert McMullan
Chief Financial Officer
(Principal Financial and Accounting
Officer)
26
<PAGE> 29
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--- -----------
<S> <C>
3.1 Form of Restated Certificate of Incorporation of the Registrant -
incorporated herein by reference to Exhibit 3.2 to the Company's
Registration Statement on Form S-1 (File No. 333-75173).
3.2 Amended and Restated Bylaws of the Registrant - incorporated
herein by reference to Exhibit 3.4 to the Company's Registration
Statement on Form S-1 (File No. 333-75173).
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 Form of Registrant's Common Stock certificate - incorporated
herein by reference to Exhibit 4.2 to the Company's Registration
Statement on Form S-1 (File No. 333-75173).
4.3 Investors' Rights Agreement dated May 6, 1999 - incorporated
herein by reference to Exhibit 10.19 to the Company's Registration
Statement on Form S-1 (File No. 333-75173).
4.4 Warrant for the purchase of Common Stock made by the Registrant
and held by Cisco Systems, Inc., dated May 6, 1999 - incorporated
herein by reference to Exhibit 10.20 to the Company's Registration
Statement on Form S-1 (File No. 333-75173).
4.5 Warrant for the purchase of Common Stock made by the Registrant
and held by Cisco Systems, Inc., dated May 6, 1999 - incorporated
herein by reference to Exhibit 10.21 to the Company's Registration
Statement on Form S-1 (File No. 333-75173).
10.1 Form of Indemnification Agreement entered into by the Registrant
with each of its directors and executive officers - incorporated
herein by reference to Exhibit 10.1 to the Company's Registration
Statement on Form S-1 (File No. 333-75173).
10.2 1999 Equity Incentive Plan - incorporated herein by reference to
Exhibit 10.2 to the Company's Registration Statement on Form S-1
(File No. 333-75173).
10.3 Employee Stock Purchase Plan - incorporated herein by reference to
Exhibit 10.3 to the Company's Registration Statement on Form S-1
(File No. 333-75173).
10.4 1999 Director Stock Plan - incorporated herein by reference to
Exhibit 10.4 to the Company's Registration Statement on Form S-1
(File No. 333-75173).
10.5 Business Loan Agreement between BankAmerica Business Credit and
Registrant, dated May 14, 1998 - incorporated herein by reference
to Exhibit 10.5 to the Company's Registration Statement on Form
S-1 (File No. 333-75173).
10.6 Real Property Lease between Paradyne Corporation and Shav
Associates, dated October 8, 1996 - incorporated herein by
reference to Exhibit 10.7 to the Company's Registration Statement
on Form S-1 (File No. 333-75173).
10.7 Real Property Sublease by and between Registrant and Paradyne
Corporation, dated December 10, 1997 - incorporated herein by
reference to Exhibit 10.8 to the Company's Registration Statement
on Form S-1 (File No. 333-75173).
10.8 Amendment to Real Property Sublease by Registrant and Paradyne
Corporation, dated January 1, 1999 - incorporated herein by
reference to Exhibit 10.9 to the Company's Registration Statement
on Form S-1 (File No. 333-75173).
10.9 Termination Agreement between Registrant and Paradyne Corporation,
dated December 31, 1998 - incorporated herein by reference to
Exhibit 10.10 to the Company's Registration Statement on Form S-1
(File No. 333-75173).
10.10 Subordinated Promissory Note between Registrant and Communication
Partners, L.P., dated December 15, 1998 - incorporated herein by
reference to Exhibit 10.11 to the Company's Registration Statement
on Form S-1 (File No. 333-75173).
10.11 Employment Agreement between Registrant and Armando Geday, dated
April 1, 1997 incorporated herein by reference to Exhibit 10.12 to
the Company's Registration Statement on Form S-1 (File No.
333-75173).
</TABLE>
27
<PAGE> 30
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--- -----------
<S> <C>
10.12 Employment Agreement between Registrant and Thomas Epley, dated
August 29, 1997 incorporated herein by reference to Exhibit 10.13
to the Company's Registration Statement on Form S-1 (File No.
333-75173).
10.13+ Agreement for the Manufacture and Sale of ASIC Products between
Registrant and Lucent Technologies Inc. Microelectronics, dated
March 23, 1999 - incorporated herein by reference to Exhibit 10.14
to the Company's Registration Statement on Form S-1 (File No.
333-75173).
10.14 Intellectual Property Agreement among Registrant, Lucent
Technologies Inc. and Paradyne Corporation, dated July 31, 1996 -
incorporated herein by reference to Exhibit 10.15 to the Company's
Registration Statement on Form S-1 (File No. 333-75173).
10.15 Tax Matters Agreement between Registrant and Paradyne Corporation,
dated July 31, 1996 - incorporated herein by reference to Exhibit
10.16 to the Company's Registration Statement on Form S-1 (File
No. 333-75173).
10.16+ Product Supply Agreement between Registrant and Paradyne
Corporation dated March 16, 1999 - incorporated herein by
reference to Exhibit 10.17 to the Company's Registration Statement
on Form S-1 (File No. 333-75173).
10.17 AT&T Trademark and Patent Agreement between Registrant, AT&T Corp.
and Paradyne Corporation, dated July 31, 1996 - incorporated
herein by reference to Exhibit 10.18 to the Company's Registration
Statement on Form S-1 (File No. 333-75173).
10.18 Investors' Rights Agreement between Registrant, Intel Corporation,
Cisco Systems, Inc. and Communication Partners, L.P., dated May 6,
1999 - incorporated herein by reference to Exhibit 10.19 to the
Company's Registration Statement on Form S-1 (File No. 333-75173).
10.19 Warrant for the purchase of Common Stock made by the Registrant
and held by Cisco Systems, Inc., dated May 6, 1999 - incorporated
herein by reference to Exhibit 10.20 to the Company's Registration
Statement on Form S-1 (File No. 333-75173).
10.20 Warrant for the purchase of Common Stock made by the Registrant
and held by Cisco Systems, Inc., dated May 6, 1999 - incorporated
herein by reference to Exhibit 10.21 to the Company's Registration
Statement on Form S-1 (File No. 333-75173).
10.21 Covenant Not to Sue between Registrant and Intel Corporation,
dated May 6, 1999 incorporated herein by reference to Exhibit
10.22 to the Company's Registration Statement on Form S-1 (File
No. 333-75173).
27.1 Financial Data Schedule for EDGAR Filing.
</TABLE>
+ Certain portions of this exhibit have been granted confidential
treatment by the Commission. The omitted portions have been separately filed
with the Commission.
28
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FORM 10-Q SEPTEMBER 30, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 46,184
<SECURITIES> 0
<RECEIVABLES> 6,928
<ALLOWANCES> 111
<INVENTORY> 5,184
<CURRENT-ASSETS> 60,561
<PP&E> 10,939
<DEPRECIATION> 4,869
<TOTAL-ASSETS> 68,309
<CURRENT-LIABILITIES> 14,699
<BONDS> 0
0
0
<COMMON> 19
<OTHER-SE> 53,114
<TOTAL-LIABILITY-AND-EQUITY> 68,309
<SALES> 17,032
<TOTAL-REVENUES> 17,032
<CGS> 6,584
<TOTAL-COSTS> 6,584
<OTHER-EXPENSES> 11,259
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 553
<INCOME-PRETAX> (258)
<INCOME-TAX> 0
<INCOME-CONTINUING> (258)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (258)
<EPS-BASIC> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
