<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 28, 1999.
REGISTRATION NO. 333-75173
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
GLOBESPAN, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3674 75-2658218
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
100 SCHULZ DRIVE
RED BANK, NJ 07701
(732) 345-7500
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
ROBERT J. MCMULLAN
CHIEF FINANCIAL OFFICER
GLOBESPAN, INC.
100 SCHULZ DRIVE
RED BANK, NJ 07701
(732) 345-7500
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
SCOTT C. DETTMER, ESQ. BARRY E. TAYLOR, ESQ.
GUNDERSON DETTMER STOUGH TREVOR J. CHAPLICK, ESQ.
VILLENEUVE FRANKLIN & HACHIGIAN, LLP WILSON SONSINI GOODRICH & ROSATI
155 CONSTITUTION DRIVE PROFESSIONAL CORPORATION
MENLO PARK, CA 94025 650 PAGE MILL ROAD, PALO ALTO, CA 94303
(650) 321-2400 (650) 493-9300
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SUCH
SECTION 8(A), MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE
COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL SECURITIES, AND
WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN ANY STATE WHERE THE
OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED MAY 28, 1999
[GLOBESPAN LOGO]
3,250,000 SHARES
COMMON STOCK
GlobeSpan, Inc. is offering 3,250,000 shares of its common stock. This is
our initial public offering and no public market currently exists for our
shares. We have filed an application for the common stock to be quoted on the
Nasdaq National Market under the symbol "GSPN." We anticipate that the initial
public offering price will be between $9.00 and $11.00 per share. Of the
3,250,000 shares being sold in this offering, we have reserved up to 336,875
shares to offer directly to our directors, officers, employees and other persons
having relationships with us, of which up to 150,000 shares have been reserved
for our officers. We have also reserved up to 250,000 shares to offer directly
to US West, Inc. All such reserved shares shall be sold on the same terms and
conditions available to the public.
------------------------------
INVESTING IN THE COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 4.
------------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public Offering Price....................................... $ $
Underwriting Discounts and Commissions...................... $ $
Proceeds to GlobeSpan....................................... $ $
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
We have granted the underwriters a 30-day option to purchase up to an
additional 487,500 shares of common stock to cover over-allotments.
------------------------------
BANCBOSTON ROBERTSON STEPHENS DONALDSON, LUFKIN & JENRETTE
------------------------------
SG COWEN THOMAS WEISEL PARTNERS LLC
THE UNDERSIGNED ARE FACILITATING INTERNET DISTRIBUTION
E*TRADE SECURITIES DLJDIRECT INC.
The date of this prospectus is , 1999
<PAGE> 3
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF THE COMMON STOCK. IN THIS PROSPECTUS, REFERENCES TO
"GLOBESPAN," "WE," "OUR" AND "US" REFER TO GLOBESPAN, INC.
UNTIL , 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 4
Note Regarding Forward-Looking Statements................... 19
Use of Proceeds............................................. 19
Dividend Policy............................................. 19
Certain Information......................................... 19
Capitalization.............................................. 20
Dilution.................................................... 22
Selected Financial Data..................................... 23
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 24
Business.................................................... 36
Management.................................................. 50
Certain Transactions........................................ 61
Principal Stockholders...................................... 69
Description of Capital Stock................................ 71
Shares Eligible for Future Sale............................. 75
Underwriting................................................ 77
Legal Matters............................................... 79
Experts..................................................... 79
Where You Can Find Additional Information................... 80
Index to Financial Statements............................... F-1
</TABLE>
-------------------------
This prospectus contains trademarks and trade names of other companies.
i
<PAGE> 4
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary is not complete and does not contain all of the
information that you should consider before buying shares in the offering. You
should read this entire prospectus carefully.
OUR BUSINESS
GlobeSpan, Inc. is a leading worldwide developer of advanced digital
subscriber line (DSL) integrated circuits (chip sets) which enable high-speed
data transmission over the existing network of copper telephone wires known as
the local loop. Our products, when deployed at each end of these copper
telephone wires, enable data transmission at rates over 100 times faster than
today's commonly deployed modem technologies, which transmit data at 56 kilobits
per second (Kbps). We sell our integrated circuits as chip sets to manufacturers
of DSL equipment for incorporation into products that are sold to
telecommunications service providers and end users. To date, we have shipped
more than one million DSL chip sets, representing a significant share of this
emerging market, to a broad base of leading communications equipment
manufacturers, including Ascom Hasler AG, Cisco Systems, LG Information &
Communications, NEC Corporation, Paradyne Corporation and Westell Technologies.
We do not own or operate our own fabrication facility and Lucent Technologies
currently manufactures substantially all of our chip sets.
Our products target the rapidly growing market for high-speed data
transmission applications such as Internet access, telecommuting and networking
among branch offices. In order to enable these applications, equipment
manufacturers are designing DSL systems around increasingly complex integrated
circuits which account for a significant portion of the value-added, proprietary
content of such systems. While equipment manufacturers have in-depth systems
knowledge, they often lack the core technology and expertise necessary to
develop these integrated circuits internally and are turning to DSL integrated
circuit developers that possess the core technologies and expertise required to
bring high performance, cost-effective solutions to market.
Our objective is to maximize the number of products that are designed by
new and existing customers to incorporate our chip sets. By maximizing the
number of such "design wins," we create an opportunity to sell our chip sets in
volume quantities, capitalize on the success of any one of our customers' DSL
products and increase the likelihood of additional design wins with our
customers. We are successful in capturing design wins because:
- We have extensive DSL development experience, including six years of
field experience in implementing DSL technology;
- We have sold over one million DSL chip sets, which represents a
significant market share of the DSL integrated circuit market;
- We offer a broad suite of DSL chip sets;
- Our DSL chip sets provide high performance processing power, enabling
billions of operations per second;
- Our DSL chip sets create software flexibility, enabling our customers to
enhance or reconfigure their products through software downloads;
- Our DSL chip sets offer a competitive total system cost;
- We apply advanced systems-level expertise;
- We sell comprehensive reference design guides and offer strong technical
support to accelerate customers' time to market; and
- Our DSL chip sets are designed to comply with industry standards.
1
<PAGE> 5
We believe these advantages and design attributes position us as the
preferred design partner and chip set supplier for DSL equipment manufacturers.
Our strategy is to maintain and grow our leading design win position by:
- Targeting all applications in the DSL market and providing the chip set
technologies necessary to enable these applications;
- Strengthening and broadening our technology competencies to maintain our
leading position in the DSL market;
- Leveraging our advanced systems-level expertise to develop and offer chip
sets that can be cost effectively incorporated into complete DSL systems;
and
- Continuing to actively participate in the formulation of critical
standards for the high-speed data transmission market.
We were formed as an independent company in July 1996 as part of the
divestiture of AT&T Paradyne Corporation by Lucent Technologies. We commenced
operations in August 1996. Prior to the divestiture, our business was operated
as the Advanced Transmission Technology Division of AT&T Paradyne Corporation.
THE OFFERING
Common stock offered by GlobeSpan......... 3,250,000 shares
Common stock to be outstanding after this
offering.................................. 17,416,573 shares
Use of proceeds........................... We intend to use the estimated
$28.5 million net proceeds from
this offering to retire
approximately $4.9 million of
indebtedness to Communication
Partners, L.P., a related party,
to loan Mr. Geday, our President
and Chief Executive Officer,
approximately $1.4 million for the
payment of withholding taxes in
connection with his early exercise
of options to purchase our common
stock and for working capital,
repayment of other indebtedness,
potential acquisitions of
technology or businesses and other
general corporate purposes.
Proposed Nasdaq National Market symbol.... GSPN
- ------------------------------
The foregoing information is based upon shares outstanding as of March 31,
1999, the assumed conversion of our Series A preferred stock into 1,461,454
shares of common stock, the completion of a one-for-three reverse stock split
and the exercise of our warrant held by Lucent Technologies into 430,500 shares
of common stock. The foregoing information excludes the underwriters'
over-allotment option, up to an aggregate of 500,000 shares of common stock
issuable upon the exercise of outstanding warrants and 4,018,181 shares of
common stock reserved for issuance under our equity incentive and stock plans.
2
<PAGE> 6
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY THE COMPANY
--------------------------- ----------------------------------------------------------------
SEVEN FIVE
YEAR ENDED MONTHS MONTHS YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, ENDED ENDED DECEMBER 31, MARCH 31,
---------------- JULY 31, DECEMBER 31, ----------------------- -----------------------
1994 1995 1996 1996 1997 1998 1998 1999
------- ------ -------- ------------ ---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues................... $ 380 $6,685 $ 1,597 $2,360 $22,546 $31,464 $7,568 $ 8,641
Gross profit................... 380 6,685 1,597 1,864 14,981 21,582 5,720 4,621
(Loss) income from
operations................... (4,593) 765 (2,419) (800) 1,051 (7,912) 778 (3,687)
Interest income (expense),
net.......................... -- -- -- -- 91 (134) 14 (182)
Net (loss) income.............. $(4,593) $ 765 $(2,419) $ (800) $ 842 $(7,829) $ 516 $(3,869)
------ ------ ------ ----- ------
------ ------ ------ ----- ------
(Loss) earnings per share:
Basic........................ $(0.07) $ 0.07 $ (0.65) $ 0.04 $ (0.32)
------ ------ ------ ----- ------
------ ------ ------ ----- ------
Diluted...................... $(0.07) $ 0.07 $ (0.65) $ 0.04 $ (0.32)
------ ------ ------ ----- ------
------ ------ ------ ----- ------
Shares used in computing (loss)
earnings per share:
Basic........................ 11,437,500 11,515,538 12,084,711 11,906,674 12,137,589
Diluted...................... 11,437,500 12,706,432 12,084,711 12,586,663 12,137,589
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1999
-----------------------
PRO FORMA
ACTUAL AS ADJUSTED
------- -----------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 146 $32,685
Working capital (deficit)................................... (5,882) 27,445
Total assets................................................ 14,261 48,248
Long-term liabilities, less current portion................. 5,391 491
Total stockholders' (deficit) equity........................ (5,024) 34,651
</TABLE>
The financial data under the heading "Predecessor Company" is for our
business when it was the Advanced Transmission Technology Division of AT&T
Paradyne Corporation. We were formed in July 1996 as part of the divestiture of
AT&T Paradyne Corporation by Lucent Technologies and commenced operations in
August 1996. For more information on the divestiture, see "Certain Transactions"
and Note 1 of the Notes to Financial Statements.
See Note 9 of the Notes to Financial Statements for an explanation of the
method used to calculate earnings per share. Earnings per share data is not
presented for the Predecessor Company since the Predecessor Company did not have
its own capital structure. As a result, this information would not be
meaningful.
The balance sheet data as of March 31, 1999, as adjusted, gives effect to
(a) our receipt of the net proceeds from the sale of shares of common stock
offered hereby at an assumed public offering price of $10.00 per share, after
deducting the underwriting discounts and commissions and estimated offering
expenses payable by us, (b) the net exercise of the outstanding warrant held by
Lucent Technologies, (c) the repayment of certain indebtedness, (d) the
extension of a loan to Mr. Geday, our President and Chief Executive Officer, for
the payment of withholding taxes in connection with his early exercise of
options to purchase our common stock and (e) the sale of 1,461,454 shares of
Series A preferred stock in May 1999 and the conversion of such shares to common
stock upon completion of this offering. See "Use of Proceeds" and
"Capitalization."
3
<PAGE> 7
RISK FACTORS
Before you invest in our common stock, you should be aware of various
risks, including those described below. You should carefully consider these risk
factors, together with all of the other information included in this prospectus,
before you decide whether to purchase shares of our common stock.
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 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 NEC Corporation;
- 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.
4
<PAGE> 8
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. For example, Paradyne Corporation
is currently entitled to purchase our chip sets at preferential prices. If
Paradyne Corporation increases its orders from us, our gross margins could be
materially adversely affected.
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 $7.8 million in 1998 and $3.9 million in the three months ended
March 31, 1999. As of March 31, 1999, we had an accumulated deficit of $11.7
million. 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 NEC Corporation, 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
three months ended March 31, 1999, our customers who individually represented at
least five percent of our net revenues accounted for 85.5%, 72.6%, 70.1% and
65.7%, 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
5
<PAGE> 9
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 three months ended March 31, 1999, our
top three customers were Cisco Systems, NEC Corporation and Ascom Hasler AG,
which accounted for 39.4%, 9.7% and 9.0% 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, NEC 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
The market for chip sets for DSL products is characterized by:
- Intense competition;
- Rapid technological change;
- Frequent new product introductions by our competitors;
6
<PAGE> 10
- 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 (2B1Q), 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 2B1Q 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, substantially all of our product revenues to
date have come from the sale of chip sets that use the CAP line code. We have
not commercially shipped chip sets based on the 2B1Q, DMT or PAM line codes and
we cannot be certain that these chip sets will be successful.
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.
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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
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
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<PAGE> 12
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.
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. If any such claims
are made, 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
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<PAGE> 13
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 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.
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<PAGE> 14
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.
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 NEC
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.
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<PAGE> 15
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 AND THE ASSUMPTION OF SERVICES
PREVIOUSLY PERFORMED FOR US BY PARADYNE CORPORATION HAS PLACED A STRAIN ON OUR
MANAGEMENT AND PERSONNEL AND OTHER RESOURCES
Since our formation, Paradyne Corporation has provided us with certain
services, including legal, accounting and tax support, information systems and
facilities management. Although we now perform many of these functions, Paradyne
Corporation still provides certain services, such as insurance and retirement
plan administration. We expect to perform an increasing number of the remaining
services currently provided by Paradyne Corporation. If we do not successfully
manage this transition, our business, financial condition and results of
operations will be seriously harmed. Further, from December 31, 1997 to March
31, 1999, we increased from 93 to 178 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.
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<PAGE> 16
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 %
Three Months Ended March 31, 1999 42.3 %
</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 three months ended March 31,
1999, 9.4% and 11.3%, 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 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.
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<PAGE> 17
AFTER THIS OFFERING 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
Upon completion of this offering, executive officers and directors and
their affiliates will own, in the aggregate, approximately 66.0% of our
outstanding common stock. The purchasers of common stock in this offering will
not have sufficient voting power to elect any members of our board of directors.
As a result, our current stockholders will be able to exercise control over all
matters requiring stockholder approval, including the election of directors and
approval of significant corporate transactions, which could have the effect of
delaying or preventing a change of control of our company.
Entities affiliated with Texas Pacific Group will own approximately 49.8%
of GlobeSpan after the offering and will be 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. Affiliates of Texas Pacific
Group are also currently the majority owners of Paradyne Corporation. See
"Certain Transactions."
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. The
waiver of this provision may make it easier for entities affiliated with Texas
Pacific Group, or other significant stockholders, to engage in a business
combination with us.
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
- Other third-party relationships.
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<PAGE> 18
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
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<PAGE> 19
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. See "Description of Capital Stock"
for a further discussion of these provisions.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL WHICH MIGHT NOT BE AVAILABLE OR WHICH,
IF AVAILABLE, WOULD BE ON TERMS ADVERSE TO PERSONS BUYING SHARES IN THIS
OFFERING
We expect the net proceeds from this offering, our current cash and cash
equivalents and cash from 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 of existing holders of our common stock. If we cannot
raise needed funds on acceptable terms, we may not be able to develop or enhance
our products, take advantage of future opportunities or respond to competitive
pressures or unanticipated requirements, which could seriously harm our
business, operating results and financial condition.
OUR STOCK PRICE MAY BE VOLATILE OR THINLY TRADED, WHICH MIGHT MAKE IT DIFFICULT
FOR INVESTORS TO SELL THEIR SHARES
Prior to this offering, you could not buy or sell our common stock on a
public market. An active public market for our common stock may not develop or
be sustained after this offering. We negotiated and determined the initial
public offering price with the representatives of the underwriters based upon
several factors. This price may vary from the market price after this offering.
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 or 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
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<PAGE> 20
and resources, which could cause serious harm to our business, financial
condition and results of operations.
14,166,573 SHARES OF OUR COMMON STOCK ARE HELD BY EXISTING STOCKHOLDERS, AND
FUTURE SALES OF THESE SHARES MAY DEPRESS OUR STOCK PRICE
After this offering, we will have 17,416,573 shares of common stock
outstanding. Of these shares, the 3,250,000 sold in this offering will be freely
tradable without restriction under the Securities Act except for any shares
purchased by "affiliates" of GlobeSpan as that term is defined in Rule 144 of
the Securities Act. As of March 31, 1999, the remaining 14,166,573 shares of
common stock held by existing stockholders are "restricted shares" as that term
is defined in Rule 144, and will be available for sale in the public market.
Sales of substantial amounts of these shares may depress our stock price, and we
cannot assure you that our stock price would recover from any such loss in
value. The eligibility of these shares to be sold in the future is described in
the table below:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE OF AVAILABILITY FOR SALE
- ---------------- -----------------------------
<C> <S>
0 At the date of this prospectus.
0 90 days after the date of this prospectus.
14,166,573 180 days after the date of this prospectus or afterwards.
</TABLE>
The above table assumes the effectiveness of certain lock-up arrangements
with the underwriters under which the stockholders have agreed not to sell or
otherwise dispose of their shares of common stock. Most of the shares that will
be available for sale after the 180th day after the date of this prospectus or
afterwards will be subject to certain volume limitations because they are held
by affiliates of GlobeSpan. In addition, we cannot assure you that these lock-up
restrictions will not be removed prior to 180 days after the offering without
prior notice by the underwriters.
As of March 31, 1999, there were options to purchase 1,998,844 shares of
our common stock outstanding. Should the holders of these options exercise their
options, there will be additional shares eligible for sale 180 days after the
date of this prospectus.
The holders of an aggregate of 13,829,454 shares of our common stock,
assuming the exercise of our outstanding warrants and the conversion of our
Series A preferred stock into common stock, have certain registration rights,
including the right to require us to register their shares and the right to
include their shares in public offerings we undertake in the future. See
"Description of Capital Stock -- Registration Rights."
If our stockholders sell substantial amounts of the common stock, including
shares issued upon the exercise of outstanding options, in the public market,
the market price of our common stock could fall. For more detailed information
regarding future sales of our common stock, please see "Shares Eligible for
Future Sale" and "Underwriting."
OUR CURRENT STOCKHOLDERS WILL BENEFIT FROM THIS OFFERING, AND YOU WILL
EXPERIENCE IMMEDIATE DILUTION
The initial public offering price is expected to be substantially higher
than the current book value per share of our outstanding common stock.
Stockholders existing as of March 31, 1999 have paid an average of $0.57 per
share for their common stock, and the pro forma net tangible book value as of
that date was $0.43 per share. After giving effect to the sale of 3,250,000
shares of our common stock in this offering at an assumed offering price of
$10.00 per share, our pro forma net tangible book value as of March 31, 1999
would have been $1.99 per share. As a result, investors purchasing our common
stock will incur immediate dilution of approximately $8.01 per share in the book
value of our common stock from the price they pay for our common stock. See
"Dilution." In addition, we have issued options to acquire common stock at
prices significantly below the initial public offering
17
<PAGE> 21
price. To the extent such outstanding options are ultimately exercised, there
will be further dilution to investors in this offering.
WE HAVE BROAD DISCRETION TO USE THE OFFERING PROCEEDS, AND HOW WE INVEST THESE
PROCEEDS MAY NOT YIELD A FAVORABLE RETURN
The principal purposes of this offering are to increase our equity capital,
to create a public market for our shares, to facilitate our future access to
public equity markets and to provide increased visibility and credibility for us
in a marketplace in which many of our current and potential competitors are or
are expected to be publicly held companies. We are effecting the offering at
this time because we believe that favorable market conditions currently exist
for the public offering of stock of companies within our industry. As of the
date of this prospectus, we have no specific plans to use the net proceeds from
the offering other than for repayment of certain indebtedness, making a loan to
Mr. Geday and general corporate purposes and plan to invest the net proceeds in
short-term, investment-grade, interest-bearing securities. Accordingly, our
management will retain broad discretion to allocate a substantial portion of the
net proceeds from this offering to uses that the stockholders may not deem as
desirable, and there can be no assurance that these proceeds can or will yield a
significant return.
WE DO NOT ANTICIPATE PAYING ANY DIVIDENDS
We currently intend to retain all future earnings to fund the development
and growth of our business and, therefore, we do not anticipate paying any
dividends. Additionally, our lines of credit currently prohibit the payment of
dividends.
18
<PAGE> 22
NOTE REGARDING FORWARD-LOOKING STATEMENTS
All statements, trend analyses and other information contained in this
prospectus regarding markets for our products and trends in net revenues, gross
margin and anticipated expense levels, and any statement that contains the words
"anticipate," "believe," "plan," "estimate," "expect," "intend" and other
similar expressions, constitute forward-looking statements. These
forward-looking statements are subject to business and economic risks, including
those risks identified in "Risk Factors" and elsewhere in this prospectus and
our actual results of operations may differ significantly from those contained
in the forward-looking statements because of such risks. The cautionary
statements made in this prospectus apply to all forward-looking statements
wherever they appear in this prospectus.
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the 3,250,000 shares of
common stock that we are offering will be approximately $28.5 million at an
assumed initial public offering price of $10.00 per share and after deducting
estimated offering expenses of $1.7 million and underwriting discounts and
commissions payable by GlobeSpan. We intend to retire approximately $0.8 million
of aggregate outstanding indebtedness to BankAmerica Business Credit, Inc. For
the year ended December 31, 1998, the weighted average interest rate was 9.1%.
The revolving credit agreement expires on January 2000 and is automatically
renewable for additional one year terms unless terminated by GlobeSpan or the
bank. We also intend to retire approximately $4.9 million of aggregate
outstanding indebtedness to Communication Partners, L.P., a related party. This
loan bears interest at a rate of 8.0% and expires May 1, 2003. We also intend to
loan Mr. Geday, our President and Chief Executive Officer, approximately $1.4
million for the payment of withholding taxes in connection with his early
exercise of options to purchase our common stock. See "Certain Transactions."
After the payment of our outstanding indebtedness and the loan to Mr.
Geday, the net proceeds we will receive from the offering will be approximately
$21.4 million, or $25.9 million if the underwriters' over-allotment option is
exercised in full. We intend to use these remaining proceeds primarily for
additional working capital. Although we may use a portion of the net proceeds to
acquire technology or businesses that are complementary to our business, we have
no current plans in this regard. Pending such uses, we plan to invest the net
proceeds in short-term, interest-bearing, investment grade securities. Another
primary purpose of the offering is to create a public market for our common
stock and facilitate our future access to public capital markets.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock or
other securities and do not anticipate paying cash dividends in the foreseeable
future. Additionally, our lines of credit currently prohibit the payment of
dividends.
CERTAIN INFORMATION
Our principal executive offices are located at 100 Schulz Drive, Red Bank,
New Jersey 07701, and our telephone number is (732)345-7500. Our logo and
certain titles and logos of our publications and products mentioned in this
prospectus are our service marks or trademarks. Each trademark, trade name or
service mark of any other company appearing in this prospectus belongs to its
holder.
19
<PAGE> 23
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999:
- On an actual basis;
- On a pro-forma basis to reflect the issuance of 1,461,454 shares of
Series A preferred stock issued in May 1999 ("Pro Forma-A");
- On a pro forma basis to reflect the net exercise of Lucent Technologies'
warrant to purchase shares of our common stock and the conversion of our
Series A preferred stock issued in May 1999 into 1,461,454 shares of
common stock upon the completion of this offering ("Pro Forma-B"); and
- On a pro forma as adjusted basis to reflect the sale of the shares of
common stock offered hereby (assuming an initial public offering price of
$10.00 per share) and the application of the net proceeds we will receive
from the offering in the manner described in "Use of Proceeds."
<TABLE>
<CAPTION>
MARCH 31, 1999
--------------------------------------------------
PRO FORMA
ACTUAL PRO FORMA-A PRO FORMA-B AS ADJUSTED
-------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Subordinated note payable to Communication Partners,
L.P................................................. $ 4,900 $ 4,900 $ 4,900 --
Long-term portion of capital lease obligations, less
current portion..................................... 491 491 491 491
Series A Redeemable Convertible Preferred Stock,
$0.001 par value, 1,461,454 shares authorized; no
shares issued and outstanding, actual, Pro Forma-B
and pro forma as adjusted; 1,461,454 shares issued
and outstanding, Pro Forma-A........................ -- 11,150 -- --
Stockholders' equity
Preferred stock, $0.001 par value, 10,000,000 shares
authorized; no shares issued or outstanding,
actual, Pro Forma-A, Pro Forma-B and pro forma as
adjusted.......................................... -- -- -- --
Beneficial conversion feature....................... -- 2,616 -- --
Common stock, $0.001 par value, 15,555,300 shares
authorized; 12,274,619 shares issued and
outstanding, actual and Pro Forma-A; 14,166,573
shares issued and outstanding, Pro Forma-B;
17,416,573 shares issued and outstanding, pro
forma as adjusted................................. 12 12 14 17
Stock purchase warrant.............................. 3,654 3,654 -- --
Additional paid-in capital.......................... 3,761 1,145 18,563 47,085
Notes receivable from stock sales................... (725) (725) (725) (725)
Deferred stock compensation......................... (70) (70) (70) (70)
(Accumulated deficit) retained earnings............. (11,656) (11,656) (11,656) (11,656)
-------- -------- -------- --------
Total stockholders' equity........................ (5,024) (5,024) 6,126 34,651
-------- -------- -------- --------
Total capitalization............................ $ 367 $ 11,517 $ 11,517 $ 35,142
======== ======== ======== ========
</TABLE>
The outstanding share information excludes the following:
- 300,000 shares of common stock issuable upon the exercise of warrants
issued in connection with the issuance of Series A preferred stock in May
1999.
- Up to 200,000 shares of common stock issuable upon the exercise of
warrants issued in connection with the issuance of Series A preferred
stock in May 1999. These warrants expire unexercised upon the completion
of this offering at an offering price of $10.00 per share or more. See
"Description of Capital Stock."
20
<PAGE> 24
- 1,998,844 shares of common stock issuable on exercise of outstanding
options as of March 31, 1999 with a weighted average exercise price of
$3.92 per share,
- 369,337 shares of common stock reserved for grant and issuance under our
1996 Equity Incentive Plan as of March 31, 1999.
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Financial
Statements and the Notes thereto included elsewhere in this prospectus. See "Use
of Proceeds" and "Management--Employee Benefit Plans."
21
<PAGE> 25
DILUTION
Our pro forma net tangible book value as of March 31, 1999 was
approximately $6.1 million, or approximately $0.43 per share. Pro forma net
tangible book value per share represents the amount of our total tangible assets
less total liabilities, divided by the total number of shares of our common
stock outstanding on a pro forma basis. Pro forma net tangible book value
includes the net $11.15 million of proceeds we realized upon the sale of our
Series A preferred stock in May 1999, net of expenses. Pro forma share amounts
include common stock outstanding, 430,500 shares of common stock to be issued at
the closing of this offering upon net exercise of an outstanding warrant held by
Lucent Technologies and 1,461,454 shares of common stock convertible upon the
completion of this offering from shares of Series A Preferred Stock.
Net tangible book value dilution per share to new investors represents the
difference between the amount per share paid by purchasers of shares of common
stock in the offering made hereby and the pro forma net tangible book value per
share of common stock immediately after completion of this offering. After
giving effect to our sale of 3,250,000 shares of common stock in this offering
at an assumed initial offering price of $10.00 per share and after deducting the
estimated underwriting discounts and commissions and estimated offering expenses
and the application of the estimated net proceeds therefrom, our pro forma net
tangible book value as of March 31, 1999 would have been $34.7 million or $1.99
per share. This represents an immediate increase in net tangible book value of
$28.5 per share to existing stockholders and an immediate dilution of $8.01 per
share to purchasers of common stock in the offering, as illustrated in the
following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $ 10.00
Pro forma net tangible book value per share as of March
31, 1999............................................... $ 0.43
Increase in pro forma net tangible book value per share
attributable to new investors.......................... 1.56
-------
Pro forma net tangible book value per share after the
offering.................................................. 1.99
-------
Dilution per share to new investors......................... $ 8.01
=======
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1999,
the differences between existing stockholders and the new investors with respect
to the number of shares of common stock purchased from GlobeSpan, the total
consideration paid and the average price per share paid, before deducting the
underwriting discounts and commissions and estimated offering expenses payable
by GlobeSpan.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders........... 12,274,619 70.5% $ 6,943,000 13.5% $ 0.57
Series A stockholders........... 1,461,454 8.4 12,000,000 23.3 8.21
Net exercise of warrant......... 430,500 2.5 -- -- --
New stockholders................ 3,250,000 18.6 32,500,000 63.2 $10.00
---------- ----- ----------- -----
Totals................ 17,416,573 100.0% $51,443,000 100.0%
========== ===== =========== =====
</TABLE>
The foregoing discussion and tables assume no exercise of any stock options
or warrants outstanding as of March 31, 1999. As of March 31, 1999, there were
options outstanding to purchase a total of 1,998,844 shares of common stock with
a weighted average exercise price of $3.92 per share, warrants to purchase
300,000 shares of common stock at an average exercise price of $13.75 and
warrants to purchase up to 200,000 shares of common stock which expire
unexercised upon completion of this offering at an assumed initial public
offering price of $10.00 per share. To the extent that options with exercise
prices below the price per share of this offering are exercised, there will be
an additional $0.03 dilution to new investors. To the extent that the additional
warrants are exercised, there will be further dilution to new investors. See
"Risk Factors--Our Current Stockholders Will Benefit from This Offering, and You
Will Experience Immediate Dilution," "Management--1999 Stock Option Plan,"
"Description of Capital Stock," and Note 10 of Notes to Financial Statements.
22
<PAGE> 26
SELECTED FINANCIAL DATA
The following selected financial data as of December 31, 1997 and 1998, and
for the seven months ended July 31, 1996, the five months ended December 31,
1996 and the years ended December 31, 1997 and 1998, was derived from financial
statements audited by PricewaterhouseCoopers LLP, independent accountants. The
selected financial data as of March 31, 1999 and for the three months ended
March 31, 1998 and 1999 was derived from our unaudited financial statements and,
in the opinion of management, reflect and include all adjustments (consisting of
normal recurring adjustments) necessary for a fair presentation of such results.
The results of operations for the three months ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999. The selected financial data for the years ended December 31,
1994 and 1995 of the Predecessor Company represent the financial position of the
Advanced Transmission Technology Division of AT&T Paradyne prior to the
divestiture in July 1996 and was derived from the unaudited financial statements
of the Predecessor Company. This information should be read in conjunction with
the financial statements, including the notes thereto, included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
PREDECESSOR COMPANY THE COMPANY
-------------------------- -----------------------------------------------------------------
SEVEN
MONTHS FIVE
YEAR ENDED ENDED MONTHS YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, JULY ENDED DECEMBER 31, MARCH 31,
---------------- 31, DECEMBER 31, -------------------- --------------------
1994 1995 1996 1996 1997 1998 1998 1999
------- ------ ------- ------------ ------- ------- ------ -------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues................. $ 380 $6,685 $ 1,597 $2,360 $22,546 $31,464 $7,568 $ 8,641
Cost of sales................ -- -- -- 496 7,565 9,882 1,848 4,020
------- ------ ------- ------ ------- ------- ------ -------
Gross profit................. 380 6,685 1,597 1,864 14,981 21,582 5,720 4,621
Operating expenses
Research and development,
net...................... 2,808 3,725 2,524 1,616 8,358 18,694 3,249 5,380
Selling, general and
administrative........... 2,165 2,195 1,492 644 4,572 10,217 1,443 2,928
Amortization and other..... -- -- -- 404 1,000 583 250 --
------- ------ ------- ------ ------- ------- ------ -------
Total operating
expenses............... 4,973 5,920 4,016 2,664 13,930 29,494 4,942 8,308
------- ------ ------- ------ ------- ------- ------ -------
(Loss) income from
operations................. (4,593) 765 (2,419) (800) 1,051 (7,912) 778 (3,687)
Interest income (expense),
net........................ -- -- -- -- 91 (134) 14 (182)
------- ------ ------- ------ ------- ------- ------ -------
(Loss) income before income
taxes...................... (4,593) 765 (2,419) (800) 1,142 (8,046) 792 (3,869)
Provision (benefit) for
income taxes............... -- -- -- -- 300 (217) 276 --
------- ------ ------- ------ ------- ------- ------ -------
Net (loss) income............ $(4,593) $ 765 $(2,419) $ (800) $ 842 $(7,829) $ 516 $(3,869)
======= ====== ======= ====== ======= ======= ====== =======
(Loss) earnings per share:
Basic...................... $(0.07) $ 0.07 $ (0.65) $ 0.04 $ (0.32)
====== ======= ======= ====== =======
Diluted.................... $(0.07) $ 0.07 $ (0.65) $ 0.04 $ (0.32)
====== ======= ======= ====== =======
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares used in computing
(loss) earnings per
share:
Basic.................... 11,437,500 11,515,538 12,084,711 11,906,674 12,137,589
Diluted.................. 11,437,500 12,706,432 12,084,711 12,586,663 12,137,589
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------ -----------
1997 1998 1999
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................................... $ 875 $ 12 $ 146
Working capital (deficit)............................................................... 2,423 (2,655) (5,882)
Total assets............................................................................ 10,215 13,430 14,261
Long-term liabilities, less current portion............................................. -- 5,506 5,391
Retained earnings (accumulated deficit)................................................. 42 (7,787) (11,656)
Total stockholders' equity (deficit).................................................... 6,448 (1,293) (5,024)
</TABLE>
See Note 9 of Notes to the Financial Statements for an explanation of the
method used to calculate earnings per share. Earnings per share data is not
presented for the Predecessor Company, since the Predecessor Company did not
have its own capital structure. As a result, this information would not be
meaningful.
23
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations should be read in conjunction with the Financial
Statements of GlobeSpan and the Notes thereto included elsewhere in this
prospectus. Our discussion contains forward-looking statements based upon
current expectations that involve risks and uncertainties, such as our plans,
objectives and intentions. GlobeSpan's actual results may differ materially from
those indicated in such forward-looking statements. See "Note Regarding
Forward-Looking Statements."
OVERVIEW
GlobeSpan, Inc. 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. We sell our integrated circuits as chip sets to manufacturers of DSL
equipment for incorporation into products which are sold to telecommunications
service providers and end users. Our products target the rapidly growing market
for high-speed data transmission applications such as Internet access,
telecommuting and networking between branch offices. We currently outsource the
manufacturing of our integrated circuits, which enables us to concentrate our
resources on the design, development and marketing of our chip set solutions. To
date, we have shipped more than one million DSL chip sets to a broad base of
leading communications equipment manufacturers.
We were formed as an independent company in July 1996 as part of the
divestiture of AT&T Paradyne Corporation by Lucent Technologies and commenced
operations in August 1996. Prior to the divestiture, our business was operated
as the Advanced Transmission Technology Division of AT&T Paradyne Corporation.
This division was primarily engaged in the development of high-speed DSL
solutions. We refer to this division as our predecessor company, although it was
not operated as a separate entity.
The predecessor company generated substantially all of its revenues through
July 1996 from the license of DSL technology and related fees and customer
funded research and development. These revenues are not representative of our
current business, results of operations or prospects.
From the date of our formation in August 1996 through December 1996, we
continued to earn a substantial portion of our revenues from amounts paid by
third-party licensees of our technology. Beginning in early 1997, we
repositioned GlobeSpan as a product company focused on developing, marketing and
selling DSL chip sets and reference design guides. Since the repositioning,
royalty revenues from licensees have been a less significant part of our
business. In the pro forma year ended December 31, 1996, the years ended
December 31, 1997 and 1998 and the three months ended March 31, 1999, revenues
from licensees accounted for 76.0%, 8.6%, 1.0% and 0.6% of our net revenues,
respectively.
Today, substantially all of our net revenues are derived from the sale of
DSL chip sets and reference design guides. Our reference design guides are
technical specifications relating to the design of systems based on our chip
sets that enable our customers to develop products that incorporate our chip
sets. In our last fiscal year, the reference design guides accounted for 0.7% of
our total revenues. We recognize revenues at the time we ship our DSL products.
We typically sell our products with a 60 day warranty, and we reserve for
estimated product returns, which to date have not been significant. We have
historically generated substantially all of our revenues from our DSL products
that use the CAP line code. In 1998, we introduced a number of new chip sets
incorporating additional features and other line code technologies, including
2B1Q, DMT and PAM. These new product introductions have substantially expanded
our DSL product offerings, although revenues from such products have been
insignificant. In conjunction with repositioning GlobeSpan as a product company,
we invested extensively in research and development projects and personnel and
have
24
<PAGE> 28
expanded our sales, marketing, general and administrative capabilities. This
investment has led to significant hiring which began in early 1997. Our overall
headcount increased from 35 employees at December 31, 1996 to 178 employees at
March 31, 1999. In particular, during this period we hired 97 additional
engineers to develop new products and target future growth opportunities.
Historically, a significant portion of our net revenues in any quarter or
annual period has been derived from sales to relatively few customers, and we
expect this trend to continue. In the five months ended December 31, 1996, the
years ended December 31, 1997 and 1998 and the three months ended March 31,
1999, our customers who individually represented at least five percent of our
net revenues accounted for 85.5%, 72.6%, 70.1% and 65.7% of our net revenues in
such periods, respectively. 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 three months ended March 31, 1999, our
top three customers were Cisco Systems, NEC Corporation and Ascom Hasler AG,
which accounted for 39.4%, 9.7% and 9.0% 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 they could cease purchasing products from
us at any time. Because fluctuations in orders from our major customers could
cause our net revenues to fluctuate significantly in any given quarter or annual
period, we do not believe that period-to-period comparisons of our financial
results are necessarily meaningful and should not be relied upon as an
indication of future performance.
Members of the group comprising our largest customers change frequently due
to our lack of long term contracts with our customers, the timing of our
customers' product implementations, demand cycles in the sales of our customers'
products and our long sales cycle. In particular, the amount of revenues we
derive from our customers depends upon their success in selling DSL equipment to
telecommunications service providers for use in DSL service deployments. To
date, DSL deployments have been initiated on a select basis by
telecommunications service providers and have not yet achieved widespread
commercial deployment. Because our revenues have been derived from comparatively
few commercial DSL service deployments, our largest customers in any particular
period have varied with the timing of DSL deployments and the identity of the
telecommunications service provider initiating the deployment. Further, since we
are a worldwide supplier, our revenues and customers may be influenced by local
economic conditions that influence our customers' level of business with us. Our
long sales cycle is another factor in the frequent change of our principal
customers. In general, our customers will evaluate our products for three to six
months prior to incorporating our products into their products and beginning
volume production. As a result, our principal customers will vary depending on
their stage in the sales cycle.
Historically, a significant portion of our net revenues has been derived
from customers outside of North America, and we expect this trend to continue.
In 1998, approximately 32.6% of our net revenues were derived from customers
outside of the United States, of which 11.8% were derived from customers based
in Europe, 9.4% were derived from customers based in Asia and 11.4% were derived
from customers based in other international markets. In the three months ended
March 31, 1999, approximately 42.3% of our net revenues were derived from
customers outside of the United States, of which 17.5% were derived from
customers based in Mexico/Latin America, 12.4% were derived from customers based
in Europe and 12.4% were derived from customers based in other international
markets. All of our net revenues to date have been denominated in United States
dollars.
Competition and technological change in the rapidly evolving DSL market has
and may continue to influence our quarterly and annual net revenues and results
of operations. Average selling prices of our chip sets and associated gross
margins tend to be higher at the time we introduce new products and decline over
time due to competitive pressures. We expect this pattern to continue with
existing
25
<PAGE> 29
and future products. Further, our gross margins are impacted by our customer
concentration and product mix. For example, purchases from our major customers
are generally at lower average selling prices and certain of our products, such
as discrete components, are generally lower margin products.
Our product development and marketing strategy is focused on generating
design wins with DSL equipment manufacturers. The sales cycle for design wins
includes detailed testing and evaluation of our products, followed by a product
development cycle. Due to these cycles, which may be up to 12 months or longer,
and because the end-user market for DSL services is an emerging market, we
invest significantly in research and development and marketing in advance of
generating substantial revenues related to these investments. Additionally, the
rate and timing of customer orders may vary significantly from month to month.
To date, our backlog has not been significant, has fluctuated from quarter to
quarter, and has not been predictive of quarterly results. Accordingly, if sales
of our products do not occur when we expect and we are unable to predict or
adjust our estimates on a timely basis, our expenses and inventory levels may
increase as a percentage of net revenues and total assets, respectively.
Our net losses have resulted from our significant investment in our
research and development and in building sales and marketing and general and
administrative infrastructure. These expenses have exceeded our gross profits.
We expect to continue to invest significantly in this infrastructure in advance
of realizing revenues associated with such expenses. Accordingly, we expect to
incur substantial operating losses for the foreseeable future.
26
<PAGE> 30
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, certain statement
of operations data. Our results of operations are reported as a single business
segment.
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY THE COMPANY
-------------- -------------------------------------------------------------------
SEVEN FIVE YEAR ENDED DECEMBER 31,
MONTHS MONTHS ------------------------------- THREE MONTHS
ENDED ENDED ENDED MARCH 31,
JULY 31, DECEMBER 31, PRO FORMA -----------------
1996 1996 1996 1997 1998 1998 1999
-------------- ------------- ----------- ------- ------- ------ -------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Net revenues......... $ 1,597 $2,360 $ 3,957 $22,546 $31,464 $7,568 $ 8,641
Cost of sales........ -- 496 496 7,565 9,882 1,848 2,901
Cost of sales related
to termination
charge............. -- -- -- -- -- -- 1,119
------- ------ ------- ------- ------- ------ -------
Gross profit......... 1,597 1,864 3,461 14,981 21,582 5,720 4,621
Operating expenses:
Research and
development...... 2,524 1,616 4,140 8,358 18,694 3,249 5,380
Selling, general
and
administrative... 1,492 644 2,136 4,572 10,217 1,443 2,928
Amortization and
other............ -- 404 404 1,000 583 250 --
------- ------ ------- ------- ------- ------ -------
Total operating
expenses....... 4,016 2,664 6,680 13,930 29,494 4,942 8,308
------- ------ ------- ------- ------- ------ -------
(Loss) income from
operations......... (2,419) (800) (3,219) 1,051 (7,912) 778 (3,687)
Interest income
(expense), net..... -- -- -- 91 (134) 14 (182)
------- ------ ------- ------- ------- ------ -------
(Loss) income before
income taxes....... (2,419) (800) (3,219) 1,142 (8,046) 792 (3,869)
Provision (benefit)
for income taxes... -- -- -- 300 (217) 276 --
------- ------ ------- ------- ------- ------ -------
Net (loss) income.... $(2,419) $ (800) $(3,219) $ 842 $(7,829) $ 516 $(3,869)
======= ====== ======= ======= ======= ====== =======
</TABLE>
27
<PAGE> 31
The following table sets forth, for the periods indicated, certain
statement of operations data as a percentage of net revenues. Our results of
operations are reported as a single business segment.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------- ---------------
PRO FORMA (UNAUDITED)
1996 1997 1998 1998 1999
STATEMENT OF OPERATIONS DATA: --------- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net revenues........................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales....................................... 12.5 33.6 31.4 24.4 33.6
Cost of sales related to termination charge......... 0.0 0.0 0.0 0.0 12.9
----- ----- ----- ----- -----
Gross profit........................................ 87.5 66.4 68.6 75.6 53.5
----- ----- ----- ----- -----
Operating expenses:
Research and development.......................... 104.6 37.1 59.4 42.9 62.3
Selling, general and administrative............... 54.0 20.3 32.5 19.1 33.9
Amortization and other............................ 10.2 4.4 1.9 3.3 0.0
----- ----- ----- ----- -----
Total operating expenses........................ 168.8 61.8 93.7 65.3 96.1
----- ----- ----- ----- -----
(Loss) income from operations....................... (81.3) 4.7 (25.1) 10.3 (42.7)
Interest income (expense), net...................... 0.0 0.4 (0.4) 0.2 (2.1)
----- ----- ----- ----- -----
(Loss) income before income taxes................... (81.3) 5.1 (25.6) 10.5 (44.8)
Provision (benefit) for income taxes................ 0.0 1.3 (0.7) 3.6 0.0
----- ----- ----- ----- -----
Net (loss) income................................... (81.3)% 3.7% (24.9)% 6.8% (44.8)%
===== ===== ===== ===== =====
</TABLE>
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999
Net Revenues. Our net revenues were $7.6 million and $8.6 million in the
three months ended March 31, 1998 and 1999, respectively. This amount represents
an increase of 14.2%. This increase in revenue was primarily due to the
increases in unit volume shipments to existing customers, expansion of our
customer base and sales from the introduction of new products. Net revenues from
international customers represented 20.2% and 42.3% of our net revenues in the
three months ended March 31, 1998 and 1999, respectively. Net revenues from
international customers increased as a percentage of net revenues from 1998 to
1999 as a result of greater shipments to existing customers in the Asian Pacific
Rim. We expect that revenue generated from international customers will continue
to account for a significant percentage of our net revenues. See "Risk
Factors -- 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."
Cost of Sales and Gross Profit. Our gross profit was $5.7 million and $4.6
million in the three months ended March 31, 1998 and 1999, respectively. This
amount represents a decrease of 19.2%. Our gross margin was 75.6%, and 53.5% in
the three months ended March 31, 1998 and 1999, respectively. The decrease in
gross margin from 1998 to 1999 resulted primarily from a charge related to the
termination of a royalty agreement with Paradyne Corporation as discussed in
Note 14 of the Notes to Financial Statements. Without this termination charge,
our gross margin would have been 66.4% in the three months ended March 31, 1999.
The remainder of this decrease was related to lower average selling prices. 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 and customer mix.
Research and Development. Our research and development expenses were $3.2
million and $5.4 million in the three months ended March 31, 1998 and 1999,
respectively. This amount represents an increase of 65.6%. Research and
development expense represented 42.9% and 62.3% of net revenues for the three
months ended March 31, 1998 and 1999, respectively. The increase in dollars and
percentage of net revenues resulted from an increase in development efforts in
advance of anticipated revenue from such efforts. In particular, we added new
personnel and related support. Our
28
<PAGE> 32
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 $1.4 million and $2.9 million in the three months
ended March 31, 1998 and 1999, respectively. This amount represents an increase
of 103%. Selling, general and administrative expense represented 19.1% and 33.9%
of net revenues for the three months ended March 31, 1998 and 1999,
respectively. The increases in dollars and percentage of net revenues resulted
from the addition of sales, marketing, management and administrative personnel
and related expenses, including increased commissions, and general business
costs. Our selling, general and administrative expense may increase due to
higher commissions and administrative costs.
Amortization and Other. Amortization was provided on a straight-line basis
commencing in August 1996 through July 1998. Our expense for amortization of
patents was $0.3 million in the three months ended March 31, 1998, and there was
no amortization expense in the three months ended March 31, 1999.
Other Income (Expense), Net. Interest expense increased $0.2 million for
the three months ended March 31, 1999. The increased interest expense resulted
from bank borrowings and other debt.
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). Our effective
tax rate for the three months ended March 31, 1998 was 34.8%. Since we generated
a loss in the three months ended March 31, 1999 and had a loss carryforward for
1998, we did not record an income tax benefit.
RECENT DEVELOPMENTS
On May 6, 1999, in a private placement with Cisco Systems and Intel
Corporation, we issued 1,461,454 shares of our Series A preferred stock,
warrants to purchase up to 300,000 shares of our common stock at an average
exercise price of $13.75 per share and warrants to purchase up to 200,000 shares
of our common stock at an exercise price per share equal to the initial public
offering price per share, which will expire unexercised upon the completion of
this offering if the offering price is equal to or exceeds $10.00 per share. The
purchase price for the Series A preferred stock and warrants was an aggregate
amount of $12,000,001. The Series A preferred stock will convert into shares of
our common stock either at the option of the holder of the preferred stock or
automatically upon the effective date of this offering if the proceeds from this
offering equal or exceed $8.211 per share or $15.0 million in the aggregate. In
connection with the private placement, we entered into a registration rights
agreement with Intel Corporation, Cisco Systems and Communication Partners, L.P.
See "Description of Capital Stock -- Registration Rights". Also in connection
with the private placement, we granted to Intel Corporation and Cisco Systems
the right to sell back their GlobeSpan shares under some circumstances. These
rights to sell shares back to us terminate upon the completion of this offering.
See "Description of Capital Stock -- Put Options." We also agreed with Intel
Corporation not to bring legal action against Intel Corporation for any
infringement by it of our patent rights. This agreement terminates if Intel
Corporation brings any legal action against us for any infringement by us of
Intel Corporation's patent rights. Because the Series A preferred stock is
immediately exercisable into common stock at less than the fair market value of
the common stock on the date of issuance, we will recognize a charge of
approximately $2.6 million for the beneficial conversion feature attributable to
the common stockholders in our second quarter 1999 financial statements.
RESULTS OF OPERATIONS IN THE PRO FORMA YEAR ENDED DECEMBER 31, 1996 AND THE
YEARS ENDED DECEMBER 31, 1997 AND 1998
Net Revenues. Our net revenues from product sales are recognized upon
shipment of DSL chip sets and reference design guides. Our net revenues were
$4.0 million, $22.5 million, and $31.5 million in the pro forma year ended
December 31, 1996 and the years ended December 31, 1997 and 1998,
29
<PAGE> 33
respectively. These amounts represent increases of 470% from 1996 to 1997 and
39.6% from 1997 to 1998. The increase in revenues from 1996 to 1997 was
primarily due to an increase in product sales as we transitioned from generating
revenues from licensees to generating revenues from the sale of products. The
increase in revenues from 1997 to 1998 was primarily due to the increases in
unit volume shipments to existing customers, the expansion of our customer base
and the introduction of new products. Net revenues from customers outside of
North America represented 40.0%, 49.2% and 32.6% of our net revenues in the five
months ended December 31, 1996 and the years ended December 31, 1997 and 1998,
respectively. Net revenues from customers outside of North America decreased as
a percentage of net revenues from 1997 to 1998 as a result of reduced shipments
to existing customers in Asia due to an economic downturn in a number of
countries in this region. We expect that revenues generated from customers
outside of North America will continue to account for a significant percentage
of our net revenues. See "Risk Factors -- 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."
Cost of Sales and Gross Profit. Cost of sales consists of the costs of
having our chip sets manufactured on a turnkey basis by our suppliers. Gross
profit represents net revenues less cost of sales. Our gross profit was $3.5
million, $15.0 million and $21.6 million in the pro forma year ended December
31, 1996 and the years ended December 31, 1997 and 1998, respectively. These
amounts represent an increase of 333% from 1996 to 1997 and 44.1% from 1997 to
1998. Our gross margin was 87.5%, 66.4%, and 68.6% in the pro forma year ended
December 31, 1996 and the years ended December 31, 1997 and 1998, respectively.
The decrease in gross margin from 1996 to 1997 was directly related to a
reduction in revenues from licensees and to an increase in product revenues. The
increase in gross margin from 1997 to 1998 resulted from an expanded customer
base and lower supplier costs based on greater volumes purchased. The increase
in gross profit dollars was the result of higher unit sales. We expect that
gross margin will decrease due to a number of factors, including pressures on
average selling prices and customer and product mix. In consideration for
modifying pricing terms for the sale of GlobeSpan products under certain
cooperative development agreements with Paradyne Corporation, GlobeSpan agreed
to pay a license fee to Paradyne Corporation on products sold to all customers
up to an aggregate amount of $1.5 million. As of March 1999, GlobeSpan had
incurred and paid approximately $300,000 to Paradyne Corporation under such
arrangement. In connection with terminating the cooperative development
agreements and entering into a new Supply Agreement effective December 1998 with
Paradyne Corporation, GlobeSpan agreed to pay Paradyne Corporation the remaining
$1.2 million which was expected to be incurred during 1999. The $1.2 million was
expensed in the first quarter of 1999 as a cost of sales and will be paid during
1999.
Research and Development. Research and development expenditures is
primarily comprised of salaries and related expenses of employees engaged in
research, design and development activities. It also includes related supplies,
license fees for acquired technologies used in research and development,
equipment expenses and depreciation and amortization. Our research and
development expenditures were $4.1 million, $8.4 million and $18.7 million, in
the pro forma year ended December 31, 1996 and the years ended December 31, 1997
and 1998, respectively. These amounts represent increases of 102% from 1996 to
1997 and 124% from 1997 to 1998. Research and development expenditures
represented 105%, 37.1% and 59.4% of net revenues in the pro forma year ended
December 31, 1996 and the years ended December 31, 1997 and 1998, respectively.
The increase in dollars in 1997 resulted from increased headcount and
depreciation expense due to increased fixed assets. The decrease in research and
development expenditures as a percentage of net revenues in 1997 resulted from
higher net revenues. The increase in dollars and as a percentage of net revenues
in 1998 resulted from a significant increase in development efforts in advance
of anticipated revenues from such efforts. In particular, we added a significant
number of new personnel and related support. In 1999, our research and
development expenditures will increase due to planned increases in personnel,
material costs and depreciation resulting from increased capital investment.
30
<PAGE> 34
Selling, General and Administrative. Selling, general and administrative
expense is primarily comprised of salaries and related costs for sales, general
and administrative personnel as well as general non-personnel related expenses.
Our selling, general and administrative expense was $2.1 million, $4.6 million
and $10.2 million in the pro forma year ended December 31, 1996 and the years
ended December 31, 1997 and 1998, respectively. These amounts represent
increases of 114% from 1996 to 1997 and 123% from 1997 to 1998. Selling, general
and administrative expense represented 54.0%, 20.3%, and 32.5% of net revenues
in the pro forma year ended December 31, 1996 and the years ended December 31,
1997 and 1998, respectively. The increase in dollars in 1997 and 1998, and as a
percentage of net revenues in 1998, resulted from the addition of sales,
marketing, management and administrative personnel and related expenses,
including increased commissions, and general business costs. In 1999, we will
increase the dollar amount we spend on selling, general and administrative
expense.
Amortization and Other. Amortization expense is related to the core
technology we acquired in connection with the divestiture by Lucent Technologies
of AT&T Paradyne. Amortization was provided on a straight-line basis commencing
in August 1996 through July 1998. Our expense for amortization of core
technology was $0.4 million, $1.0 million and $0.6 million, in the pro forma
year ended December 31, 1996 and the years ended December 31, 1997 and 1998,
respectively. These amounts represent an increase of 148% from 1996 to 1997 and
a decrease of 41.7% from 1997 to 1998.
Interest Income (Expense), Net. Interest income (expense), net is comprised
of interest expense from bank borrowings and other debt, net of interest earned
on invested cash, and other non-operating expenses. Interest income increased by
$0.1 million for the year ended December 31, 1997 due to higher levels of
invested cash and decreased by $0.2 million resulting in interest expense of
$0.1 million for the year ended December 31, 1998. The increase in interest
expense resulted from bank borrowings and other debt.
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). Our effective
tax rate for the year ended December 31, 1997 was 26.3%, which differed from the
federal statutory rate primarily due to the utilization of the net operating
loss carryforwards generated in 1996 and a reduction of the valuation allowance
recorded against deferred tax assets. Since we generated a loss in 1998, a
benefit was recorded reflecting a loss carry-back for taxes paid in 1997.
31
<PAGE> 35
QUARTERLY RESULTS
The following table sets forth certain unaudited selected quarterly results
of operations data for the eight quarters ended March 31, 1999, as well as such
data expressed as a percentage of our net revenues. This data has been derived
from unaudited financial statements that, in the opinion of management, include
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of such information when read in conjunction with our annual
audited financial statements and related notes thereto appearing elsewhere in
this prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------------
JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31,
1997 1997 1997 1998 1998 1998 1998 1999
-------- -------- -------- -------- -------- -------- -------- -----------
(IN THOUSANDS AND AS A PERCENTAGE OF NET REVENUES) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Net revenues.................... $4,115 $7,670 $7,811 $7,568 $7,683 $7,765 $8,448 $ 8,641
Cost of sales................... 1,364 3,058 2,075 1,848 2,312 2,328 3,394 4,020
------ ------ ------ ------ ------- ------- ------- -------
Gross profit.................... 2,751 4,612 5,736 5,720 5,371 5,437 5,054 4,621
Operating expenses
Research and development...... 1,467 2,240 3,368 3,249 4,286 5,020 6,139 5,380
Selling, general and
administrative.............. 765 1,204 1,826 1,443 2,556 3,022 3,196 2,928
Amortization of core
technology.................. 250 250 250 250 250 83 0 --
------ ------ ------ ------ ------- ------- ------- -------
Total operating expenses.... 2,482 3,694 5,444 4,942 7,092 8,125 9,335 8,308
------ ------ ------ ------ ------- ------- ------- -------
(Loss) income from operations... $ 269 $ 918 $ 292 $ 778 $(1,721) $(2,688) $(4,281) $(3,687)
====== ====== ====== ====== ======= ======= ======= =======
AS A PERCENTAGE OF NET REVENUES
Net revenues.................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................... 33.1 39.9 26.6 24.4 30.1 30.0 40.2 46.5
------ ------ ------ ------ ------- ------- ------- -------
Gross profit.................... 66.9 60.1 73.4 75.6 69.9 70.0 59.8 53.5
Operating expenses
Research and development...... 35.7 29.2 43.1 42.9 55.8 64.6 72.7 62.3
Selling, general and
administrative.............. 18.6 15.7 23.4 19.1 33.3 38.9 37.8 33.9
Amortization of core
technology.................. 6.1 3.3 3.2 3.3 3.3 1.1 0.0 0.0
------ ------ ------ ------ ------- ------- ------- -------
Total operating expenses.... 60.3 48.2 69.7 65.3 92.3 104.6 110.5 96.1
------ ------ ------ ------ ------- ------- ------- -------
(Loss) income from operations... 6.5% 12.0% 3.7% 10.3% (22.4)% (34.6)% (50.7)% (42.7)%
====== ====== ====== ====== ======= ======= ======= =======
</TABLE>
Our quarterly operating results have varied significantly in the past and
will continue to do so in the future due to a number of factors including, but
not limited to, changes in average selling prices, product mix, customer mix and
pricing from foundries. In addition, the timing of reserves and level of
research and development expenditures could cause quarterly operating results to
fluctuate. Accordingly, our operating results for any given quarter or series of
quarters are not necessarily indicative of our results for any future period. To
date, our backlog has not been significant, has fluctuated from quarter to
quarter, and has not been predictive of quarterly results.
In the three months ended December 31, 1997, our cost of sales decreased in
dollars and as a percentage of revenues despite an increase in net revenues,
producing a higher gross profit and gross margin. This was primarily due to
higher average selling prices and lower costs on products purchased from our
foundry. In the three months ended June 1998, selling, general and
administrative expenses increased due primarily to the addition of executive
officers and related hiring expenses. In the three months ended September 1998,
our selling, general and administrative expenses increased due to increased
hiring and the sublease of office space from Paradyne Corporation. In connection
with the relocation of Paradyne Corporation's office, we reimbursed certain of
Paradyne Corporation's moving expenses. In the three months ended December 31,
1998, gross profit decreased in dollars and as a percentage of net revenues from
the prior quarter primarily due to a relative increase in sales volume of lower
margin products to a major customer. In addition, research and development
expenses increased in the three months ended December 31, 1998 primarily due to
increased hiring and license fees of approximately $750,000 to acquire
technology used in the development of our products.
32
<PAGE> 36
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations from initial contributions
of capital, borrowings on our lines of credit, and in 1997, from ongoing
operations. As of December 31, 1998 and March 31, 1999, we had a working capital
deficit of approximately $2.7 million and $5.9 million, respectively, and
$12,000 and $146,000 in cash and equivalents, respectively. We finance and
expect to continue to finance our operations from our recent sale of Series A
preferred stock and available credit facilities.
Net cash generated by operating activities was $0.9 million and $1.9
million in the year ended December 31, 1997 and the three months ended March 31,
1999. Net cash used in operating activities was $0.7 million and $3.4 million in
the five months ended December 31, 1996 and the year ended December 31, 1998,
respectively. The increase from 1996 to 1997 and from 1998 to 1999 and the
decrease from 1997 to 1998 was primarily due to the timing of expenditures.
Net cash used in investing activities was $2.0 million, $3.4 million, $4.8
million and $0.07 million in the five months ended December 31, 1996, the years
ended December 31, 1997 and 1998, and the three months ended March 31, 1999,
respectively, and related primarily to capital expenditures to support our
expanded operations. We may increase our capital expenditures in 1999.
Net cash provided from financing activities was $6.0 million, $0.06 million
and $7.3 million in the five months ended December 31, 1996 and the years ended
December 31, 1997 and 1998, respectively, and was provided by an equity
investment from Communication Partners, L.P., bank borrowings and other debt.
Net cash used in financing activities was $1.7 million in the three months ended
March 31, 1999, and was used in repayment of bank borrowings and other debt. We
have a revolving line of credit (the "Credit Line") of up to $5.0 million from
BankAmerica Business Credit which bears interest at the bank's prime rate plus
1.5%. As of December 31, 1998 and March 31, 1999, approximately $2.5 million and
$0.8 million, respectively, was outstanding under the Credit Line. We also had a
subordinated borrowings line from Communication Partners, L.P. (the
"Subordinated Line") of up to $10.0 million bearing interest at 8.0%, of which
approximately $5.0 million and $4.9 million was outstanding at December 31, 1998
and March 31, 1999, respectively. We will use a portion of the proceeds of this
offering to repay all outstanding indebtedness under both the Credit Line and
the Subordinated Line, each of which will be available for future borrowings
following such repayment. We have no plans to borrow under either the Credit
Line or the Subordinated Line immediately following this offering. Our Credit
Line contains 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 are currently in compliance with such
financial covenants and restrictions. Borrowings under the Credit Line are
secured by substantially all of our assets. The Credit Line expires January
2000; and $5.0 million of the Subordinated Line expires on March 2000 and $5.0
million on May 2003. See "Use of Proceeds."
We believe that the net proceeds from this offering, our existing cash and
cash generated from operations, if any, will be adequate to meet our anticipated
cash needs for working capital and capital expenditures through at least the end
of 1999. Our future capital requirements will depend on many factors, including
the timing and amount of our revenues and investment commitments which will
affect our ability to generate additional cash. Thereafter, if cash generated
from operations and financing activities is insufficient to satisfy our working
capital requirements, we may need to borrow funds under our Credit Line and/or
Subordinated Line, or seek additional funding through additional bank
borrowings, sales of securities or other means. There can be no assurance that
we will be able to raise any such capital on terms acceptable to us if at all.
33
<PAGE> 37
ALTHOUGH WE ARE NOT PRIMARILY A SUPPLIER OF SOFTWARE, OUR BUSINESS COULD BE
AFFECTED BY YEAR 2000 ISSUES
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 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
34
<PAGE> 38
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.
35
<PAGE> 39
BUSINESS
INDUSTRY BACKGROUND
The Local Loop Has Become the Bottleneck to High-Speed Data Access
Vast amounts of data are carried over the Internet and private
communications networks. International Data Corporation estimates that the
number of Internet users worldwide was approximately 69 million in 1997 and will
reach approximately 320 million in 2002. As the number of end users accessing
these networks grows and their use of data-intensive applications increases, the
volume of data transmitted over these networks will also continue to grow.
In order to accommodate increasingly high volumes of data,
telecommunications service providers have invested significant resources to
upgrade central office switching centers and the interconnecting infrastructure,
known as the backbone. While these capacity constraints continue to be addressed
through the use of high-speed digital and fiber-optic equipment, the network of
twisted pair copper telephone wires that connects end users to central office
switching centers, known as the local loop, remains a bottleneck that limits
high-speed data transmission.
LOGO
According to the International Telecommunications Union, more than 700
million copper telephone wires have been installed worldwide primarily by local
telecommunications service providers. This local loop infrastructure was
originally designed for lower-speed voice traffic rather than higher-speed data
transmission. As a result, access to the Internet and private communications
networks using standard dial-up connections over the local loop has typically
been limited to data transmission rates of only 28.8 Kbps to 56 Kbps, often
requiring several minutes to several hours to download large data-intensive
files. This bottleneck has frustrated end users and limited the capability
36
<PAGE> 40
of service providers to deliver high-speed applications such as efficient
Internet access, telecommuting and networking between branch offices.
New Competition to Provide High-Speed Data Access
Until recently, incumbent local exchange carriers (ILECs) such as regional
telephone companies and GTE Corporation were the exclusive operators of the
local loop. To address the demand for high-speed data transmission, the ILECs
primarily offered integrated-services digital network services (ISDN) and T-1
high-speed copper telephone wire services (T-1). These technologies enable data
transmission rates of up to 128 Kbps and 1.5 Mbps, respectively. ISDN requires
the installation of special equipment at each end of the telephone copper wire
and has achieved limited success due to complexity and the high cost of
deployment. T-1 services provide up to 12 times the data transmission rate of
ISDN, but require expensive infrastructure modifications and investments.
The Telecommunications Act of 1996 has enabled new entrants, such as
competitive local exchange carriers (CLECs), to offer high-speed data
transmission services. Both the ILECs and the CLECs are accelerating deployment
of high-speed digital subscriber line (DSL) services over the local loop. DSL
equipment, when deployed at each end of a copper telephone wire, enables data
transmission speeds of 128 Kbps to 52 Mbps, depending on the length and
condition of the copper telephone wire. In addition, other telecommunications
service providers, including cable, wireless and direct broadcast satellite
companies, are providing high-speed data transmission services outside of the
existing telephone network. Cable services are deployed over the cable
television infrastructure at transmission rates of up to 40 Mbps. Cable is
expected to compete effectively with other high-speed data transmission
technologies, particularly in the residential market, because it enables fast
data transmission speeds at comparatively low cost and leverages an existing
infrastructure of coaxial cable. Wireless and direct broadcast satellite systems
transmit digital data without terrestrial lines at speeds of more than 1 Mbps.
Many of these services are at an early stage of development, but they are
expected to provide cost-effective high-speed data transmission. In addition,
some telecommunications service providers are delivering high-speed data
transmission services to large businesses in major metropolitan areas over local
installed fiber networks. Although local fiber networks have not generally been
cost effective to deploy for small business and residential end users, fiber
networks will compete effectively in the market for high-speed data transmission
services, particularly for large business end users. As the volume of data
traffic increases, high-speed data transmission services have become a key
competitive service offering for these providers.
DSL Technology Enables High-Speed Data Transmission Over Copper Telephone Wire
DSL technology was developed to address the local loop bottleneck. DSL
implementations have several important advantages over other high speed
technologies, including:
Dedicated bandwidth. DSL is a point-to-point technology that connects the
end user to the service provider's central office over a copper telephone wire.
Because DSL connections are dedicated, DSL does not suffer from service
degradation as other subscribers are added to the system, and, in addition,
allows a higher level of security. Some alternative high-speed data transmission
solutions, such as cable, are shared systems which may suffer degradation and
increase the risk of security breaches as additional users are added.
Low cost. Because DSL uses the existing local loop connection, it can be
significantly less expensive to deploy to businesses and homes than other
high-speed data transmission technologies. In addition, recent advances in
technology development and industry standardization can make widespread
deployment of DSL increasingly economical to both service providers and end
users.
Broad coverage. Since virtually all businesses and homes in the United
States have installed copper telephone wire connections, DSL technologies can be
made immediately available to a large percentage of potential end users.
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<PAGE> 41
DSL technology uses sophisticated digital signal processing technologies to
achieve high-speed data transmission over copper telephone wires. DSL technology
addresses different high-speed data transmission service requirements resulting
in several configuration options. Symmetric transmission technologies, such as
high bit rate DSL (HDSL), symmetric DSL (SDSL) and multi-rate symmetric DSL
(MSDSL), provide equal data transmission rates between the central office and
the end user. These configurations are therefore most ideally suited for
applications such as telecommuting and networking between branch offices, which
require equal data transmission rates in both directions. Asymmetric
transmission technologies, such as asymmetric DSL (ADSL) and rate-adaptive
asymmetric DSL (RADSL), provide greater downstream transmission rates towards
the end user than upstream from the end user. Applications most efficiently
served by asymmetric technologies include Internet access where data traffic
flows primarily downstream.
To date the ILECs have accelerated their investments primarily in ADSL
technologies because ADSL appeared most appropriate for residential subscribers.
CLECs, in contrast, have focused on providing competitively priced, high-speed
data transmission services to business customers who typically have used T-1
lines from ILECs to meet their high-speed data transmission needs or used
today's commonly available dial-up modems. These CLECs have focused on providing
services based on symmetric DSL transmission technologies (such as SDSL and
MSDSL).
In a typical deployment of DSL services, DSL equipment is connected to a
personal computer in a residence or to a router in a business where multiple
personal computers may be connected. The end user is connected to the
telecommunications service providers' central office over a copper telephone
wire that is terminated at the central office by either a stand-alone DSL
network interface unit or by a digital subscriber line access multiplier (DSLAM)
terminating up to hundreds of connections to many users. Accordingly, a local
loop of one copper telephone wire pair which connects the end user to the
service provider's central office will require DSL equipment on both ends of the
wire pair.
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 (2B1Q), carrierless amplitude phase modulation (CAP), discrete
multitone modulation (DMT), and pulse amplitude modulation (PAM). 2B1Q, CAP and
PAM are used for symmetric applications. CAP and DMT are used for asymmetric
applications. To date, most large volume DSL service deployments have used CAP
and 2B1Q line codes.
The Demands of DSL Service Providers
DSL services are in the initial phases of worldwide deployment. To present
a compelling alternative to other data transmission services, DSL services must:
- Reach a large potential end user base;
- Provide low equipment, installation and maintenance costs; and
- Be tested and proven through field deployment.
We believe that telecommunications service providers are electing to
commence DSL service deployment based primarily on these factors. These service
providers may also be commencing deployment of DSL services in response to
competition from other service providers, such as cable companies, that are also
using high-speed data transmission services to compete for traditional voice
communications.
The Opportunity for Developers of DSL Integrated Circuits
DSL equipment manufacturers are striving to meet the requirements of
telecommunications service providers by designing high performance DSL products.
In order to minimize time-to-market, development and product costs, DSL
equipment manufacturers use increasingly complex integrated circuits which
account for a large portion of the value-added proprietary content of such
products.
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<PAGE> 42
However, DSL equipment manufacturers often lack the core technology expertise in
signal processing, signal conversion and communications algorithms that is
required to develop these integrated circuits. In addition, these solutions must
overcome real-world impairments of the local loop, such as line noise, which
could otherwise degrade data transmission performance. As a result of these
factors, DSL equipment manufacturers are turning to a new breed of integrated
circuit developers that possess the core technology and expertise required to
develop DSL chip sets. A DSL chip set is needed in equipment on each end of the
copper telephone wire pair for every end user. Successful solutions must offer
field-proven technology, high performance, high levels of system integration,
low power consumption, flexibility to enhance features and performance, rapid
time-to-market and competitive total system cost.
THE GLOBESPAN SOLUTION
GlobeSpan, Inc. is a leading worldwide developer of DSL integrated circuits
which enable high-speed data transmission over the local loop. We sell our
integrated circuits to manufacturers of DSL equipment for incorporation into
products which are sold to telecommunications service providers and end users.
We believe we provide our customers with significant value created by our
leading DSL integrated circuit chip sets, our heritage in the DSL market, our
understanding of DSL equipment manufacturers, service provider and end user
needs, and our strong sales and support organizations. Key elements of our
solution include:
Long History of DSL Experience. We have leveraged six years of field
experience in implementing DSL technology to successfully bring proven DSL chip
set solutions to market. Our core engineering team includes several individuals
who were early developers of DSL technology at AT&T Bell Labs in 1988.
One Million Chip Sets Sold. We have established a proven track record,
having shipped more than one million DSL chip sets. This represents a
significant share of the emerging DSL integrated circuit market.
Broad Suite of DSL Chip Sets. We offer a broad suite of DSL solutions,
including ADSL, RADSL, HDSL, HDSL2, SDSL and MSDSL chip sets which use the 2B1Q,
CAP, DMT and PAM line codes.
Complete System-on-a-Chip. Our system-on-a-chip solutions provide
significant density, power and cost advantages by integrating the functionality
of multiple discrete components, such as memory, microprocessors or framers,
onto a single chip.
High Performance. Our chip sets are capable of performing billions of
operations per second. We believe the high performance capability of our chip
sets enables us to deliver one of the industry's longest reach per data
transmission rate which allows telecommunications service providers to offer
services to a larger customer base.
Software Flexibility. Our chip sets are highly programmable. Our customers
are able to enhance or reconfigure their products through downloads of our
software rather than through costly replacement or modification of their
installed DSL system products. This flexibility enables telecommunications
service providers to optimize performance and keep pace with changing industry
requirements, including features and standards compliance.
Competitive Total System Cost. Our high levels of integration lead to low
power consumption and density advantages, thereby maximizing the number of
transceivers that can be incorporated into a DSL central office system. Higher
system density enables telecommunications service providers to connect a larger
number of end users with their central office equipment thereby reducing total
cost per end user.
Advanced Systems-Level Expertise. Our systems-level expertise enables us to
offer chip sets which can be cost effectively incorporated into complete DSL
systems and which contribute to
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optimizing the performance of these systems in the local loop environment. As a
result we provide comprehensive step-by-step DSL reference design guides that
enable our customers to rapidly bring robust DSL systems to market.
Strong Technical Support. We provide superior technical support throughout
the design and test process to minimize our customers' cost and time to deploy.
We also provide comprehensive field support to ensure that our customers'
products perform optimally in real world environments.
Standards Compliance. We actively participate in the formulation of DSL
standards which enables us to monitor industry trends and refine our product
development efforts to bring standards-compliant solutions to market.
We believe these compelling advantages and design attributes position us as
the preferred design partner and supplier of integrated circuits for all DSL
applications.
STRATEGY
Our objective is to be the leading provider of integrated circuits for all
DSL applications. Key elements of our strategy include:
Maximize Design Win Market Share. Our strategy is to maximize the number of
design wins with both new and existing customers. A design win represents a
customer's initial commitment to develop a product incorporating our chip sets.
We believe design wins are strategically important because once a customer has
designed our chip sets into its product, that customer is more likely to
continue to choose our solutions for additional products. Furthermore, achieving
the broadest number of design wins creates an opportunity to capitalize on the
success of any one of our customers' DSL products. We maximize our ability to
compete for design wins by leveraging our extensive sales representative
organization to access the greatest number of customers and further penetrate
our existing customer base.
Target All Applications Within the DSL Market. Our strategy is to provide
the necessary technologies to enable all applications within the DSL market. We
have introduced or announced chip sets based upon ADSL, RADSL, HDSL, HDSL2, SDSL
and MSDSL technologies which use 2B1Q, CAP, DMT and PAM line codes. Our chip
sets are used in both central office and customer locations to enable high speed
data applications such as Internet access, telecommuting and networking among
branch offices. We will continue to monitor industry trends and refine our
product development efforts to target emerging DSL applications.
Strengthen and Broaden Technology Leadership. Our strategy is to continue
to build upon our strong technology core competencies to maintain our position
as a technology leader in the DSL market. We are currently investing substantial
development resources in system-level knowledge, communications algorithms,
signal processing and signal conversion. Specifically, we are devoting resources
to extend reach by enhancing our high performance algorithms and to increase
system integration by embedding more system functions on a single integrated
circuit. We invest significant resources in research and development and will
continue to work closely with our customers to develop new and enhanced
solutions that address next-generation DSL market opportunities.
Leverage Advanced Systems-Level Expertise. Our strategy is to leverage our
advanced systems-level expertise to develop and market chip sets that can be
cost effectively and rapidly incorporated into complete DSL systems manufactured
by our customers. This strategy enables our customers to optimize
time-to-market, performance and system cost. By working closely with our
customers throughout the design and deployment process, we gain valuable
insights and are often able to anticipate their needs and incorporate
value-added functionality onto our chip sets. We gain additional insights by
continually testing our solutions against real-world models of DSL networks to
verify their performance in harsh and unpredictable deployment environments. We
have built a state-of-the-art system test facility which we use to validate the
performance of our chip sets and which we make readily available to our
customers to test their DSL systems. We plan to continue to expand
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and improve this capability. Furthermore, we will continue to provide
comprehensive reference design guides that enable our customers to apply our
systems-level expertise to their products.
Drive Industry Standards. We actively participate in the formulation of
critical standards for high-speed data transmission markets. We believe such
participation accelerates and expands the development of markets for our
products and provides valuable insights and relationships which assist us in
directing our product development efforts to target emerging market
opportunities.
TECHNOLOGY CORE COMPETENCY
Our key competitive advantage is founded in our technology expertise
encompassing the entire DSL design process from the development of custom
integrated circuits to their integration into a system solution. To address the
technology challenges of DSL transmission, we have developed and will continue
to build upon our primary technology core competencies, including systems-level
knowledge, communications algorithms, digital signal processing and signal
conversion.
Systems-Level Knowledge. Our systems-level knowledge has been developed
through years of field installation experience and working relationships with
over 100 equipment manufacturer customers. As a result, we have an advantage in
understanding the harsh and varying conditions of the local loop. This
environment is characterized by various impairments that impact DSL operations
and make reliable high-speed data transmission difficult to achieve. These
factors include bridge taps, cross-talk from adjacent wires in the same wire
bundle, signal attenuation and impulse noise spikes, among others. To minimize
the effects of these impairments, we will continue to incorporate our
understanding of these factors into our DSL chip set designs. We have also
leveraged our systems-level expertise to create a state-of-the-art system test
facility to validate the performance and operation of new DSL designs. We have
invested significant resources in automating our test facility to maximize the
efficiency and repeatability of our tests. We will continue to make our test
facility readily available to our customers to verify the performance of their
DSL products.
Communications Algorithms. A key component of our continued success is the
expertise that we have developed in the areas of communications theory and
algorithms. Communications algorithms are the processes and techniques used to
transform a digital data stream into a specially-conditioned analog signal
suitable for transmission across copper telephone wires. At the receiving end of
the copper telephone wire, our algorithms process the analog signal and
transform this data into a digital form without introducing data errors. We
invest significant resources to maintain our technology leadership in the
development of communications system algorithms in the areas of start-up
training, coding for forward error correction, line codes, echo cancellation,
adaptive equalizers, digital filter design and transmission line analysis. Our
broad theoretical knowledge base, coupled with our extensive DSL field
experience, has enabled our technology team to generate comprehensive DSL system
models utilizing computer-aided design tools. These models are used to design
our complex algorithms and to determine performance and architectural
requirements for our digital communications processor and analog front end
chips. Ultimately, the knowledge gained from these simulations, combined with
the advantages of our programmable platform, enables us to optimize algorithm
designs for specific DSL applications across a broad range of local loop
conditions.
Digital Signal Processing. Digital signal processing, as it relates to DSL
applications, is a means of encoding digital data for transmission over
bandwidth limited media, such as copper telephone wires, and recovering the
encoded data at the receiving end. This process requires very high-speed, high-
precision silicon engines to meet the performance specifications of
telecommunications service providers. We are a leader in the design of
high-performance, low-power, silicon-efficient, digital communications
processors which optimize digital signal processing for DSL applications. Our
digital communications processor is based on a proprietary architecture that
incorporates concurrent multi-tasking, multi-processor digital signal processing
engines. Our digital communications processor architecture provides system
design flexibility without the inherent power and costs normally associated with
conventional, general purpose digital signal processors. The performance and
flexibility of our
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digital communications processor enables our customers to implement multiple DSL
configurations using different line codes through a simple software download.
Signal Conversion. Signal conversion is a component of our solution that
transforms digital signals into analog signals that are suitable for
transmission over copper telephone wires. Our analog front end includes a custom
integrated circuit that performs the signal conversion function, as well as a
combination of discrete components such as resistors, capacitors, linear
amplifiers and transformers. Our analog front end provides several programmable
analog functions critical to achieving high-speed and long-reach performance.
Our analog front end is capable of operating over a wide array of signal
amplitudes and frequency ranges associated with different line codes.
PRODUCTS
We offer a broad suite of DSL chip set solutions. A typical product
offering includes a chip set, consisting of a digital communications processor
and an analog front end, a DSL reference design guide and software.
Our DSL chip sets are software programmable, enabling a broad range of data
transmission rates, performance enhancements, feature upgrades and compliance
with industry standards. We have been producing high volumes of our current chip
sets for over two years and have shipped more than one million chip sets. Our
comprehensive step-by-step DSL reference design guides include schematics, bills
of materials, circuit board layouts, application interface programs and debug
guides. Our DSL reference design guides enable equipment manufacturers to bring
robust systems to market quickly and cost-effectively.
Our chip sets and reference design guides are optimized for specific DSL
applications, resulting in a variety of configuration options. Our products
offer alternative packaging and bus interface options, and standards-based line
codes.
HDSL. High bit rate digital subscriber line (HDSL) is a cost-effective
alternative to traditional repeatered T1 and E1 data services for business
applications. HDSL provides symmetric transmission over two pairs of copper
telephone wires at data transmission rates of T1 (1.544 Mbps)/ E1 (2.048 Mbps).
We currently offer HDSL chip sets using CAP or 2B1Q line codes which incorporate
a single or dual channel digital communications processor and an analog front
end. Our HDSL product is the first chip set capable of implementing both line
codes recommended by the American National Standards Institute Technical Report
TR28 draft 2 and the International Telecommunications Union standard G.991.
HDSL2. HDSL2 is a next generation HDSL configuration that provides
symmetric transmission over one pair of copper telephone wires rather than two
pairs, resulting in a more network-efficient and cost-effective solution. We
currently offer HDSL2 chip sets using the PAM line code which incorporate a
single channel digital communications processor and an analog front end. Our
HDSL2 chip set is designed to meet the HDSL2 draft standard T1E1 4/99-006 R1
currently being defined in the United States by the American National Standards
Institute.
SDSL. Symmetric digital subscriber line (SDSL) is a cost-effective
alternative to traditional repeatered T1 and E1 data services for business
applications. SDSL provides symmetric transmission over one pair of copper
telephone wires and provides T1/E1 data rates. We currently offer SDSL chip sets
using the CAP line code which incorporate a single or dual channel digital
communications processor and an analog front end. Our SDSL chip set is designed
to meet the International Telecommunications Union G.991.1 standard.
MSDSL. Multi-rate symmetric digital subscriber line (MSDSL) is used to
provide cost-effective symmetric transmission over one pair of copper telephone
wires at data transmission rates ranging from 144 Kbps to 2.3 Mbps depending
upon the available data transmission rates of the relevant service provider. We
currently offer MSDSL chip sets using the CAP or 2B1Q line codes which
incorporate a single or dual channel digital communications processor and an
analog front end.
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ADSL and RADSL. Asymmetric digital subscriber line (ADSL) and rate adaptive
asymmetric digital subscriber line (RADSL) are used to provide cost effective,
high-speed local loop access for Internet and other applications where data
flows downstream to the end user faster than it does upstream from the end user.
ADSL provides asymmetric transmission over one pair of copper telephone wires
with downstream data transmission rates ranging from 90 Kbps to 8.0 Mbps and
upstream data transmission rates ranging from 45 Kbps to 1.1 Mbps. ADSL allows
the telephone line to be used simultaneously for voice and data transmission. We
currently offer ADSL chip sets which incorporate an analog front-end and a dual
channel digital communications processor chip using the CAP line code or a
single channel digital communications processor chip using the DMT line code, or
a single channel digital communications processor using both CAP and DMT line
codes. Our ADSL chip sets are designed to meet the American National Standards
Institute standard specification T1.413 for the 8 Mbps DMT line code
configuration and the International Telecommunications Union standard G.992.2
for the 1.5 Mbps DMT line code configuration (commonly called G.lite).
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The following table summarizes our DSL product families, their key
functions, data transmission rates and introduction dates.
<TABLE>
<C> <S> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
PRODUCT DATA INTRO.
FAMILY FUNCTION TRANSMISSION RATES DATE
- -------------------------------------------------------------------------------------------------------------------
GS9070 ASIC chip used to connect our G2710, G7060, or Not Applicable 1Q99
G7061 chip sets to PCI bus and V.90 voice band
modems for PC applications.
- -------------------------------------------------------------------------------------------------------------------
G7070 Multi-mode RADSL single channel chip set for Downstream -- 90 Kbps to 8.0 Mbps 4Q98
asymmetric transmission over one wire pair using Upstream -- 45 Kbps to 1.1 Mbps
DMT or CAP line code. Includes integrated framer.
- -------------------------------------------------------------------------------------------------------------------
G7060 RADSL single channel chip set for asymmetric Downstream -- 90 Kbps to 8.0 Mbps 4Q98
transmission over one wire pair using DMT line Upstream -- 45 Kbps to 1.1 Mbps
code. Includes integrated framer.
- -------------------------------------------------------------------------------------------------------------------
G7061 RADSL (G.lite) single channel chip set for Downstream -- 90 Kbps to 1.5 Mbps 4Q98
asymmetric transmission over one wire pair using Upstream -- 45 Kbps to 540 Kbps
DMT line code. Includes integrated framer.
- -------------------------------------------------------------------------------------------------------------------
G2237 HDSL2 single channel chip set for symmetric T1 (1.544 Mbps)/E1 (2.048 Mbps) 4Q98
transmission over one wire pair using PAM line
code. Includes integrated framer.
- -------------------------------------------------------------------------------------------------------------------
G2232 SDSL single or dual channel chip set for T1 (1.544 Mbps)/E1 (2.048 Mbps) 4Q98
symmetric transmission over one wire pair using
CAP line code. Includes integrated framer.
- -------------------------------------------------------------------------------------------------------------------
G2216 MSDSL single or dual channel chip set for 144 Kbps to 1.1 Mbps 4Q98
symmetric transmission over one wire pair using
2B1Q line code. Includes integrated framer and
analog front end.
- -------------------------------------------------------------------------------------------------------------------
G2214 MSDSL single or dual channel chip set for 144 Kbps to 2.3 Mbps 4Q98
symmetric transmission over one wire pair using
CAP line code. Includes integrated framer.
- -------------------------------------------------------------------------------------------------------------------
G2710 RADSL single or dual channel chip set for Downstream -- 90 Kbps to 7.2 Mbps 3Q98
asymmetric transmission over one wire pair using Upstream -- 45 Kbps to 1.1 Mbps
CAP line code. Includes integrated framer.
- -------------------------------------------------------------------------------------------------------------------
G2213 HDSL dual channel chip set for symmetric T1 (1.544 Mbps)/E1 (2.048 Mbps) 3Q98
transmission over two wire pairs using CAP line
code. Includes integrated framer.
- -------------------------------------------------------------------------------------------------------------------
G2212 HDSL dual channel chip set for symmetric T1 (1.544 Mbps)/E1 (2.048 Mbps) 3Q98
transmission over two wire pairs using 2B1Q line
code. Includes integrated framer and analog front
end.
- -------------------------------------------------------------------------------------------------------------------
MDT-x6-01 MSDSL single channel chip set for symmetric 144 Kbps to 1.1 Mbps 3Q98
transmission over one wire pair using 2B1Q line
code.
- -------------------------------------------------------------------------------------------------------------------
HDT-12-0x HDSL single channel chip set for symmetric T1 (1.544 Mbps)/E1 (2.048 Mbps) 4Q97
transmission over two wire pairs using 2B1Q line
code.
- -------------------------------------------------------------------------------------------------------------------
MDT-x4-01 MSDSL single channel chip set for symmetric 144 Kbps to 2.3 Mbps 2Q97
transmission over one wire pair using CAP line
code.
- -------------------------------------------------------------------------------------------------------------------
SDT-32-03 SDSL single channel chip set for symmetric T1 (1.544 Mbps)/E1 (2.048 Mbps) 1Q97
transmission over one wire pair using CAP line
code.
- -------------------------------------------------------------------------------------------------------------------
HDT-13-0x HDSL single channel chip set for symmetric T1 (1.544 Mbps)/E1 (2.048 Mbps) 2Q96
transmission over two wire pairs using CAP line
code.
- -------------------------------------------------------------------------------------------------------------------
RDT-x0-01 RADSL single channel chip set for asymmetric Downstream -- 90 Kbps to 7.2 Mbps 2Q96
transmission over one wire pair using CAP line Upstream -- 45 Kbps to 1.1 Mbps
code.
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
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SALES, MARKETING AND TECHNICAL SUPPORT
Our strategy is to expand the breadth of our customer base by leveraging
our extensive worldwide sales representative organization, comprised of
approximately 31 firms with over 250 professionals. This organization is
directed by our six sales managers and is supported by our technical marketing
professionals, applications engineers and development engineers. Our sales
effort has resulted in a customer base of more than 100 DSL equipment
manufacturers who have purchased chip sets and DSL reference design guides. Our
strategy has enabled us to spread our sales efforts across a much larger base of
customers than would otherwise be possible using only a direct sales model.
Furthermore, it has been our experience that once we successfully penetrate a
new account, we become better positioned to secure additional design wins.
Providing comprehensive DSL reference design guides to our customers is
integral to our sales strategy. Our design materials are intended to enable our
customers to effectively incorporate our chip sets into their DSL systems and to
achieve a faster time-to-market. This reduces the necessary level of customer
support and allows for a greater allocation of our sales effort to target future
design wins.
We provide superior technical support throughout the design and test
process to accelerate our customers' time-to-market. We also provide
comprehensive field support to ensure that our customers' products perform
optimally in real world deployment environments.
CUSTOMERS
We sell our products worldwide to over 100 companies that manufacture data
communications products. Customers from which we recognized at least $500,000 in
revenues in 1998 include Ascom Hasler AG, C-Com Corporation, Cisco Systems, LG
Information & Communications, NEC Corporation, Paradyne Corporation, Schmid
Telecommunications and Westell Technologies. Our chip sets are incorporated by
our customers into the following products:
- Digital subscriber line access multiplexers (DSLAMs), which are used to
terminate up to hundreds of lines in a central office and aggregate them
onto high-speed lines for transmission to the communications backbone;
- DSL network interface units, which are customer premises products that
enable high-speed data transmission over the local loop;
- DSL-compatible routers, which are used to connect one or more personal
computers to the local loop; and
- Personal computer DSL network interface cards, which are used to connect
a personal computer directly to the local loop.
Our customers market their products to public and private
telecommunications service providers. These service providers include
traditional telephone companies, competitive local exchange carriers, Internet
service providers, businesses and government entities.
We depend on a relatively small number of customers for a large percentage
of our revenues. In the five months ended December 31, 1996, the years ended
December 31, 1997 and 1998 and the three months ended March 31, 1999, our
customers who individually represented at least five percent of our net revenues
accounted for 85.5%, 72.6%, 70.1% and 65.7%, respectively, of our total 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
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Ascom Hasler AG, which accounted for 48.3%, 12.6% and 9.2% of our net revenues,
respectively. In the three months ended March 31, 1999, our top three customers
were Cisco Systems, NEC Corporation and Ascom Hasler AG, which accounted for
39.4%, 9.7% and 9.0% 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. See "Risk Factors--The Loss of One or More of Our Key Customers Would
Result in a Loss of a Significant Amount of Our Revenues."
RESEARCH AND DEVELOPMENT
Our core engineering team, including several individuals who were early
developers of DSL technology at AT&T Bell Labs, has substantial expertise in DSL
technology. Since our founding in August 1996, we have invested significant
resources to expand our research and development group. As of March 31, 1999,
approximately 79 of our approximately 122 research and development engineers had
advanced degrees, including approximately 24 with Ph.Ds. These engineers are
involved in advancing our technology core competencies and our product
development activities. Recently, we have been devoting a significant portion of
our research and development expenditures to products incorporating new features
and line codes, such as 2B1Q, DMT and PAM.
We believe that we must continually enhance the performance and flexibility
of our current products, and successfully introduce new products to maintain our
leadership position. In 1999, our research and development expenditures will
increase due to planned increases in personnel, material costs and depreciation
resulting from higher capital expenditures. Our research and development
expenditures in the pro forma year ended December 31, 1996, the years ended
December 31, 1997 and 1998 and the three months ended March 31, 1999 were $4.1
million, $8.4 million, $18.7 and $5.4 million, respectively. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
MANUFACTURING
Our manufacturing objective is to produce reliable, high quality integrated
circuits at competitive prices and to achieve on-time delivery of our products
to our customers. We outsource the manufacturing of our integrated circuits
which enables us to concentrate our resources on the design, development and
marketing of our products where we believe we have greater competitive
advantages, and to eliminate the high cost of owning and operating a
semiconductor wafer fabrication facility.
Our long-term strategy is to qualify new foundries to provide additional
manufacturing capacity and to access diverse manufacturing technologies. We
intend to secure multiple sources of wafer fabrication to reduce our dependence
on any single foundry. There can be no assurance that we will be able to
successfully qualify and implement such arrangements.
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. Under this agreement, Lucent Technologies will fill our
orders for our current chip sets in accordance with agreed-upon quantity, price,
lead-time and other terms. The agreement also contains procedures for
establishing Lucent Technologies as a manufacturer of future chip sets for us.
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. Further, although the March 1999 agreement
has a term of three years for the supply of current chip sets, Lucent
Technologies has the right to discontinue the supply of any chip set upon 12
months' notice (as long as Lucent Technologies fills our orders for commercially
reasonable quantities of that
46
<PAGE> 50
chip set during the notice period). In addition, Lucent Technologies' ability to
manufacture our chip sets is limited by its available capacity, and under some
circumstances Lucent Technologies may allocate its available capacity to its
other customers. 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.
COMPETITION
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:
- For ADSL products based on the American National Standards Institute
standard T1.413, Alcatel, Analog Devices Inc., Motorola and Texas
Instruments, among others;
- For G.lite products based on the International Telecommunications Union
standard G.992.2, Alcatel, Analog Devices Inc., Centillium Technology
Corporation, Lucent Technologies and Texas Instruments, among others; and
- For HDSL, SDSL, MSDSL and HDSL2 products, Conexant Systems, Level One
Communications and MetaLink, among others.
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.
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, and our
business, financial condition and results of operations would be seriously
harmed.
Many of our competitors have greater name recognition, their own
manufacturing capabilities (such as Lucent Technologies which manufactures our
chip set designs exclusively for us and has developed and is marketing its own
chip set solutions), significantly greater financial and technical resources,
and the sales, marketing and distribution strengths that are normally associated
with large multinational companies. These competitors may also have pre-existing
relationships with our customers or potential customers. These competitors may
compete effectively with us because in addition to the above-listed factors,
they 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.
As the DSL market matures, the industry may become subject to increasing
price competition driven by the lowest cost providers of chip sets. We
anticipate that average per unit selling prices of DSL chip sets will continue
to decline as product technologies mature. If we are unable to reduce our costs
sufficiently to offset declines in the average per unit selling prices or are
unable to introduce new higher performance products with higher average per unit
selling prices, our operating results will be seriously harmed. Since we do not
manufacture our own products, we may be unable to negotiate volume discounts
with our foundries in order to reduce the costs of manufacturing our chip sets
in
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<PAGE> 51
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. Our
inability to achieve manufacturing efficiencies would have an adverse impact on
our operating results.
INTELLECTUAL PROPERTY
Our success depends significantly upon our ability to protect our
intellectual property. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our products or obtain and
use information that we regard as proprietary. In the past, competitors have
recruited our employees who have had access to our proprietary technologies,
processes and operations. Our competitors' recruiting efforts, which we expect
will continue, expose us to the risk that such employees will misappropriate our
intellectual property. For example, in June 1998, we filed suit against three
former employees who recently began employment with one of our competitors. Our
lawsuit alleges misappropriation of trade secrets. See "-- Litigation."
We rely in part on patents to protect our intellectual property. We have 28
patents in the United States and 15 patents in other countries. Our patents
principally cover various aspects of systems and features relating to
telecommunications technologies and telecommunications products, including
certain aspects specifically pertaining to particular DSL algorithms and DSL
communications systems. Our patents have expiration dates ranging from 2009 to
2017. In addition, we have 42 patent applications pending in the United States
Patent and Trademark Office. We also have 53 patent applications pending in
various countries other than the United States. These patents may never be
issued. Even if these patents are issued, taken together with our existing
patents, they may not provide sufficiently broad protection to protect our
proprietary rights, or they may prove to be unenforceable. To protect our
proprietary rights, we also rely on a combination of copyrights, trademarks,
trade secret laws, contractual provisions, licenses and maskwork protection
under the Federal Semiconductor Chip Protection Act of 1984. 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.
The laws of some foreign countries do not protect our proprietary rights to
as great an extent as do the laws of the United States, and many U.S. companies
have encountered substantial infringement problems in such countries, some of
which are countries in which we have sold and continue to sell products. There
is 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.
Another company, Singapore Telecommunications Limited (Singapore Telecom),
also has prior rights to the GlobeSpan mark in one or more countries outside the
United States, in connection with services involving the transmission and
broadcast of satellite communications. Singapore Telecom's rights in the
GlobeSpan mark may limit our ability to use or market under the GlobeSpan name
in certain territorial regions outside the United States.
EMPLOYEES
As of March 31, 1999, we had 178 full-time employees, including 122
employees engaged in research and development, 29 engaged in sales and marketing
and 27 engaged in general and administrative activities. Our employees are not
represented by any collective bargaining agreements, and we have never
experienced a work stoppage. We believe our employee relations are good.
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<PAGE> 52
PROPERTIES
We sublease our facility in Red Bank, New Jersey, which has approximately
50,000 square feet, pursuant to a sublease agreement that expires April 2002.
This facility comprises our headquarters, administration, sales and marketing
and research and development departments. We believe we have adequate space, and
any additional space required will be available to us on commercially reasonable
terms.
LITIGATION
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. Due to the nature of litigation and because the lawsuit is
at an early stage, we cannot ascertain the availability of injunctive relief or
other equitable remedies or estimate the total expenses, possible recovery or
settlement value, if any, that may be ultimately awarded or incurred in
connection with this suit. 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.
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<PAGE> 53
MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
The executive officers, key employees and directors of GlobeSpan, and their
ages as of May 5, 1999, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Armando Geday(a)........................ 37 President, Chief Executive Officer and
Director
Robert McMullan......................... 44 Chief Financial Officer, Vice President,
Treasurer and Secretary
Thomas Sennhauser....................... 44 Chief Operating Officer
Nicholas Aretakis....................... 37 Vice President, Worldwide Sales
Clete Gardenhour........................ 60 Vice President, Business Development
Daniel Amrany........................... 47 Chief Technology Officer
Angelo Stephano......................... 37 Vice President, Worldwide Marketing
Russ Bell............................... 42 Vice President, Technology Planning
George Malek............................ 62 Vice President, Engineering
Barbara Connor(c)....................... 48 Director
James Coulter(a)(b)..................... 39 Director
Dipanjan Deb(a)(c)...................... 29 Director
Federico Faggin(b)...................... 57 Director
Thomas Epley(a)(b)...................... 58 Director
Keith Geeslin(c)........................ 46 Director
David Stanton(b)........................ 36 Director
</TABLE>
- ------------------------------
(a) Member of Executive Committee
(b) Member of Compensation Committee
(c) Member of Audit Committee
Armando Geday has served as President and Chief Executive Officer of
GlobeSpan since April 1997 and as a director of GlobeSpan since April 1997. From
June 1986 to March 1997, Mr. Geday was Vice President and General Manager of the
Multimedia Communications Division of Rockwell Semiconductor Systems, a
developer and manufacturer of semiconductor systems. Prior to June 1986, Mr.
Geday held several other marketing and general management positions at Rockwell.
Prior to Rockwell, Mr. Geday was product marketing manager at Harris
Semiconductor. Mr. Geday received a B.S. in Electrical Engineering from the
Florida Institute of Technology.
Robert McMullan has served as Chief Financial Officer of GlobeSpan since
July 1998. From November 1990 to March 1998, Mr. McMullan was employed by The
BISYS Group, Inc., an outsourcer to the financial services industry, where he
served as Executive Vice President and Chief Financial Officer. Mr. McMullan
received a B.A. in Business Administration from St. Michael's College.
Thomas Sennhauser has served as Chief Operating Officer of GlobeSpan since
June 1998. From November 1993 to May 1998, Mr. Sennhauser was at Siemens
Microelectronics, Inc., a semiconductor company, where he was Vice President of
Signal Processing Integrated Circuits. From 1990 to 1992, Mr. Sennhauser was
Managing Director of the largest foreign subsidiary of Societe Suisse de
Microelectronique et Horlogerie, and from 1980 to 1989, worked at Intel
Corporation, a developer and manufacturer of semiconductor systems, in various
marketing and manufacturing positions. Mr. Sennhauser received Masters degrees
in International Management from the American Graduate School of International
Management and in Electrical Engineering from the Swiss Federal Institute of
Technology, Zurich, Switzerland.
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<PAGE> 54
Nicholas Aretakis has served as Vice President, Worldwide Sales of
GlobeSpan since May 1998. From July 1994 to April 1998, Mr. Aretakis served as
Vice President of Marketing and Sales at ESS Technology, Inc., a developer of
audio, digital video and modem/fax communication semiconductors and software
products for the personal computing industry. Prior to joining ESS Technology
Inc., Mr. Aretakis held senior sales and marketing positions at SEEQ Technology,
Inc., a developer of LAN and memory semiconductors and software, and Microchip
Technology, a manufacturer of RISC-based microcontrollers and specialized memory
products. Mr. Aretakis received a B.A. in Mathematics from Hobart College and a
B.S. in Electrical Engineering from Columbia University.
Clete Gardenhour has served as Vice President, Business Development of
GlobeSpan since May 1998. From August 1996 to August 1998, Mr. Gardenhour was
Executive Director of Worldwide Sales for GlobeSpan. From January 1992 to August
1996, Mr. Gardenhour was responsible for technology planning and business
development of DSL technology at AT&T Paradyne Corporation, a developer and
manufacturer of telecommunications products, and served as Senior Vice President
and General Manager of AT&T Paradyne Corporation's Modem and Network Management
business. Mr. Gardenhour received a B.S. in Electrical Engineering from the
Georgia Institute of Technology and a Masters degree in Management of Technology
from the University of Miami.
Daniel Amrany has served as Chief Technology Officer of GlobeSpan since
October 1998. From August 1996 to October 1998, Mr. Amrany was director of VLSI
development for GlobeSpan. In January 1985, Mr. Amrany founded Amra-Tech, a VLSI
consulting firm, which developed the VLSI devices for AT&T Bell Labs' voice band
modems and DSL products. Mr. Amrany served as Vice President of Amra-Tech from
January 1985 to August 1996. Prior to 1985, Mr. Amrany worked at Perkin-Elmer, a
developer and manufacturer of life science products, ITT Industries, a designer
and manufacturer of electronics products, and Intel Corporation, a developer and
manufacturer of semiconductor systems. Mr. Amrany holds more than ten patents in
various telecom, digital TV, and semiconductor disciplines and received a B.S.
in Electrical Engineering from Tel Aviv University.
Angelo Stephano has served as Vice President, Marketing of GlobeSpan since
August 1998. From June 1996 to August 1998, Mr. Stephano was the Director of
Marketing for Rockwell Semiconductor Systems' Multimedia Communications
Division. From June 1994 to June 1996, Mr. Stephano was the Manager of Marketing
for the same division of Rockwell International. Mr. Stephano received a B.S. in
Electrical Engineering from Syracuse University.
Russ Bell has served as Vice President, Technology Planning of GlobeSpan
since March 1999. From January 1998 to March 1999, Mr. Bell was Director,
Technology Planning of GlobeSpan. From July 1984 to January 1998 Mr. Bell held a
number of positions at Advanced Micro Devices, a developer and manufacturer of
integrated, circuits including Director of Communications Technology, Director
of Corporate Strategic Marketing and Director of Applications Engineering. Mr.
Bell received a B.S. in Electrical Engineering from the Southern Technical
Institute and a Masters degree in Information and Computer Science from the
Georgia Institute of Technology.
George Malek has served as Vice President, Engineering of GlobeSpan since
August 1996. From March 1963 to August 1996, Mr. Malek served in various
positions, at AT&T Bell Labs, a communications company, and at its successor
corporation Lucent Technologies, including head of the data communications
department. Mr. Malek received a B.S. in Electrical Engineering from Monmouth
University and a Masters degree in Electrical Engineering from New York
University.
Barbara Connor has served as a director of GlobeSpan since May 1999. Since
1973, Ms. Connor has held various positions in Bell Atlantic Corporation, a
telecommunications company, including Treasurer and Controller. Since 1995, Ms.
Connor has served as President of Bell Atlantic Federal Systems, where she
oversees Bell Atlantic's sales and servicing activities to the Federal
Government in the continental United States, Puerto Rico and Europe. Ms. Connor
received a B.A. in economics from Immaculata College, an M.A. in economics and
statistics from the University of Notre Dame and an M.B.A. in finance from Rider
University.
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<PAGE> 55
James Coulter has served as a director of GlobeSpan since May 1998. Mr.
Coulter has served as a managing partner of Texas Pacific Group, an investment
firm, since 1992. Mr. Coulter currently serves as a director of America West
Holdings Corp., Beringer Wine Estates Holdings, Inc., Oxford Health Plans Inc.
and several privately held companies. Mr. Coulter received a B.A. in Business
from Dartmouth College and an M.B.A. from the Stanford Graduate School of
Business.
Dipanjan Deb has served as a director of GlobeSpan since March 1999. Mr.
Deb has been employed by Texas Pacific Group, an investment firm, since November
1998 where he is responsible for technology-related investments. From August
1991 to June 1994, Mr. Deb was employed at BancBoston Robertson Stephens. Mr.
Deb rejoined BancBoston Robertson Stephens in June 1996 and served as their
Director of Semiconductor Banking until October 1998. Prior to rejoining
BancBoston Robertson Stephens in 1996, Mr. Deb worked as a management consultant
at McKinsey & Company. Mr. Deb received a B.S. in Electrical Engineering from
the University of California at Berkeley and an M.B.A. from the Stanford
Graduate School of Business.
Thomas Epley has served as a director of GlobeSpan since August 1996 and as
Chairman of the Board from August 1996 to March 1999. Mr. Epley has also served
as President of Paradyne Credit Corporation, a related party of GlobeSpan, since
August 1996. Mr. Epley was the CEO and President of GlobeSpan from August 1996
to April 1997 and the President and CEO of Paradyne Corporation, a developer and
manufacturer of telecommunications products and a related party of GlobeSpan,
from August 1996 to April 1997. From May 1991 to April 1996, Mr. Epley was the
CEO of Technicolor, an entertainment media company. Mr. Epley currently serves
as Chairman of Paradyne Corporation and as Chairman of MEM Solutions, a
microelectrical and mechanical systems company. Mr. Epley received a B.S. in
Mechanical Engineering from the University of Cincinnati and an M.B.A. from
Northwestern University.
Federico Faggin has served as a director of GlobeSpan since May 1999. Mr.
Faggin is the Chairman of the Board of Directors and a director of Synaptics,
Inc., a computer peripheral and software company he founded in 1986. Mr. Faggin
currently serves as a director of Integrated Device Technologies, Inc., a
semiconductor company, and several privately held companies. Mr. Faggin received
a "Dottore in Fisica" degree from the University of Padua, Italy, and holds an
honorary doctor degree in Computer Science from the University of Milan, Italy.
Keith Geeslin has served as a director of GlobeSpan since August 1996. Mr.
Geeslin is a General Partner of The Sprout Group, a venture capital firm, where
he has been employed since July 1984. In addition, he is a general or limited
partner of a series of investment funds associated with The Sprout Group, a
division of DLJ Capital Corporation, which is a subsidiary of Donaldson, Lufkin
& Jenrette. Mr. Geeslin is a director of SDL, Inc., Rhythms NetConnections Inc.
and several privately held companies, including Paradyne Corporation, a related
party to GlobeSpan. Mr. Geeslin received a B.S.E.E. degree from Stanford
University, an M.A. degree in Philosophy, Politics and Economics from Oxford and
an M.S. degree in Engineering and Economic Systems from Stanford University.
David Stanton has served as a director of GlobeSpan since June 1996. Mr.
Stanton is a partner of Texas Pacific Group, an investment firm, where he has
been employed since 1994. Prior to joining Texas Pacific Group, Mr. Stanton was
a venture capitalist with Trinity Ventures, where he specialized in information
technology, software and telecommunications investing. Mr. Stanton currently
serves as a director of Denbury Resources, Inc. and several private companies,
including Paradyne Corporation, a related party of GlobeSpan. Mr. Stanton
received a B.S. in Chemical Engineering from Stanford University and an M.B.A.
from the Stanford Graduate School of Business.
BOARD OF DIRECTORS AND COMMITTEES
Following the offering, our board of directors will consist of eight
directors, each holding office until the next annual meeting of stockholders.
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<PAGE> 56
The board of directors has a Compensation Committee, an Audit Committee and
an Executive Committee.
Executive Committee. Our board of directors has created an Executive
Committee consisting of Messrs. Coulter, Deb, Epley and Geday. The Executive
Committee is authorized to act with respect to all matters arising before the
board, except for matters which require stockholder approval or where prohibited
by Delaware law, including a sale of our company.
Compensation Committee. The Compensation Committee of the board of
directors reviews and makes recommendations to the board regarding all forms of
compensation provided to the executive officers and directors of GlobeSpan and
its subsidiaries, including stock compensation and loans. In addition, the
Compensation Committee reviews and makes recommendations on stock compensation
arrangements for all employees of GlobeSpan. As part of the foregoing, the
Compensation Committee also administers our 1999 Equity Incentive Plan and
Employee Stock Purchase Plan. The current members of the Compensation Committee
are Messrs. Coulter, Epley, Faggin and Stanton.
Audit Committee. The Audit Committee of the board of directors reviews and
monitors the corporate financial reporting and the internal and external audits
of GlobeSpan, including, among other things, our internal audit and control
functions, the results and scope of the annual audit and other services provided
by our independent auditors and our compliance with legal matters that have a
significant impact on our financial reports. The Audit Committee also consults
with our management and our independent auditors prior to the presentation of
financial statements to stockholders and, as appropriate, initiates inquiries
into aspects of our financial affairs. In addition, the Audit Committee has the
responsibility to consider and recommend the appointment of, and to review fee
arrangements with our independent auditors. The current members of the Audit
Committee are Ms. Connor and Messrs. Deb and Geeslin.
DIRECTOR COMPENSATION AND OTHER ARRANGEMENTS
Directors of GlobeSpan who are not employees receive $1,500 for
participation in meetings of the board of directors. Non-employee directors of
GlobeSpan who also serve on either the Compensation or the Audit Committees
receive $750 for participation in the committee meetings. Upon and following
this offering, directors will be eligible for automatic option grants under our
1999 Director Stock Plan. See "1999 Director Stock Plan."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
As of December 31, 1998, the Compensation Committee of the board of
directors consisted of Messrs. Epley, Stanton and Stensrud. In March 1999, Mr.
Stensrud resigned from the board of directors and was replaced by Mr. Coulter on
the Compensation Committee.
Mr. Epley is a current director of GlobeSpan, was Chairman of our board of
directors from August 1996 to March 1999 and was CEO and President of GlobeSpan
from August 1996 to April 1997. Mr. Epley is also a director of Paradyne
Corporation, is Chairman of its board of directors, is a member of its
compensation committee and was its CEO and President from August 1996 to April
1997. Mr. Epley also has a pecuniary interest in the GlobeSpan shares held by
Communication Partners, L.P., which as of May 1999 held approximately 83.2% of
our common stock and 97.1% of the common stock of Paradyne Corporation. In May
1999, Communication Partners, L.P. distributed its GlobeSpan shares to its
limited partners. Mr. Epley and Epley Investors, L.L.C. are limited partners of
Communication Partners, L.P. and received an aggregate of 1,002,405 GlobeSpan
shares in the distribution.
Mr. Stanton has a pecuniary interest in the GlobeSpan shares held by
Communication Partners, L.P., which as of May 1999 held approximately 83.2% of
our common stock and 97.1% of the common stock of Paradyne Corporation. In May
1999, Communication Partners, L.P. distributed its
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<PAGE> 57
GlobeSpan shares to its limited partners. TPG Partners, L.P. and TPG Parallel I,
L.P., limited partners of Communication Partners, L.P. and Communication GenPar,
Inc., the general partner of Communication Partners, L.P., received an aggregate
of 8,680,148 GlobeSpan shares in the distribution. Mr. Stanton is the sole
director and president of Communication GenPar, Inc. and is a partner of Texas
Pacific Group, which organized TPG Partners, L.P. and TPG Parallel I, L.P.
Mr. Stensrud has a pecuniary interest in the GlobeSpan shares held by
Communication Partners, L.P., which as of May 1999 held approximately 83.2% of
our common stock and 97.1% of the common stock of Paradyne Corporation. In May
1999, Communication Partners, L.P. distributed its GlobeSpan shares to its
limited partners. Mr. Stensrud and the Stensrud Family Trust are limited
partners of Communication Partners, L.P. and received an aggregate of 219,151
GlobeSpan shares in the distribution.
For a further description of interlocking transactions, see "Certain
Transactions."
EXECUTIVE COMPENSATION
The following table sets forth compensation information for the fiscal year
ended December 31, 1998 paid by us for services by our Chief Executive Officer
and our three other highest-paid executive officers whose total salary and bonus
for such fiscal year exceeded $100,000, collectively referred to below as the
Named Executive Officers:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------- ---------------------
SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS COMPENSATION
--------------------------- -------- -------- --------------------- ------------
<S> <C> <C> <C> <C>
Armando Geday................... $215,004 $330,000 -- $ --
President and Chief Executive
Officer
Thomas Sennhauser(a)............ 80,780 110,000 77,775 37,396(c)
Chief Operating Officer
Nicholas Aretakis(b)............ 87,704 110,000 77,775 79,227(c)
Vice President, Worldwide
Sales
Robert McMullan(d).............. 80,780 100,000 77,775 --
Chief Financial Officer,
Vice President, Treasurer
and Secretary
</TABLE>
- ------------------------------
(a) Mr. Sennhauser started employment with us in June 1998.
(b) Mr. Aretakis started employment with us in May 1998.
(c) Represents reimbursed relocation expenses.
(d) Mr. McMullan started employment with us in July 1998.
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OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options during the
fiscal year ended December 31, 1998 to each of the Named Executive Officers. No
stock appreciation rights were granted to these individuals during such year.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
----------------------------------------------------- VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF
SECURITIES STOCK
UNDERLYING % OF TOTAL PRICE APPRECIATION
OPTIONS OPTIONS GRANTED EXERCISE FOR OPTION TERM(D)
GRANTED TO EMPLOYEES IN PRICE EXPIRATION --------------------
NAME (A) 1998(B) (C) DATE 5% 10%
---- ---------- --------------- --------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Armando Geday........................ -- -- -- -- -- --
Thomas Sennhauser.................... 77,775 12.6% $12.00 5/31/08 $586,947 $1,487,440
Nicholas Aretakis.................... 77,775 12.6 12.00 5/27/08 586,947 1,487,440
Robert McMullan...................... 77,775 12.6 12.00 6/09/08 586,947 1,487,440
</TABLE>
- ------------------------------
(a) Each of the options listed in the table is immediately exercisable. The
shares purchasable under the options may be repurchased by us at the
original exercise price paid per share if the optionee ceases service before
vesting in such shares. The repurchase right lapses for Mr. Sennhauser's
option and Mr. McMullan's option, and each officer vests as to 25% of the
option shares upon completion of 12 months of service from the vesting start
date; and each officer vests as to 6.25% of the option shares upon the
completion of every three-month period of service over the next three years
thereafter. The repurchase right lapses for Mr. Aretakis' option and he
vests as to 33 1/3% of the option shares upon completion of 12 months of
service from the vesting start date; he vests as to 8.33% of the option
shares upon the completion of every three-month period of service over the
next two years thereafter. Each of the options has a ten-year term, but the
term may end earlier if the optionee ceases service with us.
(b) Based on a total of 618,625 option shares granted to our employees under our
1996 Equity Incentive Plan during 1998.
(c) The exercise price was equal to the fair market value of our common stock as
valued by our board of directors on the date of grant. The exercise price
may be paid in cash or through a cashless exercise procedure involving a
same-day sale of the purchased shares. The exercise price may also be paid
with a full recourse promissory note.
(d) The potential realizable value is calculated based on the ten-year term of
the option at the time of grant. Stock price appreciation of 5% and 10% is
assumed pursuant to rules promulgated by the Securities and Exchange
Commission and does not represent our prediction of our stock price
performance. The potential realizable value at 5% and 10% appreciation is
calculated by assuming that the exercise price on the date of grant
appreciates at the indicated rate for the entire term of the option and that
the option is exercised at the exercise price and sold on the last day of
its term at the appreciated price.
In addition to the options listed in the table, stock options were granted
in 1999 to certain of the Named Executive Officers under Globespan's 1996 Equity
Incentive Plan for the following number of shares and at an exercise price of
$10.00 per share as indicated: Mr. Geday 60,016 shares, Mr. Aretakis 23,333
shares, Mr. Sennhauser 23,333 shares, and Mr. McMullan 30,000 shares. Each of
the options is immediately exercisable. The shares purchasable thereunder are
subject to repurchase by Globespan at the original exercise price paid per share
upon the optionee's cessation of service prior to vesting in such shares. The
repurchase right lapses as to 25.0% of the shares upon completion of one year of
service from the grant date and the balance in a series of quarterly
installments over the three years thereafter.
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AGGREGATED OPTION EXERCISES IN
LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning the year-end number
and value of unexercised options for each of the Named Executive Officers. No
options or stock appreciation rights were exercised by these executive officers
in 1998, and no stock appreciation rights were outstanding at the end of that
year.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SECURITIES UNDERLYING UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
HELD AT HELD AT
DECEMBER 31, 1998(A) DECEMBER 31, 1998(B)
--------------------- ------------------------
NAME VESTED(B) UNVESTED VESTED UNVESTED
---- --------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Armando Geday.......................... 203,569 261,731 $2,239,259 $2,879,041
Thomas Sennhauser...................... -- 77,775 -- --
Nicholas Aretakis...................... -- 77,775 -- --
Robert McMullan........................ -- 77,775 -- --
</TABLE>
- ------------------------------
(a) The options are immediately exercisable for all of the option shares, but
any shares purchased under those options may be repurchased by us at the
original exercise price paid per share, if the optionee ceases service with
us before vesting in such shares. The heading "Vested" refers to shares that
are no longer subject to repurchase; the heading "Unvested" refers to shares
subject to repurchase as of December 31, 1998.
(b) Based on the fair market value of our common stock as determined by our
board of directors at the end of 1998 of $12.00 per share, less the exercise
price payable for such shares.
CHANGE OF CONTROL ARRANGEMENTS AND EMPLOYMENT AGREEMENTS
Upon certain defined events causing a change in control of GlobeSpan, an
option or other award under the 1999 Equity Incentive Plan will become fully
exercisable and fully vested if the option or award is not assumed by the
surviving corporation or its parent or if the surviving corporation or its
parent does not substitute another award on substantially the same terms. If an
optionee or other participant under the 1999 Equity Incentive Plan is
involuntarily terminated within 12 months after a change in control in which the
option or award was assumed or substituted, then the option or award becomes
fully exercisable and vested.
Except for Mr. Geday, our President and Chief Executive Officer, none of
our executive officers have an employment agreement with GlobeSpan, and they may
resign at any time and GlobeSpan may terminate their employment at any time.
GlobeSpan entered into an employment agreement with Mr. Geday, dated April 1,
1997.
The employment agreement with Mr. Geday provided for a base salary of
$200,000 per year in 1997. Mr. Geday is eligible to earn quarterly and two-level
revenue bonuses based upon goals and revenue targets as determined by our board
of directors and Mr. Geday. Under the employment agreement, we granted to Mr.
Geday an option for 465,300 shares of our common stock. If a corporate
transaction occurs in which more than 50.0% of our stock is transferred, then
50.0% of Mr. Geday's unvested options will become vested. If we are valued at
more than $100.0 million in such corporate transaction, then 100% of Mr. Geday's
unvested options will become vested. If we terminate Mr. Geday's employment
without cause or he resigns for good reason, then he will be paid as severance
any bonuses that have been earned by him and will continue to receive his base
salary until the earlier of the date that is 12 months from his termination date
or the date on which he starts comparable employment. The aggregate severance
payment will not be less than $500,000 prorated for the number of months that
Mr. Geday is entitled to receive his base salary as a severance benefit. In
addition, if we terminate Mr. Geday without cause or he resigns for good
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reason, his option will become vested, as if he provided another 18 months of
service following his termination date, and his vested option will have a
10-year term from the date of his employment agreement.
Mr. McMullan, our Chief Financial Officer, Vice President and Secretary,
received an offer letter from us in which we promised that if a change in
control occurs within 18 months after his employment start date and Mr. McMullan
is not offered a comparable position with comparable responsibilities with the
acquiring entity, then any portion of his option that is not yet exercisable or
vested will become fully exercisable or vested. If the change in control occurs
outside of the 18-month period following his employment start date and Mr.
McMullan is not offered a comparable position with comparable responsibilities
with the acquiring entity, then his option becomes vested for 50.0% of his
unvested shares.
EMPLOYEE BENEFIT PLANS
1999 Equity Incentive Plan. Our board of directors adopted GlobeSpan's
1999 Equity Incentive Plan in March 1999, and our stockholders approved the
adoption of the plan in May 1999. We have reserved 1,000,000 shares of common
stock for issuance under the 1999 Equity Incentive Plan. Any shares not yet
issued under our 1996 Equity Incentive Plan as of the date of this offering will
also be available for grant under the 1999 Equity Incentive Plan. As of each
year, commencing with the date of this offering and continuing on each May 1 in
2000 through 2002, the number of shares reserved for issuance under the 1999
Equity Incentive Plan will be increased automatically by 5.0% of the total
number of shares of common stock then outstanding or, if less, by 1,000,000
shares. We have not granted any options under the 1999 Equity Incentive Plan.
Under the 1999 Equity Incentive Plan, the eligible individuals are: employees,
non-employee members of the board of directors and consultants. The types of
awards that may be made under the 1999 Equity Incentive Plan are options to
purchase shares of common stock, stock appreciation rights, restricted shares
and stock units. Options may be incentive stock options that qualify for
favorable tax treatment for the optionee under Section 422 of the Internal
Revenue Code of 1986 or nonstatutory stock options not designed to qualify for
such favorable tax treatment. With limited restrictions, if shares awarded under
the 1999 Equity Incentive Plan or the 1996 Equity Incentive Plan are forfeited,
then those shares will again become available for new awards under the 1999
Equity Incentive Plan.
The Compensation Committee of our board of directors administers the 1999
Equity Incentive Plan. The Committee has complete discretion to make all
decisions relating to the interpretation and operation of the 1999 Equity
Incentive Plan, including the discretion to determine which eligible individuals
are to receive any award, and to determine the type, number, vesting
requirements and other features and conditions of each award.
The exercise price for incentive stock options granted under the 1999
Equity Incentive Plan may not be less than 100% of the fair market value of the
common stock on the option grant date. The exercise price for non-qualified
options granted under the 1999 Equity Incentive Plan may not be less than 85% of
the fair market value of the common stock on the option grant date. The exercise
price may be paid in cash or in outstanding shares of common stock. The exercise
price may also be paid by using a cashless exercise method, a pledge of shares
to a broker or promissory note. The purchase price for newly issued restricted
shares awarded under the 1999 Equity Incentive Plan may be paid in cash, by
promissory note or by the rendering of past or future services.
The committee may reprice options and may modify, extend or assume
outstanding options and stock appreciation rights. The committee may accept the
cancellation of outstanding options or stock appreciation rights in return for
the grant of new options or stock appreciation rights. The new option or right
may have the same or a different number of shares and the same or a different
exercise price.
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Upon certain defined events causing a change in control of GlobeSpan, an
option or other award under the 1999 Equity Incentive Plan will become fully
exercisable and fully vested if the option or award is not assumed by the
surviving corporation or its parent or if the surviving corporation or its
parent does not substitute another option or award on substantially the same
terms. If an optionee or other participant under this Plan is involuntarily
terminated within 12 months after a change in control in which the option or
award was assumed or substituted, then the option or award becomes fully
exercisable and vested. A change in control includes:
- A merger or consolidation of GlobeSpan after which our then current
stockholders own less than 50.0% of the surviving corporation;
- Sale of all or substantially all of the assets of GlobeSpan;
- A proxy contest that results in replacement of more than one-third of the
directors over a 24-month period; or
- An acquisition of 50.0% or more of GlobeSpan's outstanding stock by a
person other than by a person related to GlobeSpan, such as a corporation
owned by the stockholders of GlobeSpan.
If a merger or other reorganization occurs, the agreement of merger or
reorganization may provide that outstanding options and other awards under the
1999 Equity Incentive Plan shall be assumed by the surviving corporation or its
parent, shall be continued by us if we were a surviving corporation, shall have
accelerated vesting and then expire early, or shall be cancelled for a cash
payment.
Our board of directors may amend or terminate our 1999 Equity Incentive
Plan at any time. If the board amends the Plan, stockholder approval of the
amendment will be sought only if required by an applicable law. The 1999 Equity
Incentive Plan will continue in effect indefinitely unless the board decides to
terminate the Plan earlier.
Employee Stock Purchase Plan. Our board of directors adopted our Employee
Stock Purchase Plan in March 1999, and our stockholders approved the adoption of
the plan in May 1999. We have reserved 400,000 shares of common stock for
issuance under the Employee Stock Purchase Plan. As of February 1 each year
beginning in 2000, 2001 and 2002, the number of shares reserved for issuance
under the Employee Stock Purchase Plan will be increased automatically by 2.0%
of the total number of shares of common stock outstanding or, if less, 400,000
shares. The Employee Stock Purchase Plan is intended to qualify under Section
423 of the Internal Revenue Code. Two overlapping offering periods each with a
duration of 24 months will commence on February 1 and August 1 each calendar
year. However, the first offering period will commence on the effective date of
this offering and end on July 31, 2001. Purchases of common stock will occur on
January 31 and July 31 each calendar year during an offering period. The
Compensation Committee of our board of directors administers our Employee Stock
Purchase Plan. Each employee of GlobeSpan is eligible to participate if he or
she is employed by us for more than 20 hours per week and for more than five
months per year.
The Employee Stock Purchase Plan permits each eligible employee to purchase
common stock through payroll deductions. Each employee's payroll deductions may
not exceed 15.0% of the employee's cash compensation. The initial period during
which payroll deductions will be accumulated will begin on the effective date of
this offering and end on January 31, 2000. No more than 1,000 shares may be
purchased on any purchase date. The price of each share of common stock
purchased under the Employee Stock Purchase Plan will be 85.0% of the lower of
(A) the fair market value per share of common stock on the date immediately
before the first date of the applicable offering period or (B) the fair market
value per share of common stock on the purchase date. In the case of the first
offering period, the price per share under the plan will be 85.0% of the price
offered to the public in this offering. Employees may end their participation in
the Employee
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Stock Purchase Plan at any time. Participation ends automatically upon
termination of employment with us.
If a change in control of GlobeSpan occurs, the Employee Stock Purchase
Plan will end and shares will be purchased with the payroll deductions
accumulated to date by participating employees, unless this Plan is assumed by
the surviving corporation or its parent. Our board of directors may amend or
terminate the Employee Stock Purchase Plan at any time. If our board of
directors increases the number of shares of common stock reserved for issuance
under the Employee Stock Purchase Plan, it must seek the approval of our
stockholders.
1999 Director Stock Plan. Our board of directors adopted our 1999 Director
Stock Plan in March 1999, and our stockholders approved the adoption of the plan
in May 1999. Under the 1999 Director Stock Plan, non-employee members of our
board of directors will be eligible for option grants and other awards.
A maximum of 250,000 shares of common stock has been authorized for
issuance under the 1999 Director Stock Plan. No shares have been issued yet
under the 1999 Director Stock Plan. Options to purchase 20,000 shares have been
granted to date under this Plan.
We may grant options to purchase shares of common stock under the 1999
Director Stock Plan. Options may only be nonstatutory stock options not designed
to qualify for favorable tax treatment. With limited restrictions, if shares
awarded under the 1999 Director Stock Plan are forfeited, then those shares will
again become available for new awards under the 1999 Director Stock Plan.
The exercise price for options granted under the 1999 Director Stock Plan
may not be less than 100% of the fair market value of the common stock on the
option grant date. Optionees may pay the exercise price in cash or in
outstanding shares of common stock. Optionees may also pay the exercise price by
using a cashless exercise method or a pledge of shares to a broker. Each option
will have a maximum term of ten years, but will terminate earlier if the
optionee ceases to be a member of the board of directors.
The committee may reprice options and may modify, extend or assume
outstanding options. The committee may accept the cancellation of outstanding
options in return for the grant of new options. The new option may have the same
or a different number of shares and the same or a different exercise price.
Upon certain defined events causing a change in control of GlobeSpan, an
option or other award granted under the 1999 Director Stock Plan will become
fully exercisable and fully vested and will terminate unless the option or award
is not assumed by the surviving corporation or its parent. Change in control has
the same definition as under the 1999 Equity Incentive Plan.
The 1999 Director Stock Plan grants options to non-employee directors
pursuant to an automatic grant provision at defined intervals beginning on the
effective date of this Plan. The 1999 Director Stock Plan grants to each
non-employee director an option to purchase 10,000 shares of common stock on the
effective date of this offering at the initial public offering price, and the
plan will grant to each such director another option to purchase 5,000 shares of
common stock at the fair market value on the date of grant on the date of the
2000 annual stockholders' meeting and another option to purchase 5,000 shares of
common stock on the date of the 2001 annual stockholders' meeting, if the
director continues serving on the board following the annual stockholders'
meeting. The 1999 Director Stock Plan grants to each person who becomes a
non-employee director following the effective date of this Plan an option to
purchase 10,000 shares of common stock on the date on which he or she is
initially elected or appointed to the board; and each such new director will be
granted another option to purchase 5,000 shares of common stock at each of the
first two annual stockholders' meeting in the calendar years following the year
in which he or she initially became a board member. However, a new director will
not receive an option to purchase 5,000 shares of common stock if he or she
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resigns at that annual stockholders' meeting. At each annual stockholders'
meeting following the annual meeting during which each non-employee director
received the second option to purchase 5,000 shares of common stock, the 1999
Director Stock Plan grants to each continuing director an option to purchase
2,500 shares of common stock. Each initial option becomes exercisable and vested
as to 50% of the shares immediately and as to 50% upon the director's completion
of 12 months of service during which he or she attended at least 75% of the
board meetings. Each subsequent option will be fully vested at grant.
Our board of directors may amend or modify the 1999 Director Stock Plan at
any time. The 1999 Director Stock Plan will terminate in March 2009, unless the
board of directors decides to terminate the plan sooner.
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CERTAIN TRANSACTIONS
INITIAL FORMATION
We were formed in August 1996 as part of the divestiture of AT&T Paradyne
Corporation by Lucent Technologies. Prior to this divestiture, AT&T Paradyne
Corporation operated a communications technologies business. Communication
Partners, L.P. was formed in connection with the divestiture for the primary
purpose of holding investments in GlobeSpan and Paradyne Corporation. In the
divestiture, Communication Partners, L.P. (which at the time was our principal
stockholder) (i) formed a subsidiary, Paradyne Acquisition Corp., to acquire
AT&T Paradyne Corporation (later renamed Paradyne Corporation), and (ii) formed
another subsidiary, CAP Acquisition Group (later renamed GlobeSpan, Inc.), to
acquire certain other assets from AT&T Paradyne Corporation and from Lucent
Technologies. Also in the divestiture, Communication Partners, L.P. formed other
subsidiaries to acquire certain other assets of Lucent Technologies and/or AT&T
Paradyne Corporation.
The following table illustrates the corporate structure of Globespan and
Paradyne Corporation both before and after the divestiture by Lucent
Technologies.
<TABLE>
<CAPTION>
PERCENTAGE
INTEREST IN PERCENTAGE PERCENTAGE
GLOBESPAN INTEREST IN INTEREST IN
AND PARADYNE GLOBESPAN PARADYNE
PRIOR TO FOLLOWING FOLLOWING
FORMATION FORMATION FORMATION
------------- ------------- -------------
<S> <C> <C> <C>
Lucent Technologies........................... 100% 10.3%(1) --
General and Limited Partners of Communication
Partners, L.P.
Entities Associated with Texas Pacific
Group.................................... -- 68.1% 75.9%
Entities Associated with Sprout Group(2).... -- 12.1% 13.1%
Entities Associated with Thomas Epley....... -- 7.9% 8.8%
Entities Associated with William Stensrud... -- 1.7% 1.9%
</TABLE>
- ---------------
(1) Represents a warrant held by Lucent Technologies to purchase 1,312,500
shares of GlobeSpan's common stock and assumes a cash exercise of the
warrant.
(2) Consists of indirect ownership interests through limited partnership
interests in Communication Partners, L.P. and limited partnership interests
in Texas Pacific Group entities.
In addition to their common ownership, Lucent Technologies, GlobeSpan and
Paradyne Corporation have continuing business relationships with each other.
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 directors of both GlobeSpan
and Paradyne Corporation. Mr. Stensrud was a member of the board of directors of
both GlobeSpan and Paradyne Corporation until his resignation from GlobeSpan's
board of directors in March 1999. Mr. Stensrud will continue as a board member
of Paradyne Corporation.
As of May 1999, Communication Partners, L.P. owned approximately 83.2% of
our outstanding common stock and approximately 97.1% of the outstanding capital
stock of Paradyne Corporation. In May 1999, Communication Partners, L.P.
distributed its GlobeSpan shares and its Paradyne Corporation shares to its
limited partners. See "Principal Stockholders."
Mr. Stanton is the sole director and president of Communication GenPar,
Inc., the general partner of Communication Partners, L.P., and is, through
various investment partnerships, a partner
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of TPG Partners, L.P. and TPG Parallel I, L.P., each a limited partner of
Communication Partners, L.P. and the shareholders of Communication GenPar, Inc.
Messrs. Coulter, Epley, Geeslin and Stensrud, either directly or through various
investment partnerships and corporations, are limited partners of Communication
Partners, L.P.
DIVESTITURE TRANSACTIONS
In the divestiture, Communication Partners, L.P., through GlobeSpan and
Paradyne Corporation, paid $2.0 million in cash to Lucent Technologies for the
assets that we acquired. In addition, we issued Lucent Technologies a warrant to
purchase our common stock. The warrant, as amended, expires upon the first to
occur of June 30, 2001 or the sale of our company or all of our assets. The
warrant is currently exercisable for 1,312,500 shares of our common stock at an
exercise price of $6.72 per share. This warrant can either be exercised by
payment of the exercise price in cash or by a "net exercise." A "net exercise"
means that the aggregate exercise price of the warrant is deemed to be paid by
the warrant holder by giving up our common stock, in lieu of paying cash, based
on the fair market value of such shares at the time of net exercise.
In this prospectus we have assumed that the warrant will be net exercised.
By its terms, the warrant will be deemed to be automatically net exercised at
the closing of this offering if the price of our common stock in this offering
is $8.07 per share or higher. We have assumed that the price will be at the
mid-point of the anticipated price range, $10.00 per share, and that the warrant
will be net exercised for 430,500 shares. However, at any time prior to the
closing of this offering, Lucent Technologies can exercise the warrant for up to
1,312,500 shares of our common stock by payment of the exercise price in cash.
Further, if the price of our common stock in this offering is equal to or less
than $8.07 per share, then the warrant will remain outstanding and exercisable
for up to 1,312,500 shares of our common stock and will remain net exercisable.
Lucent Technologies has registration rights for any shares of common stock
issued upon exercise of the warrant. The registration rights include one right
to demand that we register the shares for sale to the public on a registration
statement and an unlimited number of "piggyback" registration rights. These
"piggyback" rights mean that Lucent Technologies can request that we register
its shares on most registration statements that we otherwise elect to file.
The warrant also has a covenant 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., and there can be no
assurance that Lucent Technologies would consider that all of these transactions
were on terms obtainable in a comparable arms' length transaction. If Lucent
Technologies believes that these transactions violated our covenant, they could
bring a claim for damages under the agreement against us. Any dispute with
Lucent Technologies would be expensive, time-consuming and, if we do not
prevail, would likely cause serious harm to our business, financial condition
and results of operations.
Lucent Technologies Intellectual Property Agreement. As part of the
divestiture, we entered into an intellectual property agreement with Lucent
Technologies and Paradyne Corporation. Under this agreement, Lucent Technologies
irrevocably assigned to us and our successors all rights in particular listed
patents related to CAP line code technology. We, in turn, granted to Lucent
Technologies a non-exclusive, non-transferable, irrevocable worldwide,
royalty-free license to develop, manufacture, test or repair any products or
services using the assigned patents.
Under this agreement, Lucent Technologies also granted to us other
intellectual property rights and immunities, subject to a number of restrictions
and/or conditions. Specifically, Lucent Technologies granted us a non-exclusive,
non-transferable, irrevocable, worldwide, royalty-free license under certain
patents owned or controlled by Lucent Technologies as of the date of the
divestiture to
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develop, manufacture, sell, test or repair our products, or convey to any
customer of our products the right to use and resell such products. Lucent
Technologies also granted us the right to extend immunity to our licensees and
customers under particular listed Lucent Technologies patents when those
licensees and customers need to use technical information claimed in those
patents to manufacture our products. These other intellectual property rights
are subject to several conditions and restrictions on what kind of products are
within the scope of the rights and immunities, when the rights and immunities
can be exercised and for how long, and whether the rights and immunities can be
transferred to other parties and when. These other intellectual property rights
will become subject to a predetermined royalty if we sell all or part of our
business that exercises these rights and more than six years have elapsed from
the date of the divestiture. Some of these conditions and restrictions relating
to the exercise of the other intellectual property rights are ambiguous, and
could be interpreted in more than one way. We believe that the ambiguous
conditions and restrictions will not affect our current and proposed business in
a material manner, either because we no longer rely on the rights and immunities
granted by Lucent Technologies, or because the amount of our business that would
be affected is not material. Nevertheless, these ambiguous conditions and
restrictions could require us to negotiate with Lucent Technologies for
additional rights, or to defend against assertions by Lucent Technologies that
our business exceeds the scope of the rights and immunities. If we are
unsuccessful in such negotiations or defense, we might not be able to sell some
of our products, or such sales might be subject to limitations on how those
products can be used.
All three parties to this agreement granted to each other reciprocal rights
in their respective technical information only to the extent reasonably
necessary to support the other rights and licenses granted to each party under
the agreement.
Lucent Technologies Noncompetition Agreement. As part of the divestiture,
we entered into a Noncompetition Agreement with Lucent Technologies and Paradyne
Corporation. Under this agreement, Lucent Technologies agreed not to compete
with us (with a separate agreement not to compete with Paradyne Corporation), in
strictly limited circumstances subject to several exemptions and exclusions.
AT&T Trademark and Patent License. As part of the divestiture, AT&T
Corporation (Lucent Technologies' sole stockholder at the time), entered into a
Trademark and Patent Agreement with us and Paradyne Corporation. Under this
agreement, AT&T granted us a license under particular listed AT&T patents to
develop, manufacture, test or repair our products existing as of the date of the
divestiture.
ADDITIONAL TRANSACTIONS WITH LUCENT TECHNOLOGIES
Lucent Technologies Supply Agreement. As part of the divestiture, we
entered into a Supply Agreement with Lucent Technologies and Paradyne
Corporation. This agreement remains in effect for four years from the date of
the divestiture. Under this agreement, we and Paradyne Corporation agreed to
sell listed products (and modifications specific to the listed products) to
Lucent Technologies. Lucent Technologies may purchase such products for prices
and at discounts that are at least as good as those offered by us to any of our
other customers for comparable products under comparable terms. We must give
Lucent Technologies one year's notice of discontinuation of any of the listed
products. We believe that none of the products listed in this agreement are
currently products that we currently sell.
Lucent Technologies currently manufactures substantially all of our chip
sets. In the five months ended December 31, 1996, the years ended December 31,
1997 and 1998 and the three months ended March 31, 1999, we purchased from
Lucent Technologies, for a total of $0.5 million, $7.7 million, $8.6 million and
$2.7 million, respectively, chip sets, including components, computer equipment
and software, training and consulting, maintenance and repairs. In March 1999 we
entered into a manufacturing agreement with Lucent Technologies under which
Lucent Technologies has agreed to
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<PAGE> 67
manufacture our chip sets in accordance with certain pricing quotations and
volume forecasts. This agreement may be terminated by Lucent Technologies upon
one year's notice. Lucent Technologies currently manufactures substantially all
of our chip sets, and we expect that Lucent Technologies will continue to
manufacture substantially all of our chip sets for the foreseeable future.
As part of our previous business model, Lucent Technologies paid us certain
fees in connection with the manufacture and sale of chip sets to GlobeSpan
customers. During the five months ended December 31, 1996 and the year ended
December 31, 1997, Lucent Technologies paid us a total of $635,000 and $185,000,
respectively, for such fees pursuant to standard terms and conditions. In the
year ended December 31, 1997, Lucent Technologies paid us $10,000 for chip set
sales related to Lucent Technologies' development of certain DSL products.
ADDITIONAL TRANSACTIONS WITH COMMUNICATION PARTNERS, L.P.
Sale of Common Stock. In addition to the 7,437,500 shares of stock issued
to Communication Partners, L.P. as part of the formation of GlobeSpan, we issued
a total of 4,000,000 shares of common stock to Communication Partners, L.P. at a
price of $1.00 per share on November 27, 1996. In May 1999, Communication
Partners, L.P. distributed these shares to its general partner and limited
partners according to their pro rata interest in Communication Partners, L.P.
Communication Partners, L.P. no longer holds any common stock of Globespan.
Subordinated Revolving Promissory Note. On December 15, 1998, we amended
our existing Subordinated Revolving Promissory Note with Communication Partners,
L.P. The note had an outstanding principal balance of $5.0 million at the time
of such amendment. The amendment provides that we can borrow up to an additional
$5.0 million under the note. Subject to the terms and conditions of the amended
note, the amount remaining on the note over $5.0 million becomes due and payable
on March 31, 2000. The remaining $5.0 million is payable on May 1, 2003. Amounts
outstanding may be repaid and reborrowed at any time during the term of the
note, and the interest rate is set at 8% per annum. We intend to use the
proceeds from this offering to retire this debt.
Amendment of the Lucent Technologies Warrant. In August 1998 we agreed to
amend the warrant held by Lucent Technologies. As originally issued, the warrant
would have expired upon the repayment by Paradyne Corporation of its outstanding
long-term debt to Lucent Technologies. In August 1998, Paradyne Corporation and
Lucent Technologies agreed to settle this long-term debt in an aggregate
principal and interest amount of approximately $65.7 million. As a term of such
settlement, we agreed to amend the warrant so that it did not expire upon the
repayment of the indebtedness. The amendment also extended the term of the
warrant by an additional year. We agreed to this warrant amendment in
consideration of $100,000 in loan forgiveness from Communication Partners, L.P.
which we received in March 1999. Because the warrant amendment was deemed to
have indirectly benefited Communication Partners, L.P., we have accounted for
the amendment as a $3.7 million distribution to Communication Partners, L.P.
which was reflected as an adjustment to our paid-in capital. See Note 7 of the
Notes to Financial Statements. This value was based on the increase in the fair
market value of the warrant resulting from the extension of the outstanding
warrant term.
Registration Rights. In connection with our sale of preferred stock in May
1999, we granted to Communication Partners, L.P. the right to require that we
register its shares for sale to the public. In May 1999, Communication Partners,
L.P. distributed its shares of our common stock, and these registration rights
can be exercised by the general partner and the limited partners of
Communication Partners, L.P.
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ADDITIONAL TRANSACTIONS WITH PARADYNE CORPORATION
Paradyne Corporation Cross License. As part of the divestiture, we entered
into a cross-license agreement with Paradyne Corporation. We believe the purpose
of this agreement was to ensure that both we and Paradyne Corporation had the
same intellectual property rights in connection with our and their respective
products both before and after the divestiture. Under the agreement each party
granted to the other party a non-exclusive, royalty-free license to the patents
Lucent Technologies assigned to the granting party in the divestiture, for use
in the other party's products that existed as of the date of the divestiture,
and modifications to those products. Under the agreement each party also granted
to the other party a non-exclusive, royalty-free license to the granting party's
other technical information and intellectual property for the same use. These
grants apply to technical information and other intellectual property in
existence at the date of the divestiture, or developed later and relating to the
other party's products that existed at the divestiture or modifications to these
products. Paradyne Corporation also granted us a non-exclusive, irrevocable,
royalty-free license to use several listed trademarks. The rights granted are
perpetual, subject to the expiration of patent and copyright terms.
Royalty Payments by Paradyne Corporation. As part of our earlier business
model and in conjunction with their license to reproduce GlobeSpan software,
Paradyne Corporation paid GlobeSpan a total of $235,000 in royalty payments in
1996. This payment reflected the cost of a chip set reference design guide and a
right to use fee. The rates were determined in accordance with a License
Agreement dated September 11, 1995.
Reimbursement for Chip Set Purchases. In 1996, as our business model
shifted from licensing to selling chip sets, we purchased chip sets from Lucent
Technologies through Paradyne Corporation for sale to our customers through
Paradyne Corporation. Paradyne Corporation paid Lucent Technologies for these
chip sets on our behalf and we reimbursed Paradyne Corporation for their cost.
In connection with purchases made by Paradyne Corporation on our behalf in 1996,
we paid Paradyne Corporation a total of $194,000 in 1997.
Cooperative Development Agreement/Termination Agreement/Supply
Agreement. In November 1996, we entered into a Cooperative Development Agreement
and a related rider agreement with Paradyne Corporation. Under the terms of
these agreements, we provided Paradyne Corporation with a broad, royalty-free,
unrestricted license to use our technical information and patents for any
purpose related to Paradyne Corporation's products. We also granted to Paradyne
Corporation the right to acquire our chip sets at prices not to exceed cost plus
15%. The term of these agreements was 10 years, and Paradyne Corporation had the
right to extend it for an additional 10 year term. In addition, Paradyne
Corporation leased certain assets and equipment to us for an annual lease fee of
$1.00. Effective December 1998, GlobeSpan and Paradyne Corporation terminated
these agreements pursuant to a Termination Agreement whereby both parties
affirmed that the technology licensing provisions were never implemented. The
Termination Agreement further provided that we agreed, effective July 1998, to
pay Paradyne $1.5 million in license fees, that the parties agreed that $316,000
of these fees had been paid as of the effective date of the Termination
Agreement, and that we will pay to Paradyne Corporation the $1,184,000 balance
within 30 days of the effective date of this initial public offering. In
conjunction with the signing of the Termination Agreement, we entered into a
four year Supply Agreement which gives Paradyne Corporation preferential pricing
and other terms in connection with the purchase of our products by Paradyne
Corporation. Under the terms of this Supply Agreement, we are required to honor
Paradyne Corporation's orders for our products in quantities at least consistent
with Paradyne Corporation's past ordering practices and must afford Paradyne
Corporation at least the same priority for its orders as we afford other
similarly situated customers. We also granted Paradyne Corporation immunity
under our intellectual property rights for all Paradyne Corporation customers
that purchase Paradyne Corporation products that incorporate our products. We
have been selling products to Paradyne Corporation pursuant to these terms since
July
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1998. In 1997 and 1998, Paradyne Corporation paid to us a total of $373,000 and
$962,000, respectively, for products purchased from us pursuant to the
agreements described in this paragraph.
Inventory Repurchases from Paradyne Corporation. In December 1997 and
September 1998, we purchased from Paradyne Corporation certain GlobeSpan chip
sets which it held in its inventory in the amounts of $98,000 and $29,000,
respectively. We purchased these chip sets for resale to other customers.
Payments to Paradyne Corporation. For a period following the divestiture,
Paradyne Corporation agreed to provide us with certain staffing services,
including legal and human resources; certain administrative services, including
risk management, patent management, tax management and accounting support;
certain operational services, including office communications and
telecommunications systems management, facilities management and rent; and other
services until such time as we could provide similar services on our own. Though
certain services are now provided directly by GlobeSpan facilities and
employees, other services, group insurance and retirement administration are
still provided by Paradyne Corporation. This agreement can be terminated by
GlobeSpan on 60 days' notice. For these services, we paid Paradyne Corporation,
a total of $155,000 and $231,000 for the years ended December 31, 1997 and 1998,
respectively. Because we do not expect to rely on Paradyne Corporation for these
services after this offering, we anticipate that these expenses will not
continue in fiscal year 1999. In 1998, we subleased additional office space in
Red Bank, New Jersey from Paradyne Corporation. In connection with the
relocation of the Paradyne Corporation offices, we reimbursed approximately
$392,000 of Paradyne Corporation's moving expenses.
Purchase of Fixed Assets. In 1997 we purchased fixed assets from Paradyne
Corporation approximating $350,000. In 1998, we agreed to purchase certain fixed
assets from Paradyne Corporation related to the subleased Red Bank facility.
This payment totaled $1.4 million and included costs to remodel offices
previously used by Paradyne Corporation, the purchase of furniture and certain
fixtures within the office facility. These assets were transferred at their net
book value since the transaction involved entities under common control.
Various Insurance Policies. Pursuant to insurance policies issued by
insurers who are Best 'A" rated covering liability, director and officer's
insurance, property and casualty and workers' compensation, the directors and
officers of Communication Partners, L.P., Communication GenPar, Inc., Paradyne
Corporation, Paradyne Acquisition Corp., Paradyne Credit Corp. and GlobeSpan are
all covered under the same insurance policy with up to $10.0 million of
liability coverage collectively. The term of the policy is from August 1, 1998
to July 31, 1999, and GlobeSpan's portion of the premium amount is approximately
$85,000. We expect that we will not share insurance policies with Paradyne
Corporation after this offering. We will have our own Director and Officer's
Insurance policy in effect prior to the close of this offering.
401(k) Plan. GlobeSpan currently participates in a 401(k) plan covering
substantially all employees which is maintained by Paradyne Corporation. In 1999
GlobeSpan will adopt its own 401(k) plan for its employees. Contributions paid
by Paradyne Corporation on behalf of GlobeSpan amounted to approximately
$45,000, $242,000, $348,000 and $126,000 for the five months ended December 31,
1996, the years ended December 31, 1997 and 1998 and the three months ended
March 31, 1999, respectively. All payments made by Paradyne Corporation on
behalf of GlobeSpan have been reimbursed to Paradyne Corporation. We are now
making direct contributions to Paradyne Corporation's 401(k) plan on behalf of
our employees, but we expect to initiate our own 401(k) plan in 1999.
Real Property Agreements. In an agreement dated August 1997 and
subsequently amended in August 1998, we entered into a sublease with Paradyne
Corporation at 100 Schulz Drive, Red Bank, New Jersey. We currently pay Paradyne
Corporation approximately $68,000 a month for approximately 50,000 rentable
square feet. After October 2001, the rent will increase to
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approximately $79,000 a month for a period of six months. We are also
responsible for the cost of our own utilities. The sublease will expire in April
2002.
EMPLOYMENT RELATED AGREEMENTS
We entered into an employment agreement with Armando Geday, our President
and Chief Executive Officer and a Director. See "Risk Factors--Our Executive
Officers and Key Personnel Are Critical to Our Business, these Officers and
Personnel May Not Remain with Us in the Future" and "Management--Employment
Agreements."
We entered into an employment agreement on August 29, 1997 with Thomas
Epley, who served as our Chairman of the board of directors through March 1999
and who is a director. Mr. Epley's employment agreement is at-will and provides
for an annualized base salary of $150,000 for the first twelve months of the
agreement and an annualized salary of $100,000 for the second twelve months of
the agreement. If Mr. Epley's employment is terminated without cause or for
"good reason" including assignment to a lesser position, a reduction in base
salary or a change in control of GlobeSpan, Mr. Epley will receive the remainder
of his base salary and benefits through July 31, 1999. Mr. Epley is subject to a
covenant not to compete and a noninterference requirement as long as GlobeSpan
is making payments to him under this contract.
LOANS TO CERTAIN EXECUTIVES
Loans to Executive Officers. On May 27, 1999, we loaned approximately
$1,233,300 to Robert McMullan and $1,166,630 to each of Thomas Sennhauser and
Nicholas Aretakis, secured by a stock pledge agreement, in connection with their
purchase of approximately 107,775, 101,108 and 101,108 shares of our common
stock, respectively. Each full recourse note accrues interest at the rate of
5.22% per annum and is payable upon the earlier of the fifth anniversary of the
note or 30 days following termination of employment. Prior to this offering, we
intend to loan approximately $2,200,000 to Armando Geday in connection with his
purchase of approximately 525,316 shares of our common stock. Mr. Geday's loan
will be on substantially the same terms as the loans to Messrs. McMullan,
Sennhauser and Aretakis.
Loans to Key Employees. We loaned approximately $149,850 to each of George
Malek and Daniel Amrany, secured by a stock pledge agreement, in connection with
the purchase by each of approximately 150,000 shares of our common stock. Mr.
Malek's loan was made on November 3, 1997, and Mr. Amrany's loan was made on
October 28, 1997. The full recourse notes of Messrs. Malek and Amrany accrue
interest at the rate of 5.94% and 6.06% per annum, respectively. Each note is
payable upon the earlier of the fifth anniversary of such note or termination of
employment. The largest aggregate amount of indebtedness of Mr. Malek
outstanding during 1998 was approximately $160,000 and the balance due as of
March 31, 1999, was approximately $162,000. The largest aggregate amount of
indebtedness of Mr. Amrany outstanding during 1998 was approximately $161,000
and the balance due as of March 31, 1999, was approximately $163,000.
INDEMNIFICATION PROVISIONS
Our amended and restated certificate of incorporation limits the liability
of our directors for monetary damages arising from a breach of their fiduciary
duty as directors, except to the extent otherwise required by the Delaware
General Corporation Law. Such limitation of liability does not affect the
availability of equitable remedies such as injunctive relief or rescission.
Our bylaws provide that we shall indemnify our directors and officers to
the fullest extent permitted by Delaware law, including in circumstances in
which indemnification is otherwise discretionary under Delaware law. Prior to
the close of this offering, we will enter into indemnification agreements with
our officers and directors containing provisions that may require us, among
other
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things, to indemnify such officers and directors against certain liabilities
that may arise by reason of their status or service as directors or officers
(other than liabilities arising from willful misconduct of a culpable nature),
to advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified, and to obtain directors' and officers'
insurance if available on reasonable terms.
All future transactions, including any loans from GlobeSpan to its
officers, directors, principal stockholders or affiliates, will be approved by a
majority of the board of directors, including a majority of the independent and
disinterested member of the board of directors or, if required by law, a
majority of disinterested stockholders. These transactions, if any, will be on
terms no less favorable to GlobeSpan than could be obtained from unaffiliated
third parties.
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PRINCIPAL STOCKHOLDERS
The table below sets forth information regarding the beneficial ownership
of GlobeSpan's common stock as of May 26, 1999, by the following individuals or
groups:
- Each person or entity who is known by GlobeSpan to own beneficially more
than 5.0% of GlobeSpan's outstanding stock;
- Each of the Named Executive Officers;
- Each director of GlobeSpan; and
- All directors and executive officers as a group.
Unless otherwise indicated, the address of each of the individuals listed
in the table is c/o GlobeSpan, Inc., 100 Schulz Drive, Red Bank, NJ 07701.
Except as otherwise indicated, and subject to community property laws where
applicable, the persons named in the table have sole voting and investment power
with respect to all shares of common stock shown held by them.
Applicable percentage ownership in the following table is based on
13,745,375 shares of common stock outstanding as of May 26, 1999. To the extent
that any shares are issued upon exercise of options, warrants or other rights to
acquire GlobeSpan's capital stock that are presently outstanding or granted in
the future or reserved for future issuance under GlobeSpan's stock plans, there
will be further dilution to new public investors. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission and generally includes voting or investment power with respect to
securities, subject to community property laws, where applicable. Shares of our
common stock subject to options that are presently exercisable or exercisable
within 60 days of May 26, 1999 are deemed to be outstanding and beneficially
owned by the person holding such options for the purpose of computing the
percentage of ownership of such person but are not treated as outstanding for
the purpose of computing the percentage of any other person.
The numbers shown in the table below assume no exercise by the underwriters
of their over-allotment option.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO THE OFFERING AFTER THE OFFERING
----------------------- -----------------------
NUMBER PERCENTAGE NUMBER PERCENTAGE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
5% STOCKHOLDERS:
Entities Associated with Texas Pacific Group(1)....... 8,680,148 63.2% 8,680,148 49.8%
Entities Associated with Sprout Group(2).............. 1,535,795 11.2% 1,535,795 8.8%
Intel Corporation(3).................................. 1,002,515 7.2% 1,002,515 5.7%
Cisco Systems, Inc.(4)................................ 758,939 5.5% 758,939 4.3%
Lucent Technologies Inc.(5)........................... 1,312,500 8.7% 1,312,500 7.0%
DIRECTORS AND NAMED EXECUTIVE OFFICERS:
Barbara Connor(6)..................................... 5,000 * 5,000 *
James Coulter(7)...................................... 8,680,148 63.2% 8,680,148 49.8%
Dipanjan Deb.......................................... -- -- -- --
Thomas Epley(8)....................................... 1,002,405 7.3% 1,002,405 5.8%
Federico Faggin(9).................................... 5,000 * 5,000 *
Keith Geeslin(10)..................................... 1,535,795 11.2% 1,535,795 8.8%
David Stanton(11)..................................... -- -- -- --
Armando Geday(12)..................................... 525,317 3.7% 525,317 2.9%
Robert McMullan(13)................................... 107,775 * 107,775 *
Nicholas Aretakis(14)................................. 101,108 * 101,108 *
Thomas Sennhauser(15)................................. 101,108 * 101,108 *
All directors and officers as a group(16) (11
persons)........................................... 12,058,657 82.7% 12,058,657 66.0%
</TABLE>
- -------------------------
* Represents beneficial ownership of less than 1.0%
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(1) Consists of 114,195 shares held by Communication GenPar, Inc., 7,789,353
shares held by TPG Partners, L.P. and 776,600 shares held by TPG Parallel
I, L.P. TPG Partners, L.P. and TPG Parallel I, L.P., affiliates of Texas
Pacific Group, are shareholders in Communication GenPar, Inc. David
Stanton, one of our directors, is the sole director and President of
Communication GenPar, Inc. David Stanton and James Coulter, one of our
directors, are partners of the general partner of the Texas Pacific Group
entities. The address of Texas Pacific Group is 201 Main Street, Ste. 2420,
Fort Worth, TX 76102.
(2) Consists of 30,713 shares held by DLJ Capital Corporation, 604,050 shares
held by Sprout Growth II, L.P., 738,875 shares held by Sprout Growth VII,
L.P., 8,583 shares held by The Sprout CEO Fund, L.P., and 153,574 shares
held by DLJ First ESC, L.L.C. Keith Geeslin, one of our directors, is a
general partner of Sprout Growth II, L.P., Sprout Growth VII, L.P. and The
Sprout CEO Fund, L.P. Mr. Geeslin is also a Divisional Senior Vice
President of DLJ Capital Corporation, the managing general partner of
Sprout Growth II, L.P., Sprout Growth VII, L.P. and The Sprout CEO Fund,
L.P. DLJ First ESC L.L.C. is an affiliate of DLJ Capital Corporation. The
address of The Sprout Group is 3000 Sand Hill Road, Bldg. 3, Ste. 170,
Menlo Park, CA 94025.
(3) Includes 150,000 shares subject to warrants which are exercisable within 60
days of May 26, 1999. The address of Intel Corporation is 2200 Mission
College Blvd., Santa Clara, CA 95052.
(4) Includes 150,000 shares subject to warrants which are exercisable within 60
days of May 26, 1999. The address of Cisco Systems, Inc. is 170 Tasman
Drive, San Jose, CA 95134-1706.
(5) Represents a warrant held by Lucent Technologies to purchase 1,312,500
shares of our common stock and assumes a cash exercise of the warrant. If
Lucent Technologies exercises the warrant pursuant to a net exercise
provision, they will own 430,500 shares before the offering, representing
3.0% of the total outstanding shares of Globespan, and 430,500 shares after
the offering, representing 2.4% of the total outstanding shares of
Globespan. The address of Lucent Technologies is 600 Mountain Avenue,
Murray Hill, NJ 07974.
(6) Includes 5,000 shares subject to options which are exercisable within 60
days of May 26, 1999.
(7) Includes 8,680,148 shares held by entities associated with the Texas
Pacific Group. Mr. Coulter is a partner of the general partner of the Texas
Pacific Group entities, and, as such, he may be deemed to have voting and
dispositive power over the Texas Pacific Group shares. However, Mr. Coulter
disclaims beneficial ownership of the Texas Pacific Group shares except to
the extent of his pecuniary interest therein.
(8) Includes 767,931 shares held by Epley Investors, L.L.C. and 234,474 shares
held by Mr. Epley individually.
(9) Includes 5,000 shares subject to options which are exercisable within 60
days of May 26, 1999.
(10) Includes 1,535,795 shares held by entities associated with The Sprout
Group. Mr. Geeslin is a general partner of Sprout Growth II, L.P., Sprout
Growth VII, L.P. and The Sprout CEO Fund, L.P. Mr. Geeslin is also a
Divisional Senior Vice President of DLJ Capital Corporation, the managing
general partner of Sprout Growth II, L.P., Sprout Growth VII, L.P. and The
Sprout CEO Fund, L.P. DLJ First ESC L.L.C. is an affiliate of DLJ Capital
Corporation. As such, he may be deemed to have voting and dispositive power
over the shares held by entities associated with the Sprout Group. However,
Mr. Geeslin disclaims beneficial ownership of these shares except to the
extent of his pecuniary interest therein.
(11) Mr. Stanton is the sole director and President of Communication GenPar,
Inc., a stockholder in Globespan. Mr. Stanton, through various investment
partnerships and corporations has a pecuniary interest in the shares held
by the Texas Pacific Group.
(12) Includes 525,317 shares subject to options which are exercisable within 60
days of May 26, 1999.
(13) Includes 107,775 shares subject to options which are exercisable within 60
days of May 26, 1999.
(14) Includes 101,108 shares subject to options which are exercisable within 60
days of May 26, 1999.
(15) Includes 101,108 shares subject to options which are exercisable within 60
days of May 26, 1999.
(16) Includes 835,308 shares subject to options which are exercisable within 60
days of May 26, 1999.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
On the closing of this offering, our authorized capital stock will consist
of 100,000,000 shares of common stock, $.001 par value, and 10,000,000 shares of
Preferred Stock, $.001 par value.
COMMON STOCK
As of March 31, 1999, there were 12,274,619 shares of common stock
outstanding that were held of record by approximately 56 stockholders. There
will be 17,416,573 shares of common stock outstanding (assuming no exercise of
the underwriters' over-allotment option and assuming no exercise after March 31,
1999, of outstanding options, and including 1,461,454 shares of common stock to
be issued to Intel Corporation and Cisco Systems upon conversion of the Series A
preferred stock and 430,500 shares of common stock issuable upon the net
exercise of the warrant held by Lucent Technologies) after giving effect to the
sale of the shares of common stock to the public offered hereby.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. The holders of common stock are
entitled to receive dividends on a pro rata basis, if any, declared from time to
time by the board of directors out of legally available funds. See "Dividend
Policy." In the event of the liquidation, dissolution or winding up of
GlobeSpan, the holders of common stock are entitled to share on a pro rata basis
in all assets remaining after payment of liabilities. The common stock has no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are fully paid and nonassessable, and the
shares of common stock to be issued upon completion of this offering will be
fully paid and nonassessable.
PREFERRED STOCK
On the closing of this offering, 10,000,000 shares of preferred stock will
be authorized and no shares will be outstanding. The board of directors has the
authority to issue the preferred stock in one or more series and to fix the
rights, preferences, privileges and restrictions of the preferred stock,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences and the number
of shares constituting any series or the designation of such series, without
further vote or action by the stockholders. The issuance of preferred stock may
have the effect of delaying, deferring or preventing a change in control of
GlobeSpan without further action by the stockholders and may adversely affect
the voting and other rights of the holders of common stock. The issuance of
preferred stock with voting and conversion rights may adversely affect the
voting power of the holders of common stock, including the loss of voting
control to others. At present, we have no plans to issue any of the preferred
stock.
WARRANTS
As of March 31, 1999, Lucent Technologies held a warrant to purchase
1,312,500 shares of our common stock at an exercise price of $6.72 per share.
This warrant can either be exercised by payment of the exercise price in cash or
by a net exercise. By its terms, the warrant will be deemed to be automatically
net exercised at the closing of this offering if the price of our common stock
in this offering is $8.07 per share or higher. We have assumed that the warrant
will be at the mid-point of the anticipated price range, $10.00 per share, and
that the warrant will be net exercised for 430,500 shares. However, at any time
prior to the closing of this offering, Lucent Technologies can exercise the
warrant for up to 1,312,500 shares of our common stock by payment of the
exercise price in cash. Further, if the price of our common stock in this
offering is below $8.07 per share, then the warrant
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will remain outstanding and exercisable for up to 1,312,500 shares of our common
stock and will remain net exercisable.
In May 1999, each of Cisco Systems, Inc. and Intel Corporation was issued a
warrant to purchase an aggregate of 150,000 shares of our common stock, with a
five year term after the closing of this offering, at an exercise price
determined as follows:
- For the first 37,500 shares, the exercise price shall be equal to the
initial offering price of our common stock in this offering;
- For the second 37,500 shares, the exercise price shall be 125% of the
initial offering price of our common stock in this offering;
- For the third 37,500 shares, the exercise price shall be 150% of the
initial offering price of our common stock in this offering;
- For the fourth 37,500 shares, the exercise price shall be 175% of the
initial offering price of our common stock in this offering.
Each of the foregoing warrants can either be exercised by payment of the
warrants in cash or by a net exercise.
In addition, in May 1999, each of Cisco Systems, Inc. and Intel Corporation
was issued a warrant, with a five year term after the closing of this offering,
to purchase our common stock at an exercise price equal to the price of our
shares in this offering. The number of shares for which each such warrant is
exercisable is determined as follows, based on the price of our shares in this
offering:
- The warrants will expire unexercised if the initial offering price of our
common stock in this offering is $10.00 per share or greater;
- 10,000 shares if the initial offering price of our common stock in this
offering is from $9.00 to $9.99;
- 20,000 shares if the initial offering price of our common stock in this
offering is from $8.00 to $8.99;
- 30,000 shares if the initial offering price of our common stock in this
offering is from $7.00 to $7.99;
- 100,000 shares if the initial offering price of our common stock in this
offering is less than $7.00.
Each of the foregoing warrants can either be exercised by payment of the
warrants in cash or by a net exercise.
REGISTRATION RIGHTS
Pursuant to the terms of the warrant held by Lucent Technologies, Lucent
Technologies is entitled to certain rights with respect to the registration of
the shares issuable upon the exercise of the warrant under the Securities Act.
If we propose to register any of our securities under the Securities Act, either
for our own account or for the account of other security holders, Lucent
Technologies is entitled to notice of such registration and to include the
shares of common stock issuable upon exercise of the warrant in such
registration at our expense. Additionally, Lucent Technologies may require us to
file one additional registration statement within one year of our initial public
offering. These registration rights are subject to certain conditions and
limitations, among them the lock-up agreement effective for 180 days following
the closing of this offering and the right of the underwriters of an offering to
limit the number of shares included in such registration.
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Concurrently with the purchase of our Series A preferred stock by Intel
Corporation and Cisco Systems, Inc., we entered into a registration rights
agreement with Intel Corporation, Cisco Systems, Inc. and Communication
Partners, L.P. on May 6, 1999. At any time after 180 days following the date of
this prospectus, the holders of 30% of the shares held by Intel Corporation,
Cisco Systems, Inc. and the general partner and the limited partners of
Communication Partners, L.P. may demand that we file a registration statement
under the Securities Act covering all or a portion of the securities of
GlobeSpan held by them. However, the securities to be registered must have an
anticipated aggregate public offering price of at least $10.0 million. The
holders of 30% of the shares held by Intel Corporation, Cisco Systems, Inc. and
the general partner and the limited partners of Communication Partners, L.P.
have the right to demand registration of their securities on two occasions.
When we are eligible to utilize a registration statement on Form S-3 to
register an offering of our securities, holders of 15% of the shares held by
Intel Corporation, Cisco Systems, Inc. and the limited partners of Communication
Partners, L.P. may request that we file a registration statement on Form S-3,
covering all or a portion of securities of GlobeSpan held by them, provided that
the aggregate public offering price is at least $500,000. These holders can
request two S-3 registrations per year.
These registration rights will be subject to the Company's right to delay
the filing of a registration statement in certain circumstances, not more than
once in any 12-month period, for not more than 45 days after the appropriate
number of holders have requested we file a Registration Statement.
In addition, Intel Corporation, Cisco Systems, Inc. and the general partner
and limited partners of Communication Partners, L.P. will have certain
"piggyback" registration rights. If we propose to register any common stock
under the Securities Act, other than pursuant to the registration rights noted
above, Intel Corporation, Cisco Systems, Inc. and the general partner and
limited partners of the Communication Partners, L.P. may require us to include
all or a portion of their securities in the registration. However, the managing
underwriter, if any, of any offering has the right to limit the number of
securities proposed to be included in the registration.
We are required to bear all registration expenses incurred in connection
with these registrations. Intel Corporation, Cisco Systems, Inc. and the general
partner and limited partners of Communication Partners, L.P. would pay all
underwriting discounts and selling commissions applicable to the sale of their
securities.
We also agreed to indemnify Intel Corporation, Cisco Systems, Inc. and the
general partner and limited partners of Communication Partners, L.P. for any
damages they suffer due to any untrue statement or omission that we make in a
registration statement covering their shares or any breach by us of our
agreement with them.
The registration rights of Intel Corporation, Cisco Systems, Inc. and the
general partner and limited partners of Communication Partners, L.P. under the
registration rights agreement will terminate five years after the offering or,
as to each of them, when it may sell all its shares in a three-month period
under Rule 144 of the Securities Act.
PUT OPTIONS
In connection with the sale of Series A preferred stock to Intel
Corporation and Cisco Systems Inc., GlobeSpan granted each of them the right to
sell back their GlobeSpan shares and warrants at cost upon certain events. Cisco
Systems Inc., has the right to sell back all of its GlobeSpan shares and
warrants at cost if on or prior to September 30, 1999, (A) GlobeSpan and Cisco
Systems, Inc., have not entered into a development agreement, (B) if GlobeSpan
enters into a merger or a sale of all or substantially all of its assets or (C)
if Intel gives notice of its intent to sell back its shares and
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warrants at cost. Intel Corporation has the right to sell back all of its
GlobeSpan shares and warrants at cost if either (A) Cisco Systems Inc., gives
notice of its intent to sell back its shares and warrants at cost, or (B)
GlobeSpan has not completed an initial public offering prior to December 31,
1999. Both put options terminate upon the earlier of a transfer of the shares
and warrants, a merger, a sale of all or substantially all of its assets or the
completion of this offering.
ANTITAKEOVER EFFECTS OF DELAWARE LAW AND PROVISIONS OF OUR AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION AND BYLAWS
Amended and Restated Certificate of Incorporation and Bylaws. Our amended
and restated certificate of incorporation provides that, effective upon the
closing of this offering, all stockholder actions must be effected at a duly
called meeting and not by a consent in writing. Our amended and restated
certificate of incorporation and bylaws provide that directors may be removed
only for cause and only upon the vote of eighty percent (80%) of our outstanding
shares. Our bylaws provide that our stockholders may call a special meeting of
stockholders only upon a request of stockholders owning at least 25.0% of our
capital stock. These provisions of our amended and restated certificate of
incorporation and bylaws could discourage potential acquisition proposals and
could delay or prevent a change in control of GlobeSpan. These provisions are
intended to enhance the likelihood of continuity and stability in the
composition of our board of directors and in the policies formulated by our
board of directors and to discourage certain types of transactions that may
involve an actual or threatened change of control of GlobeSpan. These provisions
are designed to reduce our vulnerability to an unsolicited acquisition proposal.
The provisions also are intended to discourage certain tactics that may be used
in proxy fights. However, such provisions could have the effect of discouraging
others from making tender offers for our shares and, as a consequence, they also
may inhibit fluctuations in the market price of our shares that could result
from actual or rumored takeover attempts. Such provisions also may have the
effect of preventing changes in our management.
WAIVER OF SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Waiver of Delaware Antitakeover Law. We have waived in our amended and
restated certificate of incorporation Section 203 of the Delaware General
Corporation Law, an antitakeover law. In general, Section 203 prohibits a
publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years following the date
the person became an interested stockholder, unless the "business combination"
or the transaction in which the person became an interested stockholder is
approved in a prescribed manner. Generally, a "business combination" includes a
merger, asset or stock sale, or other transaction resulting in a financial
benefit to the interested stockholder. Generally, an "interested stockholder" is
a person who, together with affiliates and associates, owns or within three
years prior to the determination of interested stockholder status, did own,
15.0% or more of a corporation's voting stock. The waiver of this provision may
make it easier for an interested stockholder to engage in a business combination
with us.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the common stock is American Stock
Transfer & Trust Company.
74
<PAGE> 78
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the common stock of
GlobeSpan, and there can be no assurance that a significant public market for
the common stock will develop or be sustained after this offering. Future sales
of substantial amounts of common stock, including shares issued upon exercise of
outstanding options and warrants, in the public market following this offering
could adversely affect market prices prevailing from time to time and could
impair GlobeSpan's ability to raise capital through sale of its equity
securities. As described below, no shares currently outstanding will be
available for sale immediately after this offering because of certain
contractual restrictions on resale. Sales of substantial amounts of common stock
of GlobeSpan in the public market after the restrictions lapse could adversely
affect the prevailing market price and the ability of GlobeSpan to raise equity
capital in the future.
Upon completion of this offering, GlobeSpan will have outstanding
17,416,573 shares of common stock based upon shares outstanding as of March 31,
1999, assuming no exercise of the underwriters' over-allotment option, no
exercise of outstanding options or warrants prior to completion of this offering
and a net exercise of a warrant held by Lucent Technologies for 430,500 shares
of our common stock. Of these shares, the 3,250,000 shares sold in this offering
will be freely tradable without restriction under the Securities Act except for
any shares purchased by "affiliates" of GlobeSpan as that term is defined in
Rule 144 of the Securities Act. The remaining 14,166,573 shares of common stock
held by existing stockholders are "restricted shares" as that term is defined in
Rule 144. All such restricted shares are subject to lock-up agreements providing
that, with certain limited exceptions, the stockholder will not offer, sell,
contract to sell or otherwise dispose of any common stock or any securities that
are convertible into common stock for a period of 180 days after the date of
this prospectus without the prior written consent of BancBoston Robertson
Stephens Inc. As a result of these lock-up agreements, notwithstanding possible
earlier eligibility for sale under the provisions of Rules 144, 144(k) and 701,
none of these shares will be eligible for resale until 181 days after the date
of this prospectus. Beginning 181 days after the date of this prospectus,
approximately 11,437,500 restricted shares will be eligible for sale in the
public market, all of which are subject to volume limitations under Rule 144.
Additionally, 338,562 shares will be eligible for sale without restrictions
under Rule 144(k) and 498,556 shares will be eligible for sale under Rule 701.
BancBoston Robertson Stephens Inc. may, at their sole discretion, and at any
time without notice, release all or any portion of the securities subject to
lock-up agreements.
In general, the volume limitations under Rule 144, as currently in effect,
provide that beginning 90 days after the date of this prospectus, a person who
has beneficially owned restricted shares for at least one year including the
holding period of any prior owner except an affiliate would be entitled to sell
within any three-month period a number of shares that does not exceed the
greater of:
- 1.0% of the number of shares of GlobeSpan common stock then
outstanding which will equal approximately 174,166 shares immediately after
this offering; or
- the average weekly trading volume of the GlobeSpan common stock
during the four calendar weeks preceding the filing of Form 144 with
respect to such sale.
Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about GlobeSpan. Under Rule 144(k), a person who is not deemed to have been an
affiliate of GlobeSpan at any time during the three months preceding a sale and
who has beneficially owned the shares proposed to be sold for at least two years
including the holding period of any prior owner except an affiliate, is entitled
to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
Rule 701, as currently in effect, permits resales of shares in reliance
upon Rule 144 but without compliance with certain restrictions, including the
holding period requirement of Rule 144. Any
75
<PAGE> 79
employee, officer or director of or consultant to GlobeSpan who purchased shares
under a written compensatory plan or contract may be entitled to rely on the
resale provisions of Rule 701. Rule 701 permits affiliates to sell their Rule
701 shares under Rule 144 without complying with the holding period requirements
of Rule 144. Rule 701 further provides that non-affiliates may sell such shares
in reliance on Rule 144 without having to comply with the holding period, public
information, volume limitation or notice provisions of Rule 144. Absent an
ability to sell shares in compliance with Rule 144(k), all holders of Rule 701
shares are required to wait until 90 days after the date of this prospectus
before selling such shares. However, all Rule 701 shares are subject to lock-up
agreements and will only become eligible for sale at the earlier of the
expiration of the 180-day lock-up agreements or no sooner than 90 days after the
offering upon obtaining the prior written consent of BancBoston Robertson
Stephens Inc.
Within 90 days following the effectiveness of this offering, GlobeSpan will
file a Registration Statement on Form S-8 registering shares of common stock
subject to outstanding options or reserved for future issuance under its stock
plans. As of March 31, 1999, options to purchase a total of 1,998,844 shares
were outstanding and 369,337 shares were reserved for future issuance under
GlobeSpan's 1996 Equity Incentive Plan, 1,000,000 shares were reserved for
issuance under the 1999 Equity Incentive Plan, 400,000 shares of common stock
were reserved for issuance under the Employee Stock Purchase Plan and 250,000
shares were reserved for issuance under the 1999 Director Stock Plan. All such
options are subject to lock-up agreements. Common stock issued upon exercise of
outstanding vested options or issued under GlobeSpan's purchase plan, other than
common stock issued to affiliates of GlobeSpan, will be available for resale in
the open market 181 days after the close of this offering.
Lucent Technologies holds a warrant to purchase 1,312,500 shares of common
stock, assuming the warrant is cash exercised, and 430,500 shares of common
stock if the warrant is net exercised. Intel Corporation and Cisco Systems, Inc.
each hold a warrant to purchase 450,000 shares of common stock. Each warrant is
subject to a lock-up agreement. Beginning six months after the date of this
offering, Lucent Technologies, Intel Corporation and Cisco Systems, Inc. will be
entitled to certain registration rights for sale of the warrant shares in the
public market. See "Description of Capital Stock--Registration Rights."
Registration of such shares under the Securities Act would result in such shares
becoming freely tradable without restriction under the Securities Act, except
for shares purchased by affiliates, immediately upon the effectiveness of such
registration.
76
<PAGE> 80
UNDERWRITING
The underwriters named below, acting through their representatives,
BancBoston Robertson Stephens Inc., Donaldson, Lufkin & Jenrette Securities
Corporation, SG Cowen Securities Corporation and Thomas Weisel Partners LLC,
have severally agreed with GlobeSpan, subject to the terms and conditions set
forth in the underwriting agreement, to purchase from GlobeSpan the number of
shares of common stock set forth opposite their names below. The underwriters
are committed to purchase and pay for all such shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
BancBoston Robertson Stephens Inc. .........................
Donaldson, Lufkin & Jenrette Securities Corporation.........
SG Cowen Securities Corporation.............................
Thomas Weisel Partners LLC..................................
---------
Total............................................. 3,250,000
=========
</TABLE>
GlobeSpan has been advised by the representatives of the underwriters that
the underwriters propose to offer the shares of common stock to the public at
the initial public offering price set forth on the cover page of this prospectus
and to certain dealers at such price less a concession of not in excess of
$ per share, of which $ may be reallowed to other dealers. After the
initial public offering, the public offering price, concession and reallowance
to dealers may be reduced by the representatives. No such reduction shall change
the amount of proceeds to be received by GlobeSpan as set forth on the cover
page of this prospectus. The common stock is offered by the underwriters as
stated herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part.
The underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
Over-allotment Option. GlobeSpan has granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to 487,500 additional shares of common stock at the same price per
share as GlobeSpan will receive for the 3,250,000 shares that the underwriters
have agreed to purchase. To the extent that the underwriters exercise this
option, each of the underwriters will have a firm commitment to purchase
approximately the same percentage of such additional shares that the number of
shares of common stock to be purchased by it shown in the above table represents
as a percentage of the shares offered hereby. If purchased, such additional
shares will be sold by the underwriters on the same terms as those on which the
3,250,000 shares are being sold. GlobeSpan will be obligated, pursuant to the
option, to sell shares to the extent the option is exercised. The underwriters
may exercise such option only to cover over-allotments made in connection with
the sale of the shares of common stock offered hereby. If such option is
exercised in full, the total public offering price, underwriting discounts and
commissions and proceeds to GlobeSpan will be $ , $ and
$ , respectively.
The following table summarizes the compensation and expenses we will pay.
<TABLE>
<CAPTION>
TOTAL
--------------------------------------------
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
---------- -------------- --------------
<S> <C> <C> <C>
Underwriting discounts and commissions paid by
us.............................................. $ $ $
Expenses payable by us............................ $ $ $
</TABLE>
77
<PAGE> 81
Indemnity. The underwriting agreement contains covenants of indemnity among
the underwriters and GlobeSpan against certain civil liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.
Lock-up Agreements. Each of GlobeSpan's executive officers, directors,
director-nominees, stockholders of record, optionholders, warrantholders and
holders of convertible notes has agreed with the representatives of the
underwriters, for a period of 180 days after the date of this prospectus,
subject to certain exceptions, not to offer to sell, contract to sell, or
otherwise sell, dispose of, loan, pledge or grant any rights with respect to any
shares of common stock, any options or warrants to purchase any shares of common
stock, or any securities convertible into or exchangeable for shares of common
stock owned as of the date of this prospectus or thereafter acquired directly by
such holders or with respect to which they have or hereafter acquire the power
of disposition, without the prior written consent of BancBoston Robertson
Stephens Inc. However, BancBoston Robertson Stephens Inc. may, in its sole
discretion and at any time without notice, release all or any portion of the
securities subject to the lock-up agreements. There are no agreements between
the representatives and any of GlobeSpan's stockholders providing consent by the
representatives to the sale of shares prior to the expiration of the lock-up
period.
Future Sales. In addition, GlobeSpan has agreed that during the lock-up
period GlobeSpan will not, without the consent of BancBoston Robertson Stephens
Inc., subject to certain exceptions,
- consent to the disposition of any shares held by stockholders subject to
lock-up agreements prior to the expiration of the lock-up period or
- issue, sell, contract to sell, or otherwise dispose of, any shares of
common stock, any options to purchase any shares of common stock or any
securities convertible into, exercisable for or exchangeable for shares
of common stock other than GlobeSpan's sale of shares in this offering,
the issuance of common stock upon the exercise of outstanding options,
and the issuance of options under existing stock option and incentive
plans provided such options do not vest prior to the expiration of the
lock-up period. See "Shares Eligible for Future Sale."
Listing. We have filed an application for the common stock to be quoted on
the Nasdaq National Market under the symbol "GSPN."
No Prior Public Market. Prior to this offering, there has been no public
market for the common stock of GlobeSpan. Consequently, the initial public
offering price for the common stock offered hereby will be determined through
negotiations between GlobeSpan and the representatives of the underwriters.
Among the factors to be considered in such negotiations are prevailing market
conditions, certain financial information of GlobeSpan, market valuations of
other companies that GlobeSpan and the representatives believe to be comparable
to GlobeSpan, estimates of the business potential of GlobeSpan, the present
state of GlobeSpan's development and other factors deemed relevant.
Stabilization. The representatives of the underwriters have advised
GlobeSpan that, pursuant to Regulation M under the Securities Act, certain
persons participating in this offering may engage in transactions, including
stabilizing bids, syndicate covering transactions or the imposition of penalty
bids, that may have the effect of stabilizing or maintaining the market price of
the common stock at a level above that which might otherwise prevail in the open
market. A "stabilizing bid" is a bid for or the purchase of the common stock on
behalf of the underwriters for the purpose of fixing or maintaining the price of
the common stock. A "syndicate covering transaction" is the bid for or the
purchase of the common stock on behalf of the underwriters to reduce a short
position incurred by the underwriters in connection with this offering. A
"penalty bid" is an arrangement permitting the representatives to reclaim the
selling concession otherwise accruing to an underwriter or syndicate member in
connection with this offering, if the common stock originally sold by such
underwriter or
78
<PAGE> 82
syndicate member is purchased by the representatives in a syndicate covering
transaction and has therefore not been effectively placed by such underwriter or
syndicate member. The representatives have advised GlobeSpan that such
transactions may be effected on the Nasdaq National Market or otherwise and, if
commenced, may be discontinued at any time.
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since December
1998, Thomas Weisel Partners has been named as a lead or co-manager on 35 filed
public offerings of equity securities, of which 16 have been completed, and has
acted as a syndicate member in an additional 10 public offerings of equity
securities. Thomas Weisel partners does not have any material relationship with
us or any of our officers, directors or other controlling persons, except with
respect to its contractual relationship with us pursuant to the underwriting
agreement entered into in connection with this offering.
Under Rule 2720 of the Conduct Rules of the National Association of
Securities Dealers, Inc., GlobeSpan is considered an affiliate of Donaldson,
Lufkin & Jenrette Securities Corporation. This offering is being conducted in
accordance with Rule 2720, which provides that, among other things, when an NASD
member participates in the underwriting of an affiliate's equity securities, the
offering price can be no higher than that recommended by a "qualified
independent underwriter" (QIU) meeting certain standards. In accordance with
this requirement, BancBoston Robertson Stephens Inc. has assumed the
responsibilities of acting as QIU and will recommend a price in compliance with
the requirements of Rule 2720. In connection with this offering BancBoston
Robertson Stephens Inc. is performing due diligence investigations and reviewing
and participating in the preparation of this prospectus and the registration
statement of which this prospectus forms a part.
Directed Share Program. At our request, the underwriters have reserved up
to 336,875 shares of common stock to be issued by us and offered hereby for
sale, at the initial public offering price, to directors, officers, employees,
business associates and related persons of GlobeSpan, of which up to 150,000
shares have been reserved for our officers. The number of shares of common stock
available for sale to the general public will be reduced to extent that such
individuals purchase all or a portion of these reserved shares. Any reserved
shares which are not purchased will be offered by the underwriters to the
general public on the same basis as the shares of common stock offered hereby.
Sale of Shares to US West, Inc. At our request, the underwriters have
reserved up to 250,000 shares of common stock to be issued by us and offered
hereby for sale, at the initial public offering price, to US West, Inc. The
number of shares of common stock available for sale to the general public will
be reduced to the extent that US West, Inc. purchases all or a portion of these
reserved shares. We cannot assure you that any of these reserved shares will be
purchased by US West, Inc. Any reserved shares which are not purchased will be
offered by the underwriters to the general public on the same basis as the
shares of common stock offered hereby.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
GlobeSpan by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP,
Menlo Park, California. Certain legal matters in connection with the offering
will be passed upon for the underwriters by Wilson Sonsini Goodrich & Rosati,
Professional Corporation, Palo Alto, California.
EXPERTS
The financial statements of GlobeSpan, Inc. as of December 31, 1997 and
1998, and for the five months ended December 31, 1996 and for each of the two
years in the period ended December 31, 1998
79
<PAGE> 83
included in this prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants given on the authority of
said firm as experts in auditing and accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, Washington, D.C.
20549, a registration statement on Form S-1 under the Securities Act with
respect to the common stock offered hereby. This prospectus does not contain all
of the information set forth in the registration statement and the exhibits and
schedules to the registration statement. For further information with respect to
GlobeSpan and such common stock offered hereby, reference is made to the
registration statement and the exhibits and schedules filed as a part of the
registration statement. Statements contained in this prospectus concerning the
contents of any contract or any other document referred to are not necessarily
complete; reference is made in each instance to the copy of such contract or
document filed as an exhibit to the registration statement. Each such statement
is qualified in all respects by such reference to such exhibit. You may inspect
a copy of the registration statement without charge at the Securities and
Exchange Commission's principal office in Washington, D.C. and obtain copies of
all or any part thereof upon payment of certain fees from the Public Reference
Room of the Securities and Exchange Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, or at the Securities and Exchange Commission's regional
offices in New York, located at 7 World Trade Center, Suite 1300, New York, New
York 10048, or in Chicago, located at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. You may obtain information on the operation of the
Public Reference Room by calling the Securities and Exchange Commission at
1-800-SEC-0330. The Securities and Exchange Commission maintains an Internet
site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Securities
and Exchange Commission. The Securities and Exchange Commission's World Wide Web
address is www.sec.gov.
GlobeSpan intends to furnish holders of its common stock with annual
reports containing, among other information, audited financial statements
certified by an independent public accounting firm and quarterly reports
containing unaudited condensed financial information for the first three
quarters of each fiscal year. GlobeSpan intends to furnish such other reports as
it may determine or as may be required by law.
80
<PAGE> 84
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ADVANCED TRANSMISSION TECHNOLOGY DIVISION (A DIVISION OF
AT&T PARADYNE):
Report of Independent Accountants......................... F-2
Statement of Net Assets................................... F-3
Statement of Operations and Changes in Net Assets......... F-4
Statement of Cash Flows................................... F-5
Notes to Financial Statements............................. F-6
GLOBESPAN, INC.:
Report of Independent Accountants......................... F-8
Balance Sheets............................................ F-9
Statements of Operations.................................. F-10
Statements of Changes in Stockholders' Equity............. F-11
Statements of Cash Flows.................................. F-12
Notes to Financial Statements............................. F-13
</TABLE>
F-1
<PAGE> 85
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
GlobeSpan, Inc.
In our opinion, the accompanying statement of net assets and the related
statement of operations and of cash flows present fairly, in all material
respects, the financial position of the Advanced Transmission Technology
Division of AT&T Paradyne Corporation, ("ATT"), the predecessor entity of
GlobeSpan, Inc., at July 31, 1996 and the results of its operations and its cash
flows for the period from January 1, 1996 through July 31, 1996, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of ATT's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Tampa, Florida
August 28, 1998
F-2
<PAGE> 86
ADVANCED TRANSMISSION TECHNOLOGY DIVISION
(A DIVISION OF AT&T PARADYNE CORPORATION)
STATEMENT OF NET ASSETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JULY 31,
1996
--------
<S> <C>
Current assets:
Contract receivable (Note 3).............................. $ --
----
$ --
====
LIABILITIES AND DIVISION DEFICIT
Current liabilities:
Accounts payable and accrued expenses..................... $ 69
Contingency (Note 3)...................................... --
----
Net assets............................................. $(69)
====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 87
ADVANCED TRANSMISSION TECHNOLOGY DIVISION
(A DIVISION OF AT&T PARADYNE CORPORATION)
STATEMENT OF OPERATIONS AND CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEVEN MONTHS
ENDED
JULY 31,
1996
------------
<S> <C>
Revenues.................................................... $1,597
Expenses:
Research and development.................................. 2,524
General and administrative................................ 1,492
------
Total expenses......................................... 4,016
------
Net loss.................................................... (2,419)
Net assets, beginning of period............................. 992
Advances from AT&T Paradyne............................... 1,358
------
Net assets, end of period................................. $ (69)
======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 88
ADVANCED TRANSMISSION TECHNOLOGY DIVISION
(A DIVISION OF AT&T PARADYNE CORPORATION)
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEVEN MONTHS
ENDED
JULY 31,
1996
--------------
<S> <C>
Cash flow used in operating activities:
Net loss.................................................. $(2,419)
Decrease in receivables................................ 1,000
Increase in accrued expenses........................... 61
-------
Net cash used in operating activities....................... (1,358)
-------
Cash flow from financing activities -- advances from
Paradyne............................................... 1,358
-------
Net cash flows.............................................. $ --
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 89
ADVANCED TRANSMISSION TECHNOLOGY DIVISION
(A DIVISION OF AT&T PARADYNE CORPORATION)
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS)
1. BASIS OF PRESENTATION, SUBSEQUENT ACQUISITION AND RELATED PARTY TRANSACTIONS
Pursuant to a Purchase Agreement dated June 18, 1996, three direct
wholly-owned subsidiaries and two indirect wholly-owned subsidiaries of
Communication Partners, L.P. (formerly known as Paradyne Partners, L.P.)
acquired certain assets of AT&T Paradyne Corporation from its parent company,
Lucent Technologies Inc. ("Lucent"), in exchange for $146 million in cash and
notes and the assumption of certain liabilities effective July 31, 1996. The
assets and liabilities were purchased by four separate operating subsidiaries of
Communication Partners, L.P. including GlobeSpan Technologies (subsequently
GlobeSpan, Inc.) (the "Company").
Assets acquired by the Company for $2.0 million consisted of certain
research and development activities, patents and customer licenses related to
carrierless amplitude phase modulation technique (generally referred to as "CAP
Technology") which is used to transmit data over copper telephone wires. In
addition, certain customer rent and lease agreements of AT&T Paradyne
Corporation were acquired directly by Rental Acquisition Corp. and Lease
Acquisition Corp., and certain net assets relating to the manufacturing,
marketing and research activities for data communications and networking
products for commercial end users and network service providers were acquired by
Paradyne Corporation (all of which are direct or indirect subsidiaries of
Communication Partners, L.P.). Paradyne Corporation also entered into a product
distribution agreement with Lucent. Additionally, certain assets and liabilities
of AT&T Paradyne Corporation were retained by Lucent or disposed of prior to the
transaction. All assets and liabilities and activities acquired by subsidiaries
of Communication Partners, L.P., other than the Company, or retained by Lucent
have been excluded from the accompanying financial statements.
Prior to July 31, 1996, the CAP Technology was developed through the
Advanced Transmission Technology Division ("ATT") of AT&T Paradyne Corporation,
a wholly-owned subsidiary of Lucent Technologies, which is the "predecessor
entity" to the Company. The accompanying financial statements reflect the
historical financial condition, results of operations and cash flows of ATT
which were acquired by the Company, on a carve out basis, as if it had been an
independent reporting entity for the period presented.
2. SIGNIFICANT ACCOUNTING POLICIES:
The significant accounting principles and practices used in the preparation
of the accompanying financial statements are summarized below:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods presented. Actual results could differ from those estimates.
F-6
<PAGE> 90
ADVANCED TRANSMISSION TECHNOLOGY DIVISION
(A DIVISION OF AT&T PARADYNE CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
REVENUE RECOGNITION
Licensing fees are recognized when ATT has completed delivery of technical
specifications and performed all required services under the related agreements.
Commissions and right to use fees are recognized upon shipment of product by the
licensees, in accordance with the agreements.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred and approximated
$2.5 million for the seven months ended July 31, 1996.
ALLOCATION OF RELATED PARTY EXPENSES
The accompanying financial statements include $689 of other expenses that
have been charged to the Company from AT&T Paradyne Corporation. Rent expense
was allocated on a pro rata basis computed on the number of employees. Other
fees were allocated based on negotiations with the related party. Management
believes that such amounts include all significant costs incurred to support the
Company.
3. TECHNOLOGY DEVELOPMENT AGREEMENT AND CONTINGENCY
In July 1995, AT&T Paradyne entered into a technology development agreement
with Bell Atlantic Network Services, Inc. ("Bell Atlantic"). Under the terms of
the agreement, ATT provided use of certain DSL technologies to third party
suppliers for the purpose of development of DSL network access products
incorporating CAP Technology. Bell Atlantic paid $5.0 million under the
agreement in return for the right to receive up to $7.0 million of commission
fees based on future sales of products to Bell Atlantic and other qualified
third party companies, as defined in the agreement. While the Company could be
liable for paying a commission fee to Bell Atlantic, the triggering of this fee
would result from future revenue. No fees have yet been paid under this
agreement. All research and development requirements of the agreement were
completed by ATT in 1995 and the final $1.0 million of cash was received in
January 1996.
F-7
<PAGE> 91
The reverse stock split and recapitalization described in Note 14 to the
financial statements has not been consummated at March 12, 1999. When it has
been consummated, we expect to be in a position to render the following report:
PricewaterhouseCoopers LLP
Florham Park, New Jersey
February 12, 1999, except as to Note 14 which is as of March 12, 1999
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
GlobeSpan, Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations, changes in stockholders' equity and cash flows present fairly, in
all material respects, the financial position of GlobeSpan, Inc. (the "Company")
at December 31, 1997 and 1998, and the results of its operations and its cash
flows for the period from inception through December 31, 1996 and for each of
the two years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
Florham Park, New Jersey
February 12, 1999, except as to Note 14 which is as of March 12, 1999
F-8
<PAGE> 92
GLOBESPAN, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- MARCH 31,
1997 1998 1999
------- ------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents............................... $ 875 $ 12 $ 146
Accounts receivable, less allowance for doubtful
accounts of $49, $61 and $61, respectively........... 4,520 3,823 2,307
Accounts receivable from affiliates..................... 447 73 666
Inventories............................................. 119 912 2,600
Prepaid income taxes.................................... -- 1,178 1,053
Prepaid expenses and other current assets............... 229 564 1,240
------- ------- --------
Total current assets................................. 6,190 6,562 8,012
Deferred tax asset........................................ 500 -- --
Property and equipment, net............................... 2,941 6,680 6,092
Core technology........................................... 584 -- --
Other assets.............................................. -- 188 157
------- ------- --------
Total assets......................................... $10,215 $13,430 $ 14,261
======= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under line of credit......................... $ -- $ 2,466 $ 788
Accounts payable........................................ 1,488 2,131 5,442
Accounts payable to affiliates.......................... 1,164 327 1,902
Accrued expenses and other liabilities.................. 32 1,482 2,918
Payroll and benefit related liabilities................. 1,083 2,519 2,541
Current portion of capital lease obligations............ -- 292 303
------- ------- --------
Total current liabilities............................ 3,767 9,217 13,894
------- ------- --------
Subordinated note payable to Communication Partners,
L.P. ................................................... -- 5,000 4,900
Capital lease obligations, less current portion........... -- 506 491
------- ------- --------
Total liabilities.................................... 3,767 14,723 19,285
------- ------- --------
Commitments and contingencies (Note 11)
Stockholders' equity:
Preferred stock, par value $0.001; 3,000,000 shares
authorized; none issued or outstanding............... -- -- --
Common stock, par value $0.001; 15,555,300 shares
authorized; 12,286,674, 12,265,265 and 12,274,619
shares issued and outstanding, respectively.......... 12 12 12
Stock purchase warrant.................................. 1 3,654 3,654
Additional paid-in capital.............................. 7,239 3,629 3,761
Notes receivable from stock sales....................... (794) (725) (725)
Deferred stock compensation............................. (52) (76) (70)
Retained earnings (accumulated deficit)................. 42 (7,787) (11,656)
------- ------- --------
Total stockholders' equity (deficit)................. 6,448 (1,293) (5,024)
------- ------- --------
Total liabilities and stockholders' equity........... $10,215 $13,430 $ 14,261
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE> 93
GLOBESPAN, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
FIVE MONTHS YEARS ENDED THREE MONTHS ENDED
ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, ------------------------- -------------------------
1996 1997 1998 1998 1999
------------ ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Net product sales (including related
party amounts of $0, $373, $962,
$377 and $662 for 1996, 1997 and
1998 and the three months ended
March 31, 1998 and 1999,
respectively)....................... $ 951 $ 20,615 $ 31,154 $ 7,412 $ 8,588
Other revenues (including related
party amounts of $235, $0, $0, $0
and $0 for 1996, 1997 and 1998 and
the three months ended March 31,
1998 and 1999, respectively)........ 1,409 1,931 310 156 53
----------- ----------- ----------- ----------- -----------
Total revenues...................... 2,360 22,546 31,464 7,568 8,641
Cost of sales (including related party
amounts of $0, $293, $1,042, $340 and
$1,286 for 1996, 1997 and 1998 and the
three months ended March 31, 1998 and
1999, respectively)................... 496 7,565 9,882 1,848 4,020
----------- ----------- ----------- ----------- -----------
Gross profit............................ 1,864 14,981 21,582 5,720 4,621
----------- ----------- ----------- ----------- -----------
Operating expenses:
Research and development (Note 2)..... 1,616 8,358 18,694 3,249 5,380
Selling, general and administrative
(Note 12)........................... 644 4,572 10,217 1,443 2,928
Amortization and other (Note 2)....... 404 1,000 583 250 --
----------- ----------- ----------- ----------- -----------
Total operating expenses............ 2,664 13,930 29,494 4,942 8,308
----------- ----------- ----------- ----------- -----------
(Loss) income from operations........... (800) 1,051 (7,912) 778 (3,687)
Interest income (expense), net.......... -- 91 (134) 14 (182)
----------- ----------- ----------- ----------- -----------
(Loss) income before income taxes....... (800) 1,142 (8,046) 792 (3,869)
Income tax provision (benefit).......... -- 300 (217) 276 --
----------- ----------- ----------- ----------- -----------
Net (loss) income....................... $ (800) $ 842 $ (7,829) $ 516 $ (3,869)
=========== =========== =========== =========== ===========
(Loss) earnings per share:
Basic................................. $ (0.07) $ 0.07 $ (0.65) $ 0.04 $ (0.32)
=========== =========== =========== =========== ===========
Diluted............................... $ (0.07) $ 0.07 $ (0.65) $ 0.04 $ (0.32)
=========== =========== =========== =========== ===========
Shares used in computing net (loss)
earnings per share (Note 9)
Basic................................. 11,437,500 11,515,538 12,084,711 11,906,674 12,137,589
Diluted............................... 11,437,500 12,706,432 12,084,711 12,586,663 12,137,589
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE> 94
GLOBESPAN, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NOTES RETAINED
COMMON STOCK ADDITIONAL RECEIVABLE DEFERRED EARNINGS
------------------- STOCK PAID-IN FROM STOCK (ACCUMULATED
SHARES AMOUNT WARRANT CAPITAL STOCK SALES COMPENSATION DEFICIT)
---------- ------ ------- ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Investments in the Company by
Communication Partners,
L.P........................ 11,437,500 $11 $ 1 $ 5,989 $ -- $ -- $ --
Net loss................... -- -- -- -- -- -- (800)
Asset allocation charge.... -- -- -- 106 -- -- --
---------- --- ------ ------- ----- ---- --------
Balance at December 31,
1996....................... 11,437,500 11 1 6,095 -- -- (800)
Net income................. -- -- -- -- -- -- 842
Asset allocation charge.... -- -- -- 244 -- -- --
Exercise of employee stock
options.................. 849,174 1 -- 848 (794) -- --
Non-employee stock
options.................. -- -- -- 52 -- (52) --
---------- --- ------ ------- ----- ---- --------
Balance at December 31,
1997....................... 12,286,674 12 1 7,239 (794) (52) 42
Net loss................... -- -- -- -- -- -- (7,829)
Distribution to
Communication Partners,
L.P. (Note 7)............ -- -- 3,653 (3,653) -- -- --
Exercise of employee stock
options.................. 42,654 -- -- 61 -- -- --
Non-employee stock
options.................. -- -- -- 44 -- (44) --
Amortization of
non-employee stock
options.................. -- -- -- -- -- 20 --
Benefit from exercise of
nonqualified stock
options.................. -- -- -- 2 -- -- --
Repayment of note
receivable............... -- -- -- -- 5 -- --
Forfeiture of restricted
stock.................... (64,063) -- -- (64) 64 -- --
---------- --- ------ ------- ----- ---- --------
Balance at December 31,
1998....................... 12,265,265 12 3,654 3,629 (725) (76) (7,787)
Net loss................... -- -- -- -- -- -- (3,869)
Exercise of employee stock
options.................. 9,354 -- -- 32 -- -- --
Forgiveness of subordinated
note payable to
Communication Partners,
L.P. .................... -- -- -- 100 -- -- --
Amortization of
non-employee stock
options.................. -- -- -- -- -- 6 --
---------- --- ------ ------- ----- ---- --------
Balance at March 31, 1999
(unaudited)................ 12,274,619 $12 $3,654 $ 3,761 $(725) $(70) $(11,656)
========== === ====== ======= ===== ==== ========
The accompanying notes are an integral part of these financial statements.
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Investments in the Company by
Communication Partners,
L.P........................ $ 6,001
Net loss................... (800)
Asset allocation charge.... 106
-------
Balance at December 31,
1996....................... 5,307
Net income................. 842
Asset allocation charge.... 244
Exercise of employee stock
options.................. 55
Non-employee stock
options.................. --
-------
Balance at December 31,
1997....................... 6,448
Net loss................... (7,829)
Distribution to
Communication Partners,
L.P. (Note 7)............ --
Exercise of employee stock
options.................. 61
Non-employee stock
options.................. --
Amortization of
non-employee stock
options.................. 20
Benefit from exercise of
nonqualified stock
options.................. 2
Repayment of note
receivable............... 5
Forfeiture of restricted
stock.................... --
-------
Balance at December 31,
1998....................... (1,293)
Net loss................... (3,869)
Exercise of employee stock
options.................. 32
Forgiveness of subordinated
note payable to
Communication Partners,
L.P. .................... 100
Amortization of
non-employee stock
options.................. 6
-------
Balance at March 31, 1999
(unaudited)................ $(5,024)
=======
The accompanying notes are an
</TABLE>
F-11
<PAGE> 95
GLOBESPAN, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FIVE MONTHS YEARS ENDED THREE MONTHS
ENDED DECEMBER 31, ENDED MARCH 31,
DECEMBER 31, ----------------- -----------------
1996 1997 1998 1998 1999
------------ ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flow (used in) provided by operating
activities:
Net (loss) income.......................... $ (800) $ 842 $(7,829) $ 516 $(3,869)
Adjustments to reconcile net (loss) income
to cash (used in) provided by operating
activities:
Deferred income taxes................... -- (500) 500 (125) --
Provision for bad debts................. -- 49 12 49 --
Provision for inventory obsolescence.... -- -- 95 -- --
Amortization and depreciation........... 523 1,702 2,657 388 746
Changes in assets and liabilities:
(Increase) decrease in accounts
receivable............................ (1,701) (3,315) 1,059 (128) 923
(Increase) in inventories............... -- (119) (888) (484) (1,688)
(Increase) in prepaid expenses and other
current assets........................ -- (229) (1,698) (373) (520)
Increase (decrease) in accounts
payable............................... 1,086 1,589 (194) 1,407 4,886
Increase in accrued expenses and other
current liabilities................... 218 874 2,886 304 1,458
------- ------- ------- ------- -------
Net cash (used in) provided by operating
activities................................. (674) 893 (3,400) 1,554 1,936
------- ------- ------- ------- -------
Cash flows used in investing activities:
Capital expenditures....................... (40) (3,359) (4,810) (1,597) (67)
Purchase of net assets of the Company...... (2,000) -- -- -- --
------- ------- ------- ------- -------
Net cash used in investing activities........ (2,040) (3,359) (4,810) (1,597) (67)
------- ------- ------- ------- -------
Cash flows provided by financing activities:
Proceeds from borrowings under subordinated
note payable............................ -- -- 5,000 -- --
Proceeds from (repayments of) borrowings
under line of credit.................... -- -- 2,466 -- (1,678)
Proceeds from issuance of common stock..... 4,000 55 61 3 32
Proceeds from repayment of notes
receivable.............................. -- -- 5 -- --
Repayments of capital lease borrowings..... -- -- (185) -- (89)
Equity investments in the Company.......... 2,000 -- -- -- --
------- ------- ------- ------- -------
Net cash provided by (used in) financing
activities................................. 6,000 55 7,347 3 (1,735)
------- ------- ------- ------- -------
Net increase (decrease) in cash and cash
equivalents................................ 3,286 (2,411) (863) (40) 134
Cash and cash equivalents at beginning of
period..................................... -- 3,286 875 875 12
------- ------- ------- ------- -------
Cash and cash equivalents at end of period... $ 3,286 $ 875 $ 12 $ 835 $ 146
======= ======= ======= ======= =======
Supplemental disclosure of cash flow
information:
Cash paid:
Interest................................ $ -- $ -- $ 145 $ -- $ 154
======= ======= ======= ======= =======
Income taxes............................ $ -- $ 1,000 $ 492 $ 35 $ --
======= ======= ======= ======= =======
Supplemental noncash financing activities:
Notes receivable for sale of stock......... $ -- $ 794 $ -- $ -- $ --
======= ======= ======= ======= =======
Forgiveness of subordinated note payable... $ -- $ -- $ -- $ -- $ 100
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-12
<PAGE> 96
GLOBESPAN, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Pursuant to a Purchase Agreement dated June 18, 1996, three direct
wholly-owned subsidiaries and two indirect wholly-owned subsidiaries of
Communication Partners, L.P. (formerly Paradyne Partners, L.P.), acquired
certain assets of AT&T Paradyne Corporation from its parent company, Lucent
Technologies Inc. ("Lucent"), in exchange for $146 million in cash and notes and
the assumption of certain liabilities effective July 31, 1996. The assets and
liabilities were purchased by four separate operating subsidiaries of
Communication Partners, L.P., including GlobeSpan Technologies (subsequently
GlobeSpan, Inc.) (the "Company").
Assets acquired by the Company for $2.0 million consisted of certain
research and development activities, patents and customer licenses related to
carrierless amplitude phase modulation technique (generally referred to as "CAP
Technology") which is used to transmit data over copper telephone wires. In
addition, certain customer rent and lease agreements of AT&T Paradyne
Corporation were acquired directly by Rental Acquisition Corp. and Lease
Acquisition Corp., and certain net assets relating to the manufacturing,
marketing and research activities for data communications and networking
products for commercial end users and network service providers were acquired by
Paradyne Corporation (all of which are direct or indirect subsidiaries of
Communication Partners, L.P.). Paradyne Corporation also entered into a product
distribution agreement with Lucent. Additionally, certain assets and liabilities
of AT&T Paradyne Corporation were retained by Lucent or disposed of prior to the
transaction. All assets and liabilities and activities acquired by subsidiaries
of Communication Partners, L.P., other than the Company, or retained by Lucent
have been excluded from the accompanying financial statements.
The total purchase price of the Company has been allocated as follows:
<TABLE>
<S> <C>
Core Technology (see Note 2)................................ $2,000
------
Total Assets...................................... $2,000
======
Liabilities Assumed......................................... $ --
------
Total Net Assets Acquired......................... $2,000
======
</TABLE>
The accompanying financial statements include the accounts of the Company.
See discussion of related party transactions in Notes 7 and 12. As of December
31, 1998 and March 31, 1999, Communication Partners, L.P. owned a substantial
portion of the Company's outstanding stock.
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. The
Company 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.
The Company has sustained net losses during the year ended December 31,
1998 and the three months ended March 31, 1999 and, as of March 31, 1999, had an
accumulated deficit of $11,656. The Company's ability to meet its obligations in
the ordinary course of business is dependent upon its ability to meet its
operations and raise additional financing through public or private equity
financings or other sources of financing to fund operations. Management believes
that its current funds will be sufficient to enable the Company to meet its
planned expenditures through at least December 31, 1999. If anticipated
operating results are not achieved, management has the intent and
F-13
<PAGE> 97
GLOBESPAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
believes it has the ability to delay or reduce expenditures so as not to require
additional financial resources, if such resources were not available on terms
acceptable to the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting principles and practices used in the preparation
of the accompanying financial statements are summarized below:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods presented. These estimates include assessing the
collectability of accounts receivable, the use and recoverability of inventory,
the realizability of deferred tax assets and useful lives or amortization
periods of intangible assets. Actual results could differ from those estimates.
The markets for the Company's products are characterized by intense competition,
rapid technological development and frequent new product introductions, all of
which could impact the future value of the Company's assets.
REVENUE RECOGNITION
Revenue from product sales is recognized upon shipment to the customer,
when no significant vendor obligations exist and collection of the resulting
receivable is probable. Licensing fees are recognized when the Company has
completed delivery of technical specifications and performed all required
services under the related agreements. Commissions and right to use fees are
recognized upon shipment of product by the licensees, in accordance with the
agreements.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories, substantially all of which are finished goods, are stated at
the lower of cost or market. Cost is determined on a first-in, first-out basis.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of the related assets,
ranging from three to five years. Leasehold improvements are amortized on a
straight-line basis over the lesser of the terms of the leases or the estimated
useful lives of the assets. Gains or losses on disposals of property and
equipment are recorded in current operations.
F-14
<PAGE> 98
GLOBESPAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
CORE TECHNOLOGY
Core technology, which consists of patents, trademarks and technical
know-how of $2,000 acquired by the Company at inception (see Note 1) is stated
at acquisition cost, which approximates fair value. Amortization is provided on
a straight-line basis over the estimated useful life of two years. The estimated
useful life was based primarily on the expected utilization of the assets and
rapid technological changes in the integrated circuit and telecommunications
industries. Amortization expense associated with such core technology was $417,
$1,000, $583 and $250 for the five months ended December 31, 1996, the years
ended December 31, 1997 and 1998 and for the three months ended March 31, 1998,
respectively. As of December 31, 1998 this core technology was fully amortized.
The recoverability of carrying values is evaluated on a recurring basis
with consideration of changes in circumstances based on an evaluation of such
factors as the industry and environment in which the Company operates and the
expected future cash flows from the core technology. If the total of the
expected future undiscounted cash flows is less than the carrying amount of the
asset, a loss is recognized for the difference between the fair value (computed
based on the expected future discounted cash flows) and the carrying value of
the asset.
FINANCIAL INSTRUMENTS
The carrying value of accounts receivable, accounts payable and borrowings
under the revolving credit agreement approximate their fair values due to the
relatively short-term nature of these instruments. The estimated fair value of
the outstanding borrowings under the subordinated note payable at December 31,
1998 and March 31, 1999 was approximately $4,906 and $4,830, respectively.
PRODUCT WARRANTIES
The Company provides purchasers of its products with certain warranties
that correspond with the warranties from its contract manufacturers. Warranty
expense has been immaterial for all periods presented.
RESEARCH AND DEVELOPMENT COSTS
Costs incurred in connection with the research and development of the
Company's products and enhancements to existing products are expensed as
incurred unless technological feasibility has been established. Based on the
Company's product development process, technological feasibility is established
upon completion of a working model. Costs incurred by the Company between
completion of the working model and the point at which the product is ready for
general release have not been material. Accordingly, research and development
costs have been expensed as incurred.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes, which
requires use of the asset and liability method. Deferred income taxes are
recorded for temporary differences between financial
F-15
<PAGE> 99
GLOBESPAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
statement carrying amounts and the tax bases of assets and liabilities. Deferred
tax assets and liabilities reflect the tax rates expected to be in effect for
the years in which the differences are expected to reverse. A valuation
allowance is provided if it is more likely than not that some or all of the
deferred tax asset will not be realized.
STOCK SPLITS
In 1996, the board of directors approved an 8.75 to 1 stock split. In
November 1997, the board of directors approved a 2 to 1 stock split. In February
1998, the board of directors approved a 1.5 to 1 stock split. All share, stock
option and stock warrant information included in the accompanying financial
statements and related notes have been restated for all periods to reflect these
stock splits. (See Note 14).
INTERIM FINANCIAL DATA
The unaudited financial data as of March 31, 1999 and for the three months
ended March 31, 1998 and 1999 has been prepared by management and includes all
adjustments, consisting of normal recurring adjustments, considered necessary
for a fair presentation of the financial position, results of operations and
cash flows of the Company. The results of operations for the three months ended
March 31, 1999 are not necessarily indicative of the operating results to be
expected for the year ending December 31, 1999.
3. CONCENTRATION OF RISK AND CUSTOMER INFORMATION
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of cash equivalents and trade receivables.
The Company does not generally require collateral from its customers and
substantially all of its trade receivables are unsecured. At December 31, 1997
and 1998 and March 31, 1999, five of the Company's customers accounted for
$3,582 (79.2%), $3,492 (91.3%) and $1,552 (67.3%) of net accounts receivable,
respectively.
Sales to three customers amounted to approximately $1,301 (55.1%), $9,818
(43.5%), $22,042 (70.1%), $5,141 (67.9%) and $5,021 (58.1%) of total revenues
for the five months ended December 31, 1996, the years ended December 31, 1997
and 1998 and the three months ended March 31, 1998 and 1999, respectively.
Revenues from customers who represented more than 10% of net revenues were as
follows:
F-16
<PAGE> 100
GLOBESPAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
FIVE MONTHS YEARS ENDED THREE MONTHS ENDED
ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, ----------------- -------------------
1996 1997 1998 1998 1999
------------- ------ ------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues:
Customer A....................... $ 642 $ -- $ -- $ -- $ --
Customer B....................... 376 4,832 -- -- --
Customer C....................... 283 2,811 -- -- --
Customer D....................... 248 -- -- 1,051 --
Customer E....................... -- -- 15,190 1,973 3,410
Customer F....................... -- -- 3,974 2,117 --
</TABLE>
The Company's sales to overseas customers are denominated in the U.S.
dollar. Revenues by geographic region for the five months ended December 31,
1996, the years ended December 31, 1997 and 1998 and the three months ended
March 31, 1998 and 1999 were as follows:
<TABLE>
<CAPTION>
FIVE MONTHS YEARS ENDED THREE MONTHS ENDED
ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, ------------------ ------------------
1996 1997 1998 1998 1999
------------ ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues:
United States..................... $1,417 $11,458 $21,214 $6,037 $4,983
Europe............................ 313 3,940 3,712 1,032 1,073
Mexico/Latin America.............. -- 98 3,063 80 1,508
Asia.............................. 406 6,964 2,973 407 979
Australia......................... 224 86 502 12 98
------ ------- ------- ------ ------
$2,360 $22,546 $31,464 $7,568 $8,641
====== ======= ======= ====== ======
</TABLE>
A single vendor manufactures substantially all of the chip sets sold by the
Company. Purchases from this vendor approximated 94%, 98%, 81%, 96% and 62% of
total inventory purchases for the five months ended December 31, 1996, the years
ended December 31, 1997 and 1998 and the three months ended March 31, 1998 and
1999, respectively. If this vendor were to become unwilling or unable to
continue to manufacture these chip sets in required volumes, the Company would
have to identify and qualify acceptable alternative vendors. The inability to
develop alternative sources, if required in the future, could result in delays
or reductions in product shipments.
4. TECHNOLOGY LICENSING AGREEMENTS
The Company entered into technology licensing and right to use agreements
whereby the Company receives fees for the use and/or sale of specific patented
technology. Revenues from these agreements amounted to $1,409, $1,931, $310,
$156 and $53 for the five months ended December 31, 1996, the years ended
December 31, 1997 and 1998 and the three months ended March 31, 1998 and 1999,
respectively. (See Note 12).
F-17
<PAGE> 101
GLOBESPAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------- -----------
1997 1998 1999
------ ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Computers and equipment..................................... $3,028 $ 5,110 $ 5,140
Office furniture and fixtures............................... 68 131 143
Software.................................................... 266 1,991 2,016
Leasehold improvements...................................... 37 1,099 1,099
Property under capital leases............................... -- 861 946
------ ------- -------
3,399 9,192 9,344
Less: accumulated depreciation.............................. (458) (2,512) (3,252)
------ ------- -------
$2,941 $ 6,680 $ 6,092
====== ======= =======
</TABLE>
Included in operating expenses is depreciation expense of $106, $702,
$2,054, $388 and $740 for the five months ended December 31, 1996, the years
ended December 31, 1997 and 1998 and the three months ended March 31, 1998 and
1999, respectively. Of such amounts, $106 and $244 for the five months ended
December 31, 1996 and the year ended December 31, 1997, respectively, represent
a non-cash allocation of depreciation expense from Paradyne for the use of
specified assets, which was recorded as a capital contribution. Accumulated
amortization on assets accounted for as capital leases, amounted to
approximately $47 and $131 as of December 31, 1998 and March 31, 1999,
respectively.
6. REVOLVING CREDIT AGREEMENT
In May 1998, the Company entered into a revolving credit agreement with
BankAmerica Business Credit, Inc. ("BABC") pursuant to which the Company may
borrow the lesser of a borrowing base or $5.0 million ("the Available
Facility"). The borrowing base is equal to 85.0% of eligible receivables, as
defined. Outstanding borrowings on the Company's revolving credit facility bear
interest, payable on a monthly basis, at a rate of 1.0% in excess of the
reference rate announced by BABC. For the year ended December 31, 1998, the
weighted average interest rate was 9.1%. Interest related to this facility was
approximately $50 and $55 for the year ended December 31, 1998 and the three
months ended March 31, 1999, respectively. The revolving credit agreement
expires on January 31, 2000 and is automatically renewable for additional
one-year terms unless terminated by the Company or BABC.
A portion of the revolving credit facility is available for the issuance of
merchandise or standby letters of credit provided that the aggregate undrawn
amount of all such outstanding merchandise and standby letters of credit does
not exceed $1.0 million. The Company is charged a fee equal to 1.5% per annum on
the aggregate face amount of each outstanding standby letter of credit and 0.75%
per annum on the aggregate face amount of each outstanding merchandise letter of
credit, which is payable on a monthly basis. As of December 31, 1998, the
Company had no outstanding letters of credit under this agreement.
F-18
<PAGE> 102
GLOBESPAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The Company is charged a commitment fee of 0.5% per annum, payable on a
quarterly basis, on the difference between $5.0 million and the sum of the
average daily outstanding amount of the revolving credit facility and the
average undrawn face amount of all outstanding letters of credit. Commitment
fees relating to the above facility amounted to $13 and $3 for the year ended
December 31, 1998 and the three months ended March 31, 1999, respectively. (See
Note 12 for related party borrowings).
Substantially all of the Company's assets are pledged as collateral under
the BABC revolving credit agreement. Under the terms of the credit agreement,
the Company is required to maintain an account with BABC to which all customer
payments are remitted and applied against the outstanding balance under the
revolving credit agreement. Accordingly, the entire outstanding balance has been
classified as a current liability as of December 31, 1998. The credit agreement
also contains various covenants which, among other things, restrict certain
corporate actions including, but not limited to, mergers, sales of assets and
payment of dividends. As discussed in Note 12, the Company purchased certain
assets from Paradyne Corporation in December 1998, which constituted a violation
of the revolving credit agreement. This violation was waived by BABC.
7. STOCK PURCHASE WARRANT
In connection with the Company's inception (see Note 1), the Company issued
a warrant to acquire 1,312,500 shares of its common stock at an exercise price
of $6.72 per share to Lucent. The warrant was due to expire upon payment or
transfer by Paradyne Corporation, an affiliated company ("Paradyne"), of
Paradyne's long-term debt maturing June 30, 2000 and upon the sale or merger of
the Company (as provided in the Stock Warrant Agreement) at a price less than
the exercise price. The warrant includes other provisions, including certain
anti-dilution provisions.
In August 1998, Paradyne settled its outstanding long-term debt due June
30, 2000. As a term of such settlement, the Company agreed to extend the
exercise period of the outstanding stock purchase warrant to the earlier of June
30, 2001 or the consummation of a qualifying business combination, as defined.
In connection therewith, the Company recorded a $3,653 distribution to the
Parent based on the increase in the fair value of the warrant resulting from the
extension of the outstanding warrant term. (See Note 14).
F-19
<PAGE> 103
GLOBESPAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8. INCOME TAXES
Deferred tax assets are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------- -----------
1997 1998 1999
----- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Amortization of intangibles............................... $ 491 $ 670 $ 657
Inventory obsolescence reserve............................ -- 38 38
Depreciation.............................................. (52) (190) (119)
Accrued expenses.......................................... -- 386 705
Other..................................................... 61 25 64
Net operating loss carryforwards.......................... -- 2,121 3,211
----- ------- -------
500 3,050 4,556
Less valuation allowance.................................. -- (3,050) (4,556)
----- ------- -------
Net deferred tax asset.................................... $ 500 $ -- $ --
===== ======= =======
</TABLE>
As of December 31, 1997, the Company did not provide a valuation allowance
against its net deferred tax asset based on the net income generated during 1997
and management's expectations at such time that the Company's deferred tax
assets would be realized through future earnings. Subsequent to 1997, the
Company has modified its strategic plan and anticipates continuing investments
to research and development and corporate infrastructure in advance of revenues.
As such, as of December 31, 1998, the Company has established a full valuation
allowance against its net deferred tax asset based on management's current
belief that it is more likely than not that the benefits related to such net
deferred tax asset will not be realized.
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
FIVE MONTHS YEARS ENDED THREE MONTHS ENDED
ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, ---------------- --------------------
1996 1997 1998 1998 1999
------------ ----- ------- ----- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
Federal......................... $(112) $ 700 $ (649) $ 352 $ --
State........................... (16) 100 (23) 94 --
----- ----- ------- ----- -------
(128) 800 (672) 446 --
----- ----- ------- ----- -------
Deferred:
Federal......................... (122) (172) (1,834) (138) (1,167)
State........................... (18) (60) (761) (32) (339)
Change in valuation allowance... 268 (268) 3,050 -- 1,506
----- ----- ------- ----- -------
128 (500) 455 (170) --
----- ----- ------- ----- -------
Income tax provision (benefit).... $ -- $ 300 $ (217) $ 276 $ --
===== ===== ======= ===== =======
</TABLE>
The Company has generated net operating loss carryforwards of approximately
$3,051 and $4,590 as of December 31, 1998 and March 31, 1999, respectively,
which are due to expire between 2013
F-20
<PAGE> 104
GLOBESPAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
and 2014. Section 382 of the Internal Revenue Code of 1986, as amended, places a
limitation on the utilization of federal net operating loss carryforwards when
an ownership change occurs. Generally, an ownership change occurs when a greater
than 50% change in ownership takes place over a three-year test period. The
annual utilization of net operating loss carryforwards generated prior to such
change in ownership is limited, in any one year, to a percentage of the fair
market value of the Company at the time of the ownership change.
The provision (benefit) for income taxes differs from the amount of income
tax determined by applying the applicable U.S. income tax rate to income before
taxes as follows:
<TABLE>
<CAPTION>
FIVE MONTHS YEARS ENDED THREE MONTHS ENDED
ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, -------------- -------------------
1996 1997 1998 1998 1999
------------- ----- ----- ----- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
U.S. statutory rate................... (34.0)% 34.0% (34.0)% 34.0% (34.0)%
State taxes........................... (5.0) 2.0 (6.6) 5.3 (6.3)
Other................................. 0.5 6.3 0.0 (4.5) 0.1
Net operating loss utilized........... 0.0 (10.0) 0.0 0.0 0.0
Change in valuation allowance......... 38.5 (6.0) 37.9 0.0 40.2
----- ----- ----- ---- ------
Effective tax rate.................... 0.0% 26.3% (2.7)% 34.8% 0.0%
===== ===== ===== ==== ======
</TABLE>
9. 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.
F-21
<PAGE> 105
GLOBESPAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The computations of Basic EPS and Diluted EPS for the five months ended
December 31, 1996, the years ended December 31, 1997 and 1998 and the three
months ended March 31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
FIVE MONTHS ENDED DECEMBER 31, 1996
Net loss.............................................. $ (800)
Basic EPS:
Income available to common stockholders............. $ (800) 11,437,500 $(0.07)
Effect of dilutive stock options.................... -- -- --
------- ----------- ------
Diluted EPS:
Income available to common stockholders plus assumed
conversions...................................... $ (800) 11,437,500 $(0.07)
======= =========== ======
YEAR ENDED DECEMBER 31, 1997
Net income............................................ $ 842
Basic EPS:
Income available to common stockholders............. $ 842 11,515,538 $ 0.07
Effect of dilutive stock options.................... -- 1,190,894 --
------- ----------- ------
Diluted EPS:
Income available to common stockholders plus assumed
conversions...................................... $ 842 12,706,432 $ 0.07
======= =========== ======
YEAR ENDED DECEMBER 31, 1998
Net loss.............................................. $(7,829)
Basic EPS:
Income available to common stockholders............. $(7,829) 12,084,711 $(0.65)
Effect of dilutive stock options.................... -- -- --
------- ----------- ------
Diluted EPS:
Income available to common stockholders plus assumed
conversions...................................... $(7,829) 12,084,711 $(0.65)
======= =========== ======
THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
Net income............................................ $ 516
Basic EPS:
Income available to common stockholders............. $ 516 11,906,674 $ 0.04
Effect of dilutive stock options.................... -- 679,989 --
------- ----------- ------
Diluted EPS:
Income available to common stockholders plus assumed
conversions...................................... $ 516 12,586,663 $ 0.04
======= =========== ======
THREE MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
Net loss.............................................. $(3,869)
Basic EPS:
Income available to common stockholders............. $(3,869) 12,137,589 $(0.32)
Effect of dilutive stock options.................... -- -- --
------- ----------- ------
Diluted EPS:
Income available to common stockholders plus assumed
conversions...................................... $(3,869) 12,137,589 $(0.32)
======= =========== ======
</TABLE>
F-22
<PAGE> 106
GLOBESPAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
As of December 31, 1996 and 1998 and March 31, 1999, the Company had
outstanding options, restricted stock and a warrant to purchase an aggregate
3,138,000, 3,374,181 and 3,444,460 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.
10. STOCK OPTION PLAN
In December 1996, the Company adopted the 1996 Equity Incentive Plan (the
"1996 Plan") pursuant to which, as amended, nonqualified or incentive stock
options, stock bonus and restricted stock awards (collectively, "Stock Awards")
to purchase up to 2,805,300 of the Company's common stock may be granted to
employees, directors and consultants. Stock Awards granted under the 1996 Plan
generally vest in equal installments over a four-year period. The exercise price
of incentive stock options granted under the 1996 Plan may not be less than the
fair market value of the underlying shares (110% of the fair market value in the
case of a 10% voting shareholder) at the grant date. Each stock option is
exercisable for ten years (five years in the case of a 10% voting stockholder)
from the date of grant. Through March 31, 1999, no stock options had been
granted to a 10% stockholder.
Under the 1996 Plan, certain individuals to whom stock options have been
granted may elect to exercise those options prior to the lapse of the full
vesting period. Upon termination of employment, the Company may repurchase any
unvested shares issued pursuant to such election at the exercise price. During
the year ended December 31, 1998, the Company repurchased 64,063 shares under
such provision. No shares had been repurchased during the three months ended
March 31, 1999. At December 31, 1996, 1997 and 1998 and March 31, 1999, there
were 0, 420,000, 168,750 and 131,250 shares, respectively, issued and
outstanding that were subject to this repurchase provision.
Stock bonuses and restricted stock awards issued under the 1996 Plan
provide that shares awarded may not be sold or otherwise transferred until
restrictions established by the underlying agreements have elapsed. Upon
termination of employment, the Company may repurchase shares upon which
restrictions have not lapsed. The 1996 Plan provides that the price for each
restricted stock award shall not be less than 85% of the fair market value of
the share at the date of grant.
Notes receivable from stock sales result from the exercise of stock options
for promissory notes. The notes are full recourse promissory notes bearing
interest at variable rates ranging from 5.94% to 6.16% and are collateralized by
the stock issued upon exercise of the stock options. The notes including accrued
interest thereon mature five years from the date of exercise.
F-23
<PAGE> 107
GLOBESPAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
A summary of the status of the Company's stock option plan through March
31, 1999 is as follows:
<TABLE>
<CAPTION>
EXERCISE PRICE PER SHARE
-----------------------------------------------------
$1.00 $4.00 $6.00 $10.00 $12.00 TOTAL
--------- ------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
August 1, 1996....... -- -- -- -- -- --
Granted.............. 1,825,500 -- -- -- -- 1,825,500
--------- ------- ------- ------- ------- ---------
Options outstanding at
December 31, 1996.... 1,825,500 -- -- -- -- 1,825,500
Granted.............. 612,600 -- -- -- -- 612,600
Exercised............ (849,174) -- -- -- -- (849,174)
Forfeited............ (223,000) -- -- -- -- (223,000)
--------- ------- ------- ------- ------- ---------
Options outstanding at
December 31, 1997.... 1,365,926 -- -- -- -- 1,365,926
Granted.............. -- 114,000 155,083 -- 349,542 618,625
Exercised............ (37,175) (3,979) (1,500) -- -- (42,654)
Forfeited............ (21,850) (16,000) (8,716) -- (2,400) (48,966)
--------- ------- ------- ------- ------- ---------
Options outstanding at
December 31, 1998.... 1,306,901 94,021 144,867 -- 347,142 1,892,931
Granted.............. -- -- -- 124,067 -- 124,067
Exercised............ (3,333) (3,604) (2,417) -- -- (9,354)
Forfeited............ -- -- (2,167) (2,533) (4,100) (8,800)
--------- ------- ------- ------- ------- ---------
Options outstanding at
March 31, 1999
(unaudited).......... 1,303,568 90,417 140,283 121,534 343,042 1,998,844
========= ======= ======= ======= ======= =========
Weighted average
remaining life on
outstanding options
at December 31,
1998................. 7.97 8.68 9.16 -- 9.39 8.36
========= ======= ======= ======= ======= =========
Weighted average
remaining life on
outstanding options
at March 31, 1999
(unaudited).......... 7.69 8.39 8.91 9.96 9.16 8.20
========= ======= ======= ======= ======= =========
</TABLE>
Outstanding options at December 31, 1998 have a weighted average exercise
price of $3.55 per share. At December 31, 1998, 1,268,874 shares of the
outstanding stock options were vested and 84,604 additional stock options were
available for grant. Outstanding options at March 31, 1999 have a weighted
average price of $3.92 per share. At March 31, 1999, 1,383,575 shares of the
outstanding stock options were vested and 369,337 additional stock options were
available for grant. (See Note 14.)
F-24
<PAGE> 108
GLOBESPAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
EMPLOYEE STOCK OPTIONS
The Company accounts for stock options granted to employees in accordance
with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees. Accordingly, no compensation has been recorded since grants are made
at fair market value. Had the compensation cost for the Stock Option Plan been
determined based on the fair value at the grant dates for awards under the 1996
Plan consistent with the method of Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation ("FAS 123"), the Company's net
(loss) income on a pro forma basis would have been ($800), $823, ($9,236), $411
and $(4,085) for the five months ended December 31, 1996, the years ended
December 31, 1997 and 1998 and three months ended March 31, 1998 and 1999,
respectively, calculated with the use of the Black Scholes option-pricing model.
The following assumptions were used for the five months ended December 31, 1996,
the years ended December 31, 1997 and 1998 and the three months ended March 31,
1998 and 1999: (1) risk-free interest rate of 6.2%, 6.6%, 4.6%, 5.5% and 5.5%
respectively; (2) dividend yield of 0.00%; (3) expected life of five years; and
(4) volatility of .001%. Results may vary depending on the assumptions applied
within the model.
NON-EMPLOYEE OPTIONS
In fiscal 1997 and 1998, the Company granted 223,000 and 5,500 stock
options, respectively, to non-employees. In accordance with the requirements of
FAS 123, the Company recorded $52 and $44, respectively, reflecting the
estimated fair value of these options utilizing the Black Scholes option-pricing
model. The Company will amortize this obligation to expense over the period
services are performed.
11. COMMITMENTS AND CONTINGENCIES
In October 1996, the Company became the sub-tenant of Paradyne under a
noncancelable operating lease for office and research and development facilities
located in Red Bank, New Jersey which expires April 30, 2002. In addition, the
Company leases certain computer and office equipment under agreements that are
classified as capital leases, the net book value of which was $814 and $815
F-25
<PAGE> 109
GLOBESPAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
at December 31, 1998 and March 31, 1999, respectively. Minimum required future
lease payments under the Company's capital and operating leases at December 31,
1998 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
YEARS ENDED DECEMBER 31,
1999................................................... $361 $ 813
2000................................................... 294 813
2001................................................... 240 835
2002................................................... 7 317
2003................................................... 4 --
---- ------
Total minimum lease payments...................... 906 $2,778
Less: amount representing interest.......................... (108)
----
Present value of net minimum lease payments................. 798
Less: current portion....................................... (292)
----
$506
====
</TABLE>
Rent expense for the five months ended December 31, 1996, the years ended
December 31, 1997 and 1998 and the three months ended March 31, 1998 and 1999
approximated $126, $467, $868, $157 and $245, respectively, and is included in
operating expenses.
In July 1995, AT&T Paradyne entered into a technology development agreement
with Bell Atlantic Network Services, Inc. ("Bell Atlantic"). Under the terms of
the agreement, the Company's predecessor entity provided use of certain Digital
Subscriber Line ("DSL") technologies to third party suppliers for the purpose of
development of DSL network access products incorporating CAP technology. Bell
Atlantic paid $5.0 million under the agreement in return for the right to
receive up to $7.0 million of commission fees based on future sales of products
to Bell Atlantic or other qualified third party companies, as defined in the
agreement. In connection with the Company's inception (see Note 1), this
agreement was assigned to the Company as the successor entity. No commission
fees have been accrued related to this agreement since such fees are only
payable based on future sales. Through the year ended December 31, 1998, no fees
have been paid to Bell Atlantic under this agreement. All research and
development requirements of the agreement were completed by the Company's
predecessor entity in 1995.
The semiconductor and telecommunications industries are characterized by
substantial litigation regarding patent and other intellectual property rights.
The Company is party to various inquiries or claims in connection with these
rights. Although the ultimate outcome of these matters is not presently
determinable, management believes that the resolution of these matters will not
have a material adverse effect on the Company's financial position and results
of operations.
12. RELATED PARTY TRANSACTIONS
In 1996, the Company entered into a license agreement with Paradyne
Corporation for the use of certain technologies. Total revenues related to the
use of these agreements was $235 for the five months ended December 31, 1996 and
has been included in other revenue.
F-26
<PAGE> 110
GLOBESPAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
During the years ended December 31, 1997 and 1998 and the three months
ended March 31, 1998 and 1999, the Company recorded product sales of $373, $962,
$377 and $662, respectively, related to goods sold to Paradyne Corporation. Such
sales reflect, through June 30, 1998, a discount, equal to cost plus 15%,
provided to Paradyne pursuant to a Cooperative Development Agreement. In July
1998, the Company revised its discounted pricing arrangement with Paradyne which
had existed under the Cooperative Development Agreement. Paradyne agreed to
modify the pricing terms such that Paradyne purchased products from the Company
at preferential prices. In exchange, the Company agreed to pay a 1.25% fee based
on net revenues up to an aggregate amount of $1.5 million. The Company recorded
a charge of $381, which is included in cost of sales, related to the agreement
during the year ended December 31, 1998. In addition, Paradyne provided
operating, management and other administrative services for the Company pursuant
to an Intercompany Services Agreement. Paradyne charged the Company for the cost
of such services, without markup, in accordance with the Intercompany Services
Agreement, which amounted to $0, $155, $231, $57 and $0 for the five months
ended December 31, 1996, the years ended December 31, 1997 and 1998 and the
three months ended March 31, 1998 and 1999, respectively. In the opinion of
management, the estimated costs of such services would not have been materially
different than those reflected in these financial statements had such services
been provided by an unaffiliated entity. (See Notes 11 and 13).
In fiscal 1997, the Company purchased fixed assets from Paradyne
approximating $350. In February and December 1998, the Company purchased fixed
assets from Paradyne for an aggregate cost of $1,442. These assets were sold at
their net book value since the transaction involved entities under common
control.
In 1997, the Company paid Paradyne $194 as a reimbursement for their cost
of chip sets purchased on GlobeSpan's behalf. These payments were equal to the
amount paid by Paradyne for the initial purchase of the inventory.
In December 1997 and September 1998, the Company purchased from Paradyne
certain GlobeSpan chip sets which it held in its inventory in the amounts of $98
and $29, respectively. GlobeSpan purchased these chip sets for resale to other
customers.
In December 1998, the Company subleased additional office space from
Paradyne (see related disclosure in Note 11). In connection therewith, the
Company reimbursed approximately $392 of Paradyne's moving expenses, the cost of
which is included in operating expenses for the year ended December 31, 1998.
GlobeSpan is covered under a group insurance policy with Paradyne for an
annual premium amount of $85.
In May 1998, the Company entered into a subordinated credit agreement with
Communication Partners in the aggregate principal amount of $5.0 million. Such
loan bears interest at a rate of 8.0% payable on a monthly basis and expires on
May 1, 2003. Outstanding borrowings under this loan agreement may be prepaid at
any time, without penalty, subject to limitations contained in the BABC
revolving credit agreement. Interest related to this facility approximated $95
and $99 for the period ended December 31, 1998 and the three months ended March
31, 1999, respectively. In December 1998, the amount available under the credit
agreement was increased to $10.0 million, of which $5.0 million expires on March
31, 2000.
F-27
<PAGE> 111
GLOBESPAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
13. DEFINED CONTRIBUTION PLAN
The Company participates in a 401(k) plan covering substantially all
employees, which is maintained by Paradyne. Benefits vest based on number of
years of service. The Company's policy is to match two-thirds of an employee's
contributions, up to 6.0% of an employee's annual salary. Additionally, the
board of directors may grant discretionary contributions based on an employee's
age. Contributions to the plan paid by Paradyne on behalf of the Company
amounted to approximately $45, $242, $348, $63 and $126 for the five months
ended December 31, 1996, the years ended December 31, 1997 and 1998 and the
three months ended March 31, 1998 and 1999, respectively. In addition, the
Company accrued $179 and $0 for discretionary contributions as of December 31,
1998 and March 31, 1999.
14. SUBSEQUENT EVENTS
REVERSE STOCK SPLIT AND RECAPITALIZATION
On March 12, 1999, the Company's board of directors approved the amendment
of the certificate of incorporation to effect a 1-for-3 reverse stock split
applicable to all issued and outstanding shares of its common stock and
increased its authorized capital to 10,000,000 shares of preferred stock, $0.001
par value and 100,000,000 shares of common stock $0.001 par value. The 1-for-3
reverse stock split and the increase in the authorized preferred shares was
approved by the Company's stockholders in May 1999 and is contingent upon the
closing of the Company's proposed initial public offering of its common stock
(the "IPO"). All share, stock option and stock warrant information included in
these financial statements and related footnotes have been restated for all
periods to reflect this reverse stock split for all periods presented.
TERMINATION AGREEMENT WITH PARADYNE
In March 1999, the Company and Paradyne agreed to terminate the Cooperative
Development Agreement (see Note 12). 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 will be made in 1999 and has been 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.
F-28
<PAGE> 112
GLOBESPAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
AMENDMENT TO THE LUCENT TECHNOLOGIES WARRANT
In March 1999, Communication Partners (the Company's Parent) forgave $100
of the subordinated note payable (see Note 12), as consideration for the
extension of the outstanding warrant. (See Note 7). This amount has been
recorded as a contribution to capital.
AMENDMENT TO THE 1996 EQUITY INCENTIVE PLAN
On March 12, 1999, the Company's board of directors approved an increase in
the number of shares reserved for issuance under the 1996 Plan to 3,205,300. On
May 20, 1999, the Company's board of directors approved an increase in the
number of shares reserved for issuance under the 1996 Plan to 3,255,300.
EMPLOYEE STOCK PURCHASE PLAN
On March 12, 1999, the Company's board of directors approved the adoption
of an Employee Stock Purchase Plan (the "Purchase Plan"). The Purchase Plan was
approved by the Company's stockholders in May 1999 and is contingent upon the
closing of the Company's IPO. Upon closing of the Company's IPO, the Company
will reserve 400,000 shares of its common stock for issuance under the Purchase
Plan, which shall automatically increase each year beginning February 1, 2000,
by the lesser of 2.0% of the total number of shares of common stock then
outstanding or 400,000 shares. The Purchase Plan will permit each eligible
employee, as defined, to purchase shares of the Company's common stock through
payroll deductions, provided that the aggregate amount of each employee's
payroll deductions does not exceed 15.0% of his cash compensation. Purchases of
common stock will occur on January 31 and July 31 of each year. The Purchase
Plan will be administered by the Compensation Committee of the board of
directors in accordance with the terms of the Purchase Plan.
1999 EQUITY INCENTIVE PLAN
On March 12, 1999, The Company's board of directors approved the adoption
of the 1999 Equity Incentive Plan (the "1999 Plan"). The 1999 Plan was approved
by the Company's stockholders in May 1999 and is contingent upon the closing of
the Company's IPO. Upon adoption of the 1999 Plan by the closing of the
Company's IPO, the Company will reserve 1,000,000 shares of its common stock,
together with the shares of common stock remaining available for issuance under
the 1996 Plan, for issuance under the 1999 Plan. The number of shares reserved
for issuance under the 1999 Plan shall automatically increase each year
beginning May 1, 2000, by the lesser of 5.0% of the total number of shares of
common stock then outstanding or 1,000,000 shares. Under the 1999 Plan, the
Company may grant incentive or nonqualified stock options, stock appreciation
rights, restricted stock or stock units to employees, non-employee directors and
consultants. The 1999 Plan will be administered by the Compensation Committee of
the board of directors in accordance with the terms of the 1999 Plan.
1999 DIRECTOR STOCK PLAN
On March 12, 1999, the Company's board of directors approved the adoption
of the 1999 Director Stock Plan (the "Director Plan"). The Director Plan was
approved by the Company's shareholders in May 1999 and is contingent upon the
closing of the Company's IPO. Upon closing of
F-29
<PAGE> 113
GLOBESPAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
the Company's IPO, the Company will reserve 250,000 shares of its common stock
for issuance under the Director Plan. Under the Director Plan, the Company may
only grant nonqualified stock options to non-employee directors. The 1999 Plan
provides for automatic grants to non-employee directors of the Company at
defined intervals beginning on the effective date of the Company's IPO. Each
non-employee director of the Company will be granted an option to purchase
10,000 shares of common stock at the IPO price upon consummation of the
Company's IPO, an additional option to purchase 5,000 shares of common stock on
the date of the Company's annual stockholders' meeting in the year 2000 and an
additional option to purchase 5,000 shares of common stock on the date of the
Company's annual stockholders' meeting in the year 2001, provided that the
director continues to serve as a director of the Company. Each non-employee
director elected to serve following the consummation of the IPO will be granted
an option to purchase 10,000 shares of common stock on the date he or she is
first elected to the board of directors and an additional option to purchase
5,000 shares of common stock on the date of the Company's annual stockholder's
meeting in the calendar year following such initial election. At each annual
stockholders' meeting following the annual meeting during which each
non-employee director received the second option to purchase 5,000 shares of
common stock, each non-employee director will be granted an option to purchase
2,500 shares of common stock. Stock options granted pursuant to the Director
Plan vest upon the director's completion of twelve months of service during
which he or she attended at least 75% of the meetings of the Company's board of
directors.
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK
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 is 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
converts upon consummation of an IPO at a price per share that is equal to or
exceeds $8.211 per share and $15.0 million in the aggregate. Holders of Series A
Stock are entitled to receive dividends prior to any payment of dividends on the
Company's common stock, at a rate of $0.81 per share per annum, when and if
declared by the Company's board of directors. Such dividends are not cumulative.
In the event of a liquidation, dissolution or winding up of the Company, holders
of the Series A Stock are entitled to a distribution ratably with other common
stockholders of the Company, on an as-if converted basis. The Series A Stock
carries voting rights equal to one vote per share, on an as-converted basis. In
addition, the Company is precluded from certain specific corporate actions
without the consent of at least 66.6% of the holders of the Series A Stock.
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 two investors (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 IPO price for the first
75,000 shares, 125% of the IPO price for the second 75,000 shares, 150% of the
IPO price for the third 75,000 shares and 175% of the IPO price for the last
75,000 shares. In addition, the Series A Investors each received a warrant to
purchase, at the IPO price, 10,000 shares of common stock if the IPO price is
from $9.00 to $9.99 per share, 20,000 shares of common stock if the IPO price is
from $8.00 to $8.99 per share, 30,000 shares if the IPO price is from $7.00 to
$7.99 per share and 100,000 shares of common stock if the IPO price is less than
$7.00 per share (the "Anti-Dilution Warrants"). The Anti-Dilution Warrants are
exercisable for five years after consummation of the IPO but expire, unexercised
if the IPO price is equal to or exceeds $10.00 per share.
F-30
<PAGE> 114
GLOBESPAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The Company granted one of the Series A Investors 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 terminates upon consummation of the IPO, subject to
certain conditions as defined.
The Company granted the second Series A Investor 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 IPO. This right terminates upon consummation of the IPO,
subject to certain conditions as defined. In addition, the Company has agreed
not to assert any patent right against this Series A Investor as long as the
investor maintains an investment in the Company of at least 1% of its capital
stock.
Since the issuance of the aforementioned Series A Stock includes a
non-detachable conversion feature, that is "in-the-money" at the date of
issuance and is immediately exercisable, the Company will recognize a charge of
approximately $2.6 million for the beneficial conversion feature attributable to
the common stockholders in its second quarter 1999 financial statements.
F-31
<PAGE> 115
(inside cover)
Color Photo of GlobeSpan products. Picture shows a digital communication
processor chip, an analog front end chip, and a DSL reference design guide and
DSL development system.
(Front Cover fold out)
Color graphic of a Telecommunication Service providers local loop network
deploying an HDSL Internet service and an HDSL business data service. The
graphic shows the digital subscriber line access multiplexer and HDSL modem in
the central office. It also shows the ADSL modem in the residential end user
location and the HDSL modem in the business end user location. The picture also
shows DSL equipment located in a multidwelling unit location to provide Internet
access to end users living in the dwelling unit.
<PAGE> 116
[GLOBESPAN LOGO]
<PAGE> 117
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by GlobeSpan in connection with
the sale of common stock being registered. All amounts are estimates except the
SEC registration fee and the NASD filing fees.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 15,290
NASD fee.................................................... 6,500
Nasdaq National Market listing fee.......................... 30,000
Printing and engraving expenses............................. 300,000
Legal fees and expenses..................................... 750,000
Accounting fees and expenses................................ 450,000
Blue sky fees and expenses.................................. 10,000
Transfer agent fees......................................... 10,000
Miscellaneous fees and expenses............................. 128,210
----------
Total............................................. $1,700,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's Board of Directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). Article VII, Section 6, of the Registrant's
bylaws provides for mandatory indemnification of its directors and officers and
permissible indemnification of employees and other agents to the maximum extent
permitted by the Delaware General Corporation Law. The Registrant's certificate
of incorporation provides that, pursuant to Delaware law, its directors shall
not be liable for monetary damages for breach of the directors' fiduciary duty
as directors to GlobeSpan and its stockholders. This provision in the
certificate of incorporation does not eliminate the directors' fiduciary duty,
and in appropriate circumstances equitable remedies such as injunctive or other
forms of non-monetary relief will remain available under Delaware law. In
addition, each director will continue to be subject to liability for breach of
the director's duty of loyalty to GlobeSpan for acts or omissions not in good
faith or involving intentional misconduct, for knowing violations of law, for
actions leading to improper personal benefit to the director, and for payment of
dividends or approval of stock repurchases or redemptions that are unlawful
under Delaware law. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws. Prior to the closing of this offering, the
Registrant will enter into Indemnification Agreements with its officers and
directors, a form of which is attached as Exhibit 10.1 hereto and incorporated
herein by reference. The Indemnification Agreements provide the Registrant's
officers and directors with further indemnification to the maximum extent
permitted by the Delaware General Corporation Law. Reference is made to Section
of the Underwriting Agreement contained in Exhibit 1.1 hereto, indemnifying
officers and directors of the Registrant against certain liabilities.
II-1
<PAGE> 118
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since June 7, 1996, Registrant has issued and sold the following securities
(which numbers do not reflect the 8.75 for 1 split effected on November 25,
1996, the 2 for 1 split effected on October 16, 1997, the 1.5 for 1 split
effected on February 25, 1998, or the reverse 1 for 3 split to be effected prior
to this offering):
(1) On June 7, 1996, Registrant issued 1,000 shares in a private
placement of its common stock at a purchase price of $1.00 per share, for
cash in the aggregate amount of $1,000, to Communication Partners, L.P.
pursuant to the divestiture of GlobeSpan.
(2) On July 31, 1996, Registrant issued a warrant for 150,000 shares
of its common stock, with an exercise price of $58.83, to Lucent
Technologies in connection with the divestiture of GlobeSpan.
(3) On November 25, 1996, Registrant issued an aggregate of 4,000,000
shares in a private placement of its common stock, at a purchase price of
$1.00 per share, for cash in the aggregate amount of $4,000,000, to
Communication Partners, L.P. pursuant to a Common Stock Purchase Agreement.
(4) As of March 11, 1999, Registrant has sold and issued 897,369
shares of its common stock for an aggregate purchase price of $916,985 to
employees and consultants pursuant to direct issuance and to exercises of
options under its 1996 Option Plan.
(5) On May 6, 1999, in a private placement with Intel Corporation and
Cisco Systems, Inc., Registrant issued 4,384,363 shares of its Series A
Preferred Stock, warrants to purchase up to 900,000 shares of our Common
Stock at an average exercise price of $13.75 per share and warrants to
purchase up to 600,000 shares at the initial price of our shares in this
offering (to be appropriately adjusted for stock splits, stock dividends,
recapitalizations and the like). The purchase price for the Series A
Preferred Stock and warrants was an aggregate amount of $12,000,001.00.
The sale of the above securities was deemed to be exempt from registration
under the Securities Act in reliance upon Section 4(2) of the Securities Act or
Rule 701 promulgated under Section 3(b) of the Securities Act as transactions by
an issuer not involving any public offering or transactions pursuant to
compensation benefit plans and contracts relating to compensation as provided
under such Rule 701. The recipients of securities in each such transaction
represented their intentions to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof, and
appropriate legends were affixed to the share certificates issued in such
transactions. All recipients had adequate access, through their relationships
with the Registrant, to information about the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
<S> <C>
1.1* Form of Underwriting Agreement (preliminary form).
3.1** Certificate of Incorporation of the Registrant, as amended
to date.
3.2 Form of Restated Certificate of Incorporation to be filed
upon the closing of the offering made pursuant to this
Registration Statement.
3.3** Bylaws of the Registrant.
3.4 Bylaws of the Registrant effective upon the close of the
offering made pursuant to this Registration Statement.
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4 and 10.20.
4.2* Specimen Common Stock certificate.
5.1 Opinion of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian.
10.1** Form of Indemnification Agreement.
</TABLE>
II-2
<PAGE> 119
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
<S> <C>
10.2** 1999 Equity Incentive Plan.
10.3** Employee Stock Purchase Plan.
10.4** 1999 Director Stock Plan.
10.5** Business Loan Agreement between BankAmerica Business Credit
and Registrant, dated May 14, 1998.
10.6*** Warrant for the purchase of Common Stock made by the
Registrant and held by Lucent Technologies Inc., dated July
31, 1996.
10.7** Real Property Lease between Paradyne Corporation and Shav
Associates, dated October 8, 1996.
10.8** Real Property Sublease by and between Registrant and
Paradyne Corporation, dated December 10, 1997.
10.9** Amendment to Real Property Sublease by and between
Registrant and Paradyne Corporation, dated January 1, 1999.
10.10** Termination Agreement between Registrant and Paradyne
Corporation, dated December 31, 1998.
10.11** Subordinated Promissory Note between Registrant and
Communication Partners, L.P., dated December 15, 1998.
10.12* Bill of Sale between Registrant and Paradyne, dated
, 1999.
10.13** Employment Agreement between Registrant and Armando Geday,
dated April 1, 1997.
10.14** Employment Agreement between Registrant and Thomas Epley,
dated August 29, 1997.
10.15**+ Agreement for the Manufacture and Sale of ASIC Products
between Registrant and Lucent Technologies Inc.
Microelectronics, dated March 23, 1999.
10.16** Intellectual Property Agreement among Registrant, Lucent
Technologies Inc. and Paradyne Corporation, dated July 31,
1996.
10.17 Tax Matters Agreement between Registrant and Paradyne
Corporation dated July 31, 1996.
10.18**+ Product Supply Agreement between Registrant and Paradyne
Corporation dated March 16, 1999.
10.19** AT&T Trademark and Patent Agreement between Registrant, AT&T
Corp. and Paradyne Corporation, dated July 31, 1996.
10.20** Investors' Rights Agreement between Registrant, Intel
Corporation, Cisco Systems, Inc. and Communication Partners,
L.P., dated May 6, 1999.
10.21** Warrant for the purchase of Common Stock made by the
Registrant and held by Cisco Systems, Inc., dated May 6,
1999.
10.22** Warrant for the purchase of Common Stock made by the
Registrant and held by Intel Corporation, dated May 6, 1999.
10.23** Covenant Not to Sue between Registrant and Intel
Corporation, dated May 6, 1999.
23.1 Consent of Independent Accountants.
23.2 Consent of Counsel. Reference is made to Exhibit 5.1.
24.1** Power of Attorney (see page II-5).
27.1** Financial Data Schedule for EDGAR Filing.
</TABLE>
- ---------------
* To be filed by amendment.
** Previously filed.
*** Corrected version of previously filed document.
+ Certain portions of this exhibit have been granted confidential treatment by
the Commission. The omitted portions have been separately filed with the
Commission.
II-3
<PAGE> 120
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes to provide to the underwriters at the
closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Delaware General Corporation Law, the Certificate of
Incorporation or the Bylaws of the Registrant, the Underwriting Agreement, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act, and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered hereunder, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 121
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of Red
Bank, State of New Jersey, on this 28th day of May, 1999.
GLOBESPAN, INC.
By: /s/ ARMANDO GEDAY
---------------------------------------
Armando Geday
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Armando Geday and Robert McMullan, and
each of them, his true and lawful attorneys-in-fact and agents with full power
of substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to sign any registration statement for the
same offering covered by this Registration Statement that is to be effective
upon filing pursuant to Rule 462(b) promulgated under the Securities Act of
1933, and all post-effective amendments thereto, and to file the same, with all
exhibits thereto and all documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or his or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
<TABLE>
<S> <C> <C>
/s/ BARBARA CONNOR Director May 28, 1999
- ------------------------------------------------
Barbara Connor
/s/ FEDERICO FAGGIN Director May 28, 1999
- ------------------------------------------------
Federico Faggin
</TABLE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS AMENDMENT NO. 3 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE
FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------ -------------------------------------- ------------
<S> <C> <C>
/s/ ARMANDO GEDAY President, Chief Executive Officer May 28, 1999
- ------------------------------------------------ (Principal Executive Officer) and
Armando Geday Director
/s/ ROBERT MCMULLAN Chief Financial Officer May 28, 1999
- ------------------------------------------------ (Principal Financial and Accounting
Robert McMullan Officer)
Director May 28, 1999
- ------------------------------------------------
Thomas Epley*
Director May 28, 1999
- ------------------------------------------------
Keith Geeslin*
</TABLE>
II-5
<PAGE> 122
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------ -------------------------------------- ------------
<S> <C> <C>
Director May 28, 1999
- ------------------------------------------------
David Stanton*
Director May 28, 1999
- ------------------------------------------------
Dipanjan Deb*
Director May 28, 1999
- ------------------------------------------------
James Coulter*
Director May 28, 1999
- ------------------------------------------------
Barbara Connor*
Director May 28, 1999
- ------------------------------------------------
Federico Faggin*
*By: /s/ ARMANDO GEDAY
-------------------------------------
Armando Geday
Attorney-in-Fact
*By: /s/ ROBERT MCMULLAN
-------------------------------------
Robert McMullan
Attorney-in-Fact
</TABLE>
II-6
<PAGE> 123
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
<S> <C>
1.1* Form of Underwriting Agreement (preliminary form).
3.1** Certificate of Incorporation of the Registrant, as amended
to date.
3.2 Form of Restated Certificate of Incorporation to be filed
upon the closing of the offering made pursuant to this
Registration Statement.
3.3** Bylaws of the Registrant.
3.4 Bylaws of the Registrant effective upon the close of the
offering made pursuant to this Registration Statement.
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4 and 10.20.
4.2* Specimen Common Stock certificate.
5.1 Opinion of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian.
10.1** Form of Indemnification Agreement.
10.2** 1999 Equity Incentive Plan.
10.3** Employee Stock Purchase Plan.
10.4** 1999 Director Stock Plan.
10.5** Business Loan Agreement between BankAmerica Business Credit
and Registrant, dated May 14, 1998.
10.6*** Warrant for the purchase of Common Stock made by the
Registrant and held by Lucent Technologies Inc., dated July
31, 1996.
10.7** Real Property Lease between Paradyne Corporation and Shav
Associates, dated October 8, 1996.
10.8** Real Property Sublease by and between Registrant and
Paradyne Corporation, dated December 10, 1997.
10.9** Amendment to Real Property Sublease by and between
Registrant and Paradyne Corporation, dated January 1, 1999.
10.10** Termination Agreement between Registrant and Paradyne
Corporation, dated December 31, 1998.
10.11** Subordinated Promissory Note between Registrant and
Communication Partners, L.P., dated December 15, 1998.
10.12* Bill of Sale between Registrant and Paradyne Corporation,
dated , 1999.
10.13** Employment Agreement between Registrant and Armando Geday,
dated April 1, 1997.
10.14** Employment Agreement between Registrant and Thomas Epley,
dated August 29, 1997.
10.15**+ Agreement for the Manufacture and Sale of ASIC Products
between Registrant and Lucent Technologies Inc.
Microelectronics, dated March 23, 1999.
10.16** Intellectual Property Agreement among Registrant, Lucent
Technologies Inc. and Paradyne Corporation, dated July 31,
1996.
10.17 Tax Matters Agreement between Registrant and Paradyne
Corporation dated July 31, 1996.
10.18**+ Product Supply Agreement between Registrant and Paradyne
dated March 16, 1999.
10.19** AT&T Trademark and Patent Agreement between Registrant, AT&T
Corp. and Paradyne Corporation, dated July 31, 1996.
10.20** Investors' Rights Agreement between Registrant, Intel
Corporation, Cisco Systems, Inc. and Communication Partners,
L.P., dated May 6, 1999.
</TABLE>
<PAGE> 124
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
<S> <C>
10.21** Warrant for the purchase of Common Stock made by the
Registrant and held by Cisco Systems, Inc., dated May 6,
1999.
10.22** Warrant for the purchase of Common Stock made by the
Registrant and held by Intel Corporation, dated May 6, 1999.
10.23** Covenant Not to Sue between Registrant and Intel
Corporation, dated May 6, 1999.
23.1 Consent of Independent Accountants.
23.2 Consent of Counsel. Reference is made to Exhibit 5.1.
24.1** Power of Attorney (see page II-5).
27.1** Financial Data Schedule for EDGAR Filing.
</TABLE>
- ---------------
* To be filed by amendment.
** Previously filed.
*** Corrected version of previously filed document.
+ Certain portions of this exhibit have been granted confidential treatment by
the Commission. The omitted portions have been separately filed with the
Commission.
<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION OF
GLOBESPAN, INC.
A DELAWARE CORPORATION
(PURSUANT TO SECTIONS 228, 242 AND 245
OF THE DELAWARE GENERAL CORPORATION LAW)
GlobeSpan, Inc., a corporation organized and existing under the General
Corporation Law of the State of Delaware (the "General Corporation Law")
DOES HEREBY CERTIFY:
FIRST: That this corporation was originally incorporated on June 7,
1996, pursuant to the General Corporation Law.
SECOND: That the Board of Directors duly adopted resolutions proposing
to amend and restate the Amended and Restated Certificate of Incorporation of
this corporation, declaring said amendment and restatement to be advisable and
in the best interests of this corporation and its stockholders, and authorizing
the appropriate officers of this corporation to solicit the consent of the
stockholders therefor, which resolution setting forth the proposed amendment and
restatement is as follows:
"RESOLVED, that the Amended and Restated Certificate of Incorporation
of this corporation, as amended, be amended and restated in its entirety as
follows:
ARTICLE I
The name of the corporation is GlobeSpan, Inc. (the "Corporation").
ARTICLE II
The address of the registered office of this corporation in the State
of Delaware is 15 E. North Street, Dover, Kent County. The name of its
registered agent at such address is Incorporating Services, Ltd.
ARTICLE III
The nature of the business or purposes to be conducted or promoted is
to engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of Delaware.
<PAGE> 2
ARTICLE IV
Section 1. Authorized Stock. The Corporation is authorized to issue two
classes of stock to be designated common stock ("Common Stock") and preferred
stock ("Preferred Stock"). The number of shares of Common Stock authorized to be
issued is One Hundred Million (100,000,000), par value $0.001 per share, and the
number of Preferred Stock authorized to be issued is Ten Million (10,000,000),
par value $0.001 per share.
Section 2. Preferred Stock. The Preferred Stock may be issued from time
to time in one or more series, without further stockholder approval. The Board
of Directors is hereby authorized, in the resolution or resolutions adopted by
the Board of Directors providing for the issue of any wholly unissued series of
Preferred Stock, within the limitations and restrictions stated in this Amended
and Restated Certificate of Incorporation (the "Restated Certificate"), to fix
or alter the dividend rights, dividend rate, conversion rights, voting rights,
rights and terms of redemption (including sinking fund provisions), the
redemption price or prices, the liquidation preferences of any wholly unissued
series of Preferred Stock and any other relative rights, preferences and
limitations thereof, and the number of shares constituting any such series and
the designation thereof, or any of them, and to increase or decrease the number
of shares of any series subsequent to the issue of shares of that series, but
not below the number of shares of such series then outstanding. In case the
number of shares of any series shall be so decreased, the shares constituting
such decrease shall resume the status that they had prior to the adoption of the
resolution originally fixing the number of shares of such series.
Section 3. Voting Rights. Except as otherwise provided by law or by the
resolution or resolutions providing for the issue of any series of Preferred
Stock, the holders of outstanding shares of Common Stock shall have the
exclusive right to vote for the election of directors and for all other
purposes, each holder of record of shares of Common Stock being entitled to one
vote for each share of Common Stock standing in such holder's name on the books
of the Corporation.
ARTICLE V
Except as otherwise provided in this Restated Certificate, in
furtherance and not in limitation of the powers conferred by statute, the Board
of Directors is expressly authorized to make, repeal, alter, amend and rescind
any or all of the Bylaws of the Corporation.
ARTICLE VI
Section 1. Number. The number of directors of the Corporation shall be
fixed from time to time by a bylaw or amendment thereof duly adopted by the
Board of Directors.
Section 2. Removal. Subject to the rights of the holders of any one or
more classes or series of Preferred Stock issued by the Corporation, any
director, or the entire Board, may be removed from office at any time, but only
for cause and only by the affirmative
2
<PAGE> 3
vote of the holders of not less than eighty percent (80%) of the voting power of
all of the outstanding shares of capital stock of the Corporation entitled to
vote generally in the election of directors, considered for purposes of this
sentence as a single class. Any vacancy in the Board that results from an
increase in the number of directors may be filled by a majority of the directors
then in office, provided that a quorum is present, and any other vacancy may be
filled only by a majority of the directors then in office, even if less than a
quorum, or by a sole remaining director. Any director elected to fill a vacancy
not resulting from an increase in the number of directors shall hold office for
the remaining term of his or her predecessor.
ARTICLE VII
Elections of directors need not be by written ballot unless the Bylaws
of the Corporation shall so provide.
ARTICLE VIII
Except as otherwise provided in this Restated Certificate, any action
required or permitted to be taken by the stockholders of the Corporation must be
effected at an annual or special meeting of the stockholders of the Corporation,
and no action required to be taken or that may be taken at any annual or special
meeting of the stockholders of the Corporation may be taken by written consent.
ARTICLE IX
A director of the Corporation shall, to the fullest extent permitted by
the General Corporation Law as it now exists or as it may hereafter be amended,
not be personally liable to the Corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (i) for
any breach of the director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the General Corporation Law, or (iv) for any transaction from which the director
derived any improper personal benefit. If the General Corporation Law is amended
after approval by the stockholders of this Article IX to authorize corporate
action further eliminating or limiting the personal liability of directors, then
the liability of a director of the Corporation shall be eliminated or limited to
the fullest extent permitted by the General Corporation Law as so amended.
Any repeal or modification of the foregoing provisions of this Article
IX by the stockholders of the Corporation shall not adversely affect any right
or protection of a director of the Corporation existing at the time of, or
increase the liability of any director of this Corporation with respect to any
acts or omissions of such director occurring prior to, such repeal or
modification.
3
<PAGE> 4
ARTICLE X
In addition to any vote of the holders of any class or series of the
stock of the Corporation required by law or by this Restated Certificate, the
affirmative vote of the holders of a majority of the voting power of all of the
then outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors, voting together as a single class, shall
be required to amend or repeal any provision of this Restated Certificate.
ARTICLE XI
Section 1. Right to Indemnification. Each person who was or is made a
party or is threatened to be made a party to or is involved in any action, suit
or proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she, or a person
of whom he or she is the legal representative, is or was a director or officer
of the Corporation or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to
employee benefit plans, whether the basis of such proceeding is alleged action
in an official capacity as a director, officer, employee or agent or in any
other capacity while serving as a director, officer, employee or agent, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the General Corporation Law of the State of Delaware, as the same
exists or may hereafter be amended (but, in the case of any such amendment, to
the fullest extent permitted by law, only to the extent that such amendment
permits the Corporation to provide broader indemnification rights than said law
permitted the Corporation to provide prior to such amendment), against all
expense, liability and loss (including, without limitation, attorneys' fees,
judgments, fines, amounts paid or to be paid in settlement, and excise taxes or
penalties arising under the Employee Retirement Income Security Act of 1974)
reasonably incurred or suffered by such person in connection therewith and such
indemnification shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of his or her heirs,
executors and administrators; provided, however, that, except as provided in
Section (2) hereof, the Corporation shall indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof) initiated by
such person only if such proceeding (or part thereof) was authorized by the
Board. The right to indemnification conferred in this Section shall be a
contract right and shall include the right to be paid by the Corporation the
expenses incurred in defending any such proceeding in advance of its final
disposition; provided, however, that, if the General Corporation Law of the
State of Delaware requires, the payment of such expenses incurred by a director
or officer in his or her capacity as a director of officer (and not in any other
capacity in which service was or is rendered by such person while a director or
officer, including, without limitation, service to an employee benefit plan) in
advance of the final disposition of a proceeding, shall be made only upon
delivery to the Corporation of an undertaking, by or on behalf of such director
or officer, to repay all amounts so advanced if it shall ultimately be
determined that such director or officer is not entitled to be indemnified under
this Section or otherwise. The Corporation may provide indemnification to
employees and agents of the Corporation with the same scope and effect as the
foregoing indemnification of directors and officers.
4
<PAGE> 5
Section 2. Right of Claimant to Bring Suit. If a claim under this
Section is not paid in full by the Corporation within thirty days after a
written claim has been received by the Corporation, the claimant may at any time
thereafter bring suit against the Corporation to recover the unpaid amount of
the claim and, if successful in whole or in part, the claimant shall be entitled
to be paid also the expense of prosecuting such claim. It shall be a defense to
any such action (other than an action brought to enforce a claim for expenses
incurred in defending any proceeding in advance of its final disposition where
the required undertaking, if any is required, has been tendered to the
Corporation) that the claimant has not met the standards of conduct which make
it permissible under the General Corporation Law of the State of Delaware for
the Corporation to indemnify the claimant for the amount claimed, but the burden
of proving such defense shall be on the Corporation. Neither the failure of the
Corporation (including its Board, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct set forth in the
General Corporation Law of the State of Delaware, nor an actual determination by
the Corporation (including its Board, independent legal counsel, or its
stockholders) that the claimant has not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that the claimant has
not met the applicable standard of conduct.
Section 3. Non-Exclusivity of Rights. The right to indemnification and
the payment of expenses incurred in defending a proceeding in advance of its
final disposition conferred in this Section shall not be exclusive of any other
right which any person may have or hereafter acquire under any statute,
provision of the Certificate of Incorporation, Bylaw, agreement, vote of
stockholders or disinterested directors or otherwise.
Section 4. Insurance. The Corporation may maintain insurance, at its
expense, to protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or other
enterprise against any such expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the General Corporation Law of the State of Delaware.
ARTICLE XII
The provisions of Section 203 of the Delaware General Corporation Law
shall not apply to the Corporation.
* * *
THIRD: The foregoing Restated Certificate was approved by the holders
of the requisite number of shares of said corporation in accordance with Section
228 of the General Corporation Law of the State of Delaware.
FOURTH: That said Restated Certificate was duly adopted in accordance
with the provisions of Section 242 and 245 of the General Corporation Law of the
State of Delaware.
5
<PAGE> 6
IN WITNESS WHEREOF, the undersigned has signed this Certificate this
___ day of _______ 1999.
-------------------------------------
Armando Geday
President and Chief Executive Officer
ATTEST:
- -------------------------------------
Robert McMullan
Secretary
<PAGE> 1
EXHIBIT 3.4
AMENDED AND RESTATED BYLAWS
OF
GLOBESPAN, INC.
ARTICLE I
OFFICES
Section 1. The registered office shall be in the City of Dover, County
of Kent, State of Delaware.
Section 2. The corporation may also have offices at such other places
both within and without the State of Delaware as the Board of Directors may from
time to time determine or the business of the corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. All meetings of the stockholders for the election of
directors shall be held in the City of Red Bank, New Jersey, at such place as
may be fixed from time to time by the Board of Directors, or at such other place
either within or without the State of Delaware as shall be designated from time
to time by the Board of Directors and stated in the notice of the meeting.
Meetings of stockholders for any other purpose may be held at such time and
place, within or without the State of Delaware, as shall be stated in the notice
of the meeting or in a duly executed waiver of notice thereof.
Section 2.
(a) Annual meetings of stockholders, commencing with fiscal year 2000,
shall be held at such date and time as shall be designated from time to time by
the Board of Directors
1.
<PAGE> 2
and stated in the notice of the meeting, at which they shall elect by a
plurality vote a board of directors, and transact such other business as may
properly be brought before the meeting.
(b) Nominations of persons for election to the Board of Directors of
the corporation and the proposal of business to be considered by the
stockholders may be made at an annual meeting of stockholders (i) pursuant to
the corporation's notice of meeting, (ii) by or at the direction of the Board of
Directors or (iii) by any stockholder of the corporation who was a stockholder
of record at the time of giving of the notice provided for in this bylaw, who is
entitled to vote at the meeting and who complied with the notice procedures set
forth in this bylaw.
(c) For nominations or other business to be properly brought before an
annual meeting by a stockholder pursuant to clause (iii) of paragraph (b) of
this bylaw, the stockholder must have given timely notice thereof in writing to
the secretary of the corporation and any such business must otherwise be a
proper matter for stockholder action under Delaware law. To be timely, a
stockholder's notice shall be delivered to the secretary at the principal
executive offices of the corporation not less than 60 days nor more than 90 days
prior to the first anniversary of the preceding year's annual meeting; provided,
however, that in the event that the date of the annual meeting is advanced by
more than 30 days or delayed by more than 60 days from such anniversary date,
notice by the stockholder to be timely must be so delivered not earlier than the
90th day prior to such annual meeting and not later than the close of business
on the later of the 60th day prior to such annual meeting or the 10th day
following the day on which public announcement of the date of such meeting is
first made. Such stockholder's notice shall set forth (i) as to each person whom
the stockholder proposes to nominate for election or reelection as a
2.
<PAGE> 3
director all information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors, or is otherwise
required, in each case pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended (the "Exchange Act") (including such person's written
consent to being named in the proxy statement as a nominee and to serving as a
director if elected); (ii) as to any other business that the stockholder
proposes to bring before the meeting, a brief description of the business
desired to be brought before the meeting, the reasons for conducting such
business at the meeting and any material interest in such business of such
stockholder and the beneficial owner, if any, on whose behalf the proposal is
made; and (iii) as to the stockholder giving the notice and the beneficial
owner, if any, on whose behalf the nomination or proposal is made (a) the name
and address of such stockholder, as they appear on the corporation's books, and
of such beneficial owner and (b) the class and number of shares of the
corporation which are owned beneficially and of record by such stockholder and
such beneficial owner.
(d) Notwithstanding anything in the second sentence of paragraph (c) of
this bylaw to the contrary, in the event that the number of directors to be
elected to the Board of Directors of the corporation is increased and there is
no public announcement naming all of the nominees for director or specifying the
size of the increased Board of Directors made by the corporation at least 70
days prior to the first anniversary of the preceding year's annual meeting, a
stockholder's notice required by this bylaw shall also be considered timely, but
only with respect to nominees for any new positions created by such increase, if
it shall be delivered to the secretary at the principal executive offices of the
corporation not later than the close of business on the 10th day following the
day on which such public announcement is first made by the corporation.
3.
<PAGE> 4
(e) Only such persons who are nominated in accordance with the
procedures set forth in these bylaws shall be eligible to serve as directors and
only such business shall be conducted at an annual meeting of stockholders as
shall have been brought before the meeting in accordance with the procedures set
forth in these bylaws. The chairman of the meeting shall have the power and duty
to determine whether a nomination or any business proposed to be brought before
the meeting was made in accordance with the procedures set forth in these
bylaws. The chairman of the meeting shall have the power and duty to determine
whether a nomination or any business proposed to be brought before the meeting
was made in accordance with the procedures set forth in these bylaws, and, if
any proposed nomination or business is not in compliance with these bylaws, to
declare that such defective proposed business or nomination shall be
disregarded.
(f) For purposes of these bylaws, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or a comparable national news service or in a document publicly filed by
the corporation with the Securities and Exchange Commission pursuant to Section
13, 14 or 15(d) of the Exchange Act.
(g) Notwithstanding the foregoing provisions of this bylaw, a
stockholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth in this bylaw. Nothing in this bylaw shall be deemed to affect any rights
of stockholders to request inclusion of proposals in the corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act.
Section 3. Written notice of the annual meeting stating the place, date
and hour of
4.
<PAGE> 5
the meeting shall be given to each stockholder entitled to vote at such meeting
not fewer than ten (10) nor more than sixty (60) days before the date of the
meeting.
Section 4. The officer who has charge of the stock ledger of the
corporation shall prepare and make, at least ten days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
Section 5. Notwithstanding any other provision of these bylaws, special
meetings of the stockholders, for any purpose or purposes, unless otherwise
prescribed by statute or by the certificate of incorporation, may be called by
the president and shall be called by the president or secretary at the request
in writing of a majority of the Board of Directors, or at the request in writing
of stockholders owning at least twenty-five percent (25%) in amount of the
entire capital stock of the corporation issued and outstanding and entitled to
vote. Such request shall state the purpose or purposes of the proposed meeting.
Section 6. Written notice of a special meeting stating the place, date
and hour of the meeting and the purpose or purposes for which the meeting is
called, shall be given not fewer than ten (10) nor more than sixty (60) days
before the date of the meeting, to each stockholder
5.
<PAGE> 6
entitled to vote at such meeting.
Section 7. Business transacted at any special meeting of stockholders
shall be limited to the purposes stated in the notice.
Section 8. The holders of fifty percent (50%) of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute or by the
certificate of incorporation. If, however, such quorum shall not be present or
represented at any meeting of the stockholders, the stockholders entitled to
vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented any business may be
transacted which might have been transacted at the meeting as originally
notified. If the adjournment is for more than thirty days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
Section 9. When a quorum is present at any meeting, the vote of the
holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of the statutes or of
the certificate of incorporation, a different vote is required, in which case
such express provision shall govern and control the decision of such question.
Section 10. Unless otherwise provided in the certificate of
incorporation, each stockholder shall at every meeting of the stockholders be
entitled to one vote in person or by
6.
<PAGE> 7
proxy for each share of the capital stock having voting power held by such
stockholder, but no proxy shall be voted on after three years from its date,
unless the proxy provides for a longer period.
ARTICLE III
DIRECTORS
Section 1. The number of directors which shall constitute the whole
board shall be determined by resolution of the Board of Directors or by the
stockholders at the annual meeting of the stockholders, except as provided in
Section 2 of this Article, and each director elected shall hold office until his
successor is elected and qualified. Directors need not be stockholders.
Section 2. Any vacancy in the Board of Directors that results from an
increase in the number of directors may be filled by a majority of the directors
then in office, provided that a quorum is present, and any other vacancy may be
filled only by a majority of the directors then in office, even if less than a
quorum, or by a sole remaining director. Any director elected to fill a vacancy
not resulting from an increase in the number of directors shall hold office for
the remaining term of his or her predecessor.
Section 3. The business of the corporation shall be managed by or under
the direction of its board of directors which may exercise all such powers of
the corporation and do all such lawful acts and things as are not by statute or
by the certificate of incorporation or by these bylaws directed or required to
be exercised or done by the stockholders.
MEETINGS OF THE BOARD OF DIRECTORS
Section 4. The Board of Directors of the corporation may hold meetings,
both
7.
<PAGE> 8
regular and special, either within or without the State of Delaware.
Section 5. The first meeting of each newly elected Board of Directors
shall be held at such time and place as shall be fixed by the vote of the
stockholders at the annual meeting, and no notice of such meeting shall be
necessary to the newly elected directors in order legally to constitute the
meeting, provided a quorum shall be present. In the event of the failure of the
stockholders to fix the time or place of such first meeting of the newly elected
Board of Directors, or in the event such meeting is not held at the time and
place so fixed by the stockholders, the meeting may be held at such time and
place as shall be specified in a notice given as hereinafter provided for
special meetings of the Board of Directors, or as shall be specified in a
written waiver signed by all of the directors.
Section 6. Regular meetings of the Board of Directors may be held
without notice at such time and at such place as shall from time to time be
determined by the board.
Section 7. Special meetings of the board may be called by the president
on two (2) days' notice to each director by mail or twenty-four (24) hours'
notice to each director either personally, by telegram, or by facsimile; special
meetings shall be called by the president or secretary in like manner and on
like notice on the written request of two (2) directors unless the board
consists of only one (1) director, in which case special meetings shall be
called by the president or secretary in like manner and on like notice on the
written request of the sole director.
Section 8. At all meetings of the board a majority of the directors
shall constitute a quorum for the transaction of business and the act of a
majority of the directors present at any meeting at which there is a quorum
shall be the act of the Board of Directors, except as may be otherwise
specifically provided by statute or by the certificate of incorporation. If a
quorum shall
8.
<PAGE> 9
not be present at any meeting of the Board of Directors, the directors present
thereat may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
Section 9. Unless otherwise restricted by the certificate of
incorporation of these bylaws, any action required or permitted to be taken at
any meeting of the Board of Directors or of any committee thereof may be taken
without a meeting, if all members of the board or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the board or committee.
Section 10. Unless otherwise restricted by the certificate of
incorporation or these bylaws, members of the Board of Directors, or any
committee designated by the Board of Directors, may participate in a meeting of
the Board of Directors, or any committee, by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
COMMITTEES OF DIRECTORS
Section 11. The Board of Directors may, by resolution passed by a
majority of the whole board, designate one or more committees, each committee to
consist of one or more of the directors of the corporation. The board may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee.
In the absence or disqualification of a member of a committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not he or
9.
<PAGE> 10
they constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of any such absent or disqualified
member.
Any such committee, to the extent provided in the resolution of the
Board of Directors, shall have and may exercise all the powers and authority of
the Board of Directors in the management of the business and affairs of the
corporation, and may authorize the seal of the corporation to be affixed to all
papers which may require it; but no such committee shall have the power or
authority in reference to amending the certificate of incorporation, adopting an
agreement of merger or consolidation, recommending to the stockholders the sale,
lease or exchange of all or substantially all of the corporation's property and
assets, recommending to the stockholders a dissolution of the corporation or a
revocation of a dissolution, or amending the bylaws of the corporation; and,
unless the resolution or the certificate of incorporation expressly so provide,
no such committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock. Such committee or committees shall have such
name or names as may be determined from time to time by resolution adopted by
the Board of Directors.
Section 12. Each committee shall keep regular minutes of its meetings
and report the same to the Board of Directors when required.
COMPENSATION OF DIRECTORS
Section 13. Unless otherwise restricted by the certificate of
incorporation or these bylaws, the Board of Directors shall have the authority
to fix the compensation of directors. The directors may be paid their expenses,
if any, of attendance at each meeting of the Board of Directors and may be paid
a fixed sum for attendance at each meeting of the Board of Directors or a stated
salary as director. No such payment shall preclude any director from serving the
10.
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corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
REMOVAL OF DIRECTORS
Section 14. Subject to the rights of the holders of any one or more
classes or series of Preferred Stock issued by the corporation, any director, or
the entire Board of Directors, may be removed from office at any time, but only
for cause and only by the affirmative vote of the holders of not less than
eighty percent (80%) of the voting power of all of the outstanding shares of
capital stock of the corporation entitled to vote generally in the election of
directors, considered for purposes of this sentence as a single class.
ARTICLE IV
NOTICES
Section 1. Whenever, under the provisions of the statutes or of the
certificate of incorporation or of these bylaws, notice is required to be given
to any director or stockholder, it shall not be construed to mean personal
notice, but such notice may be given in writing, by mail, addressed to such
director or stockholder, at his address as it appears on the records of the
corporation, with postage thereon prepaid, and such notice shall be deemed to be
given at the time when the same shall be deposited in the United States mail.
Notice to directors may also be given by telegram.
11.
<PAGE> 12
Section 2. Whenever any notice is required to be given under the
provisions of the statutes or of the certificate of incorporation or of these
bylaws, a waiver thereof in writing, signed by the person or persons entitled to
said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE V
OFFICERS
Section 1. The officers of the corporation shall be chosen by the Board
of Directors and shall be a president, treasurer and a secretary. The Board of
Directors may elect from among its members a Chairman of the Board and a Vice
Chairman of the Board. The Board of Directors may also choose one or more
vice-presidents, assistant secretaries and assistant treasurers. Any number of
offices may be held by the same person, unless the certificate of incorporation
or these bylaws otherwise provide.
Section 2. The Board of Directors at its first meeting after each
annual meeting of stockholders shall choose a president, a treasurer, and a
secretary and may choose vice presidents.
Section 3. The Board of Directors may appoint such other officers and
agents as it shall deem necessary who shall hold their offices for such terms
and shall exercise such powers and perform such duties as shall be determined
from time to time by the board.
Section 4. The salaries of all officers and agents of the corporation
shall be fixed by the Board of Directors.
Section 5. The officers of the corporation shall hold office until
their successors are chosen and qualify. Any officer elected or appointed by the
Board of Directors may be
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removed at any time by the affirmative vote of a majority of the Board of
Directors. Any vacancy occurring in any office of the corporation shall be
filled by the Board of Directors.
THE CHAIRMAN OF THE BOARD
Section 6. The Chairman of the Board, if any, shall preside at all
meetings of the Board of Directors and of the stockholders at which he shall be
present. He shall have and may exercise such powers as are, from time to time,
assigned to him by the Board and as may be provided by law.
Section 7. In the absence of the Chairman of the Board, the Vice
Chairman of the Board, if any, shall preside at all meetings of the Board of
Directors and of the stockholders at which he shall be present. He shall have
and may exercise such powers as are, from time to time, assigned to him by the
Board and as may be provided by law.
THE PRESIDENT AND VICE-PRESIDENTS
Section 8. The president shall be the chief executive officer of the
corporation; and in the absence of the Chairman and Vice Chairman of the Board
he shall preside at all meetings of the stockholders and the Board of Directors;
he shall have general and active management of the business of the corporation
and shall see that all orders and resolutions of the Board of Directors are
carried into effect.
Section 9. He shall execute bonds, mortgages and other contracts
requiring a seal, under the seal of the corporation, except where required or
permitted by law to be otherwise signed and executed and except where the
signing and execution thereof shall be expressly delegated by the Board of
Directors to some other officer or agent of the corporation.
Section 10. In the absence of the president or in the event of his
inability or
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refusal to act, the vice-president, if any, (or in the event there be more than
one vice-president, the vice-presidents in the order designated by the
directors, or in the absence of any designation, then in the order of their
election) shall perform the duties of the president, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the
president. The vice-presidents shall perform such other duties and have such
other powers as the Board of Directors may from time to time prescribe.
THE SECRETARY AND ASSISTANT SECRETARY
Section 11. The secretary shall attend all meetings of the Board of
Directors and all meetings of the stockholders and record all the proceedings of
the meetings of the corporation and of the Board of Directors in a book to be
kept for that purpose and shall perform like duties for the standing committees
when required. He shall give, or cause to be given, notice of all meetings of
the stockholders and special meetings of the Board of Directors, and shall
perform such other duties as may be prescribed by the Board of Directors or
president, under whose supervision he shall be. He shall have custody of the
corporate seal of the corporation and he, or an assistant secretary, shall have
authority to affix the same to any instrument requiring it and when so affixed,
it may be attested by his signature or by the signature of such assistant
secretary. The Board of Directors may give general authority to any other
officer to affix the seal of the corporation and to attest the affixing by his
signature.
Section 12. The assistant secretary, or if there be more than one, the
assistant secretaries in the order determined by the Board of Directors (or if
there be no such determination, then in the order of their election) shall, in
the absence of the secretary or in the event of his inability or refusal to act,
perform the duties and exercise the powers of the secretary
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and shall perform such other duties and have such other powers as the board of
directors may from time to time prescribe.
THE TREASURER AND ASSISTANT TREASURERS
Section 13. The treasurer shall have the custody of the corporate funds
and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the corporation in
such depositories as may be designated by the Board of Directors.
Section 14. He shall disburse the funds of the corporation as may be
ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the president and the Board of Directors, at
its regular meetings, or when the Board of Directors so requires, an account of
all his transactions as treasurer and of the financial condition of the
corporation.
Section 15. If required by the Board of Directors, he shall give the
corporation a bond (which shall be renewed every six years) in such sum and with
such surety or sureties as shall be satisfactory to the Board of Directors for
the faithful performance of the duties of his office and for the restoration to
the corporation, in case of his death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the corporation.
Section 16. The assistant treasurer, or if there shall be more than
one, the assistant treasurers in the order determined by the Board of Directors
(or if there be no such determination, then in the order of their election)
shall, in the absence of the treasurer or in the event of his
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<PAGE> 16
inability or refusal to act, perform the duties and exercise the powers of the
treasurer and shall perform such other duties and have such other powers as the
Board of Directors may from time to time prescribe.
ARTICLE VI
CERTIFICATE OF STOCK
Section 1. Every holder of stock in the corporation shall be entitled
to have a certificate, signed by, or in the name of the corporation by, the
chairman or vice-chairman of the Board of Directors, or the president or a
vice-president and the treasurer or an assistant treasurer, or the secretary or
an assistant secretary of the corporation, certifying the number of shares owned
by him in the corporation.
Certificates may be issued for partly paid shares and in such case upon
the face or back of the certificates issued to represent any such partly paid
shares, the total amount of the consideration to be paid therefor, and the
amount paid thereon shall be specified.
If the corporation shall be authorized to issue more than one class of
stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualification, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate which the corporation shall
issue to represent such class or series of stock, provided that, except as
otherwise provided in section 202 of the General Corporation Law of Delaware, in
lieu of the foregoing requirements, there may be set forth on the face or back
of the certificate which the corporation shall issue to represent such class or
series of stock, a statement that the corporation will furnish without charge to
each
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stockholder who so requests the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights.
Section 2. Any of or all the signatures on the certificate may be
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the corporation with the same effect as if he were
such officer, transfer agent or registrar at the date of issue.
LOST CERTIFICATES
Section 3. The Board of Directors may direct a new certificate or
certificates to be issued in place of any certificate or certificates
theretofore issued by the corporation alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen or destroyed. When authorizing such
issue of a new certificate or certificates, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate or certificates, or his
legal representative, to advertise the same in such manner as it shall require
and/or to give the corporation a bond in such sum as it may direct as indemnity
against any claim that may be made against the corporation with respect to the
certificate alleged to have been lost, stolen or destroyed.
FIXING RECORD DATE
Section 4. In order that the corporation may determine the stockholders
entitled to
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receive payment of any dividend or other distribution or allotment of any
rights, or entitled to exercise any rights in respect of any change, conversion
or exchange of stock or for the purpose of any other lawful action, the Board of
Directors may fix, in advance, a record date, which shall not be more than sixty
nor less than ten days before the date of such meeting, nor more than sixty days
prior to any other action. A determination of stockholders of record entitled to
notice of or to vote at a meeting of stockholders shall apply to any adjournment
of the meeting; provided, however, that the Board of Directors may fix a new
record date for the adjourned meeting.
REGISTERED STOCKHOLDERS
Section 5. The corporation shall be entitled to recognize the exclusive
right of a person registered on its books as the owner of shares to receive
dividends, and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE VII
GENERAL PROVISIONS
DIVIDENDS
Section 1. Dividends upon the capital stock of the corporation, subject
to the provisions of the certificate of incorporation, if any, may be declared
by the Board of Directors at any regular or special meeting, pursuant to law.
Dividends may be paid in cash, in property, or in shares of the capital stock,
subject to the provisions of the certificate of incorporation.
Section 2. Before payment of any dividend, there may be set aside out
of any
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<PAGE> 19
funds of the corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for such other
purposes as the directors shall think conducive to the interest of the
corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
CHECKS
Section 3. All checks or demands for money and notes of the corporation
shall be signed by such officer or officers or such other person or persons as
the Board of Directors may from time to time designate.
FISCAL YEAR
Section 4. The fiscal year of the corporation shall be fixed by
resolution of the Board of Directors.
SEAL
Section 5. The Board of Directors may adopt a corporate seal having
inscribed thereon the name of the corporation, the year of its organization and
the words "Corporate Seal, Delaware". The seal may be used by causing it or a
facsimile thereof to be impressed or affixed or reproduced or otherwise.
INDEMNIFICATION
Section 6.
(a) Each person who was or is made a party or is threatened to be made
a party to or is involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative (hereinafter a "proceeding"), by
reason of the fact that he or she, or a person of
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<PAGE> 20
whom he or she is the legal representative, is or was a director or officer of
the Corporation or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to
employee benefit plans, whether the basis of such proceeding is alleged action
in an official capacity as a director, officer, employee or agent or in any
other capacity while serving as a director, officer, employee or agent, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the General Corporation Law of the State of Delaware, as the same
exists or may hereafter be amended (but, in the case of any such amendment, to
the fullest extent permitted by law, only to the extent that such amendment
permits the Corporation to provide broader indemnification rights than said law
permitted the Corporation to provide prior to such amendment), against all
expense, liability and loss (including, without limitation, attorneys' fees,
judgments, fines, amounts paid or to be paid in settlement, and excise taxes or
penalties arising under the Employee Retirement Income Security Act of 1974)
reasonably incurred or suffered by such person in connection therewith and such
indemnification shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of his or her heirs,
executors and administrators; provided, however, that, except as provided in
paragraph (b) hereof, the Corporation shall indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof) initiated by
such person only if such proceeding (or part thereof) was authorized by the
Board. The right to indemnification conferred in this Section shall be a
contract right and shall include the right to be paid by the Corporation the
expenses incurred in defending any such proceeding in advance of its final
disposition; provided, however, that, if the General Corporation Law of the
State of
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Delaware requires, the payment of such expenses incurred by a director or
officer in his or her capacity as a director of officer (and not in any other
capacity in which service was or is rendered by such person while a director or
officer, including, without limitation, service to an employee benefit plan) in
advance of the final disposition of a proceeding, shall be made only upon
delivery to the Corporation of an undertaking, by or on behalf of such director
or officer, to repay all amounts so advanced if it shall ultimately be
determined that such director or officer is not entitled to be indemnified under
this Section or otherwise. The Corporation may provide indemnification to
employees and agents of the Corporation with the same scope and effect as the
foregoing indemnification of directors and officers.
(b) If a claim under this Section is not paid in full by the
Corporation within thirty days after a written claim has been received by the
Corporation, the claimant may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim and, if successful in
whole or in part, the claimant shall be entitled to be paid also the expense of
prosecuting such claim. It shall be a defense to any such action (other than an
action brought to enforce a claim for expenses incurred in defending any
proceeding in advance of its final disposition where the required undertaking,
if any is required, has been tendered to the Corporation) that the claimant has
not met the standards of conduct which make it permissible under the General
Corporation Law of the State of Delaware for the Corporation to indemnify the
claimant for the amount claimed, but the burden of proving such defense shall be
on the Corporation. Neither the failure of the Corporation (including its Board,
independent legal counsel, or its stockholders) to have made a determination
prior to the commencement of such action that indemnification of the claimant is
proper in the circumstances because he or she has
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met the applicable standard of conduct set forth in the General Corporation Law
of the State of Delaware, nor an actual determination by the Corporation
(including its Board, independent legal counsel, or its stockholders) that the
claimant has not met such applicable standard of conduct, shall be a defense to
the action or create a presumption that the claimant has not met the applicable
standard of conduct.
(c) The right to indemnification and the payment of expenses incurred
in defending a proceeding in advance of its final disposition conferred in this
Section shall not be exclusive of any other right which any person may have or
hereafter acquire under any statute, provision of the Certificate of
Incorporation, Bylaw, agreement, vote of stockholders or disinterested directors
or otherwise.
(d) The Corporation may maintain insurance, at its expense, to protect
itself and any director, officer, employee or agent of the Corporation or
another corporation, partnership, joint venture, trust or other enterprise
against any such expense, liability or loss, whether or not the Corporation
would have the power to indemnify such person against such expense, liability or
loss under the General Corporation Law of the State of Delaware.
ARTICLE VIII
AMENDMENTS
Section 1. These bylaws may be altered, amended or repealed or new
bylaws may be adopted by the stockholders or by the Board of Directors, when
such power is conferred upon the Board of Directors by the certificate of
incorporation at any regular meeting of the stockholders or of the Board of
Directors or at any special meeting of the stockholders or of the Board of
Directors if notice of such alteration, amendment, repeal or adoption of new
bylaws be
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contained in the notice of such special meeting. If the power to adopt, amend or
repeal bylaws is conferred upon the Board of Directors by the certificate or
incorporation it shall not divest or limit the power of the stockholders to
adopt, amend or repeal bylaws.
23.
<PAGE> 24
CERTIFICATE OF SECRETARY OF
GLOBESPAN, INC.
The undersigned, Robert McMullan, hereby certifies that he is the duly
elected and acting Secretary of GlobeSpan, Inc., a Delaware corporation (the
"Corporation"), and that the Bylaws attached hereto constitute the Bylaws of
said Corporation as duly adopted by Action by Unanimous Written Consent of the
Directors on March ____, 1999.
IN WITNESS WHEREOF, the undersigned has hereunto subscribed his name
this ____ day of _________ 1999.
------------------------------------------
Robert McMullan, Secretary
24.
<PAGE> 1
EXHIBIT 5.1
May 28, 1999
GlobeSpan, Inc.
100 Schulz Drive
Red Bank, NJ 07701
Re: Registration Statement on Form S-1
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 (File No.
333-75173) originally filed by GlobeSpan, Inc. (the "Company") with the
Securities and Exchange Commission (the "Commission") on March 29, 1999, as
thereafter amended or supplemented (the "Registration Statement"), in connection
with the registration under the Securities Act of 1933, as amended, of up to
3,250,000 shares of the Company's Common Stock (the "Shares"). The Shares, which
include an over-allotment option granted to the Underwriters to purchase up to
487,500 additional shares of the Company's Common Stock, are to be sold to the
Underwriters by the Company as described in the Registration Statement for
resale to the public. As your counsel in connection with this transaction, we
have examined the proceedings taken and are familiar with the proceedings
proposed to be taken by you in connection with the sale and issuance of the
Shares.
It is our opinion that, upon completion of the proceedings being
taken or contemplated by us, as your counsel, to be taken prior to the issuance
of the Shares being sold by the Company and upon completion of the proceedings
being taken in order to permit such transactions to be carried out in accordance
with the securities laws of the various states where required, the Shares being
sold by the Company, when issued and sold in the manner described in the
Registration Statement and in accordance with the resolutions adopted by the
Board of Directors of the Company, will be duly authorized, validly issued,
nonassessable and fully paid.
We consent to the use of this opinion as an exhibit to said
Registration Statement and further consent to the use of our name wherever
appearing in said Registration Statement, including the prospectus constituting
a part thereof, and in any amendment or supplement thereto.
Very truly yours,
/s/ Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP
----------------------------------------
Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP
<PAGE> 1
EXHIBIT 10.6
NEITHER THE WARRANT REPRESENTED BY THIS CERTIFICATE NOR ANY OF THE SECURITIES
ISSUABLE UPON EXERCISE THEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAW. NO TRANSFER OF THE
WARRANT REPRESENTED BY THIS CERTIFICATE OR OF THE STOCK ISSUABLE UPON EXERCISE
THEREOF SHALL BE VALID OR EFFECTIVE UNLESS (A) SUCH TRANSFER IS MADE PURSUANT TO
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR (B) THE HOLDER OF THE
SECURITIES PROPOSED TO BE TRANSFERRED SHALL HAVE DELIVERED TO THE COMPANY
EITHER, A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION OR AN
OPINION OF COUNSEL EXPERIENCED IN SECURITIES MATTERS TO THE EFFECT THAT SUCH
PROPOSED TRANSFER IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE ACT OR (C)
SUCH TRANSFER IS PURSUANT TO RULE 144 OR RULE 144A UNDER THE ACT AND SUCH HOLDER
SHALL HAVE DELIVERED TO THE COMPANY A CERTIFICATE SETTING FORTH THE BASIS FOR
APPLYING SUCH RULE TO THE PROPOSED TRANSFER.
THIS WARRANT IS NOT TRANSFERABLE BY THE HOLDER EXCEPT IN ACCORDANCE WITH SECTION
8.1.
Warrant No. 1
WARRANT
CAP ACQUISITION CORP.
THIS IS TO CERTIFY THAT LUCENT TECHNOLOGIES INC., or registered
assigns, is entitled, at any time prior to the Expiration Date (such term, and
certain other capitalized terms used herein being hereinafter defined), to
purchase from CAP ACQUISITION CORP., a Delaware corporation (the "Company"), ONE
HUNDRED FIFTY THOUSAND (150,000) shares of the Common Stock of the Company
(subject to adjustment as provided herein), at a purchase price of FIFTY EIGHT
AND 83/100 ($58.83) per share (the initial "Exercise Price", subject to
adjustment as provided herein), all on the terms and conditions and pursuant to
the provisions hereinafter set forth.
1. DEFINITIONS
As used in this Warrant, the following terms have the respective
meanings set forth below:
"Affiliate" of any Person means a Person (a) which directly or
indirectly through one or more intermediaries controls, or is controlled by, or
is under common control with such Person, (b) which beneficially owns or holds
more than five percent (5.0%) of the outstanding shares of any class of voting
stock of such Person or (c) more than five percent (5.0%) of the outstanding
shares of any class of voting stock (or, in the case of a Person which is not a
corporation, more than five percent (5.0%) of the equity interest) of which is
beneficially owned
<PAGE> 2
or held by such Person. The term "control" as used with respect to any Person
means the possession, directly or indirectly, of the power to direct or cause
the direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Agreed Rate" shall mean 8.50%.
"Appraised Value" of Common Stock or other securities, evidences
of indebtedness or property to be determined hereunder shall mean the value
thereof as determined by an investment bank of nationally recognized standing or
a "Big 6" accounting firm selected by the Holder and reasonably acceptable to
the Company. If the investment bank or accounting firm selected by the Holder is
not reasonably acceptable to the Company, and the Company and the Holder cannot
agree on a mutually acceptable investment bank or accounting firm, then the
Company and the Holder shall each choose one such investment bank or accounting
firm and the respective chosen firms shall jointly select a third investment
bank or accounting firm, which shall make the determination. The Company and the
Holder shall each pay one-half of the costs and fees of each such investment
bank or accounting firm, and the decision of the investment bank or accounting
firm making such determination of Appraised Value shall be final and binding on
the Company and the Holder. In the case of a valuation of the Common Stock, such
Appraised Value shall be determined as a pro rata portion of the value of the
Company taken as a whole, based on the higher of (A) the value derived from a
hypothetical sale of the entire Company as a going concern by a willing seller
to a willing buyer (neither acting under any compulsion) and (B) the liquidation
value of the entire Company. No discount shall be applied on account of (i) any
Common Stock representing a minority interest, (ii) any lack of liquidity of the
Common Stock or (iii) any other grounds.
"Book Value" per share of Common Stock as of a date specified
herein shall mean the consolidated book value of the Company and its
Subsidiaries as of such date determined in accordance with generally accepted
accounting principles divided by the number of shares of Common Stock
Outstanding on such date.
"Business Day" shall mean any day that is not a Saturday or
Sunday or a day on which banks are required or permitted to be closed in the
State of New York.
"Commission" shall mean the Securities and Exchange Commission or
any other federal agency then administering the Securities Act and other federal
securities laws.
"Common Stock" shall mean (except where the context otherwise
indicates) the Common Stock of the Company, par value $.001 per share, as
constituted on the Original Issue Date, and any capital stock into which such
Common Stock may thereafter be changed, and shall also include (i) capital stock
of the Company of any other class (regardless of how denominated) issued to the
holders of shares of any Common Stock upon any reclassification thereof which is
also not preferred as to dividends or liquidation over any other class of stock
of the Company and which is not subject to redemption and (ii) shares of common
stock of any successor or acquiring corporation (as defined in Section 4.5
hereof) received by or distributed to the holders of Common Stock of the Company
in the circumstances contemplated by Section 4.5 hereof.
2
<PAGE> 3
"Company" means CAP Acquisition Corp., a Delaware corporation,
and any successor corporation.
"Company Default" means (a) the breach of any warranty or the
inaccuracy at the time when made of any representation made by the Company
herein or (b) the failure by the Company to comply with any covenant of the
Company contained herein.
"Consideration Securities" shall have the meaning set forth in
Section 2.2(e) hereof.
"Continuously Effective", with respect to a specified
registration statement, shall mean that it shall not cease to be effective and
available for Transfers of Warrant Stock thereunder for longer than either (i)
any ten (10) consecutive business days, or (ii) an aggregate of fifteen (15)
business days during the period specified in the relevant provision of Section 9
hereof.
"Convertible Securities" shall mean evidences of indebtedness,
shares of stock or other securities that are convertible into or exchangeable
for, with or without payment of additional consideration in cash or property,
shares of Common Stock, either immediately or upon the occurrence of a specified
date or a specified event.
"Core Business Notes" shall mean the collective reference to (i)
the Core Business Note due June 30, 2000 in the outstanding original principal
amount of $76,250,000 issued by AT&T Paradyne Corporation ("Paradyne"), a
Delaware corporation, to Lucent Technologies Inc. ("Lucent"), a Delaware
corporation and (ii) the Interim Core Business Note due December 31, 1997 in the
outstanding original principal amount of $7,500,000 issued by Paradyne to
Lucent.
"Current Market Price" shall mean as of any specified date the
average of the daily market prices of the security being valued for the ten (10)
consecutive Business Days immediately preceding the date which is four Business
Days prior to such date (or, the ten (10) consecutive Business Days prior to
such date in the case of Section 2.2 (b)) and ending on the date which is four
Business Days prior to such date (or, the ten (10) consecutive Business Days
prior to such date in the case of Section 2.2 (b)). The "daily market price" for
each such Business Day shall be: (i) if the security being valued is then listed
on a national securities exchange or is listed on NASDAQ and is designated as a
National Market security, the last sale price, regular way, on such day on the
principal stock exchange or market system on which such security being valued is
then listed or admitted to trading, or, if no such sale takes place on such day,
the average of the closing bid and asked prices for the security being valued on
such day as reported on such stock exchange or market system or (ii) if the
security being valued is not then listed or admitted to trading on any national
securities exchange or designated as a National Market security on NASDAQ but is
traded over-the-counter, the average of the closing bid and asked prices for the
security being valued as reported on NASDAQ or the Electronic Bulletin Board or
in the National Daily Quotation Sheets, as applicable.
"Demand Registration" shall have the meaning set forth in
Section 9.2(a) hereof.
"Demanding Holder" shall have the meaning set forth in Section
9.2(a) hereof.
3
<PAGE> 4
"Designated Office" shall have the meaning set forth in Section
11 hereof.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, or any similar federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect from time to time.
"Exercise Notice" shall have the meaning set forth in Section
2.1 hereof.
"Exercise Period" shall mean the period during which this Warrant
is exercisable pursuant to Section 2.1 hereof.
"Exercise Price" shall mean, in respect of a share of Common
Stock at any date herein specified, the initial Exercise Price set forth in the
preamble of this Warrant as adjusted from time to time pursuant to Section 4
hereof.
"Expiration Date" shall mean the earlier of (i) the tenth (10th)
day after the date on which the Core Business Notes shall have been paid in cash
in full (which payment shall have been preceded by 20 days by a written notice
to the Holder specifying such Expiration Date and stating that this Warrant will
expire unless exercised on or prior to such date) or the Core Business Notes
shall have been exchanged by the Holder on a voluntary basis in which the Holder
receives debt securities of the issuer of the Core Business Notes having a
principal amount not less than the current unpaid principal amount and accrued
interest due on the Core Business Notes and maturity dates not less favorable to
the Holder than the Core Business Notes, (ii) ten days after the date on which
the Holder shall have transferred the Core Business Notes other than to an
Affiliate in a transaction in which the Holder receives cash equal to at least
80% of the current unpaid principal amount and accrued interest due on the Core
Business Notes (in the event the Core Business Notes shall be so transferred by
the Holder, the Holder shall within 15 calendar days inform the Company in
writing of such transfer and the consideration received therefor) and (iii) the
date on which the Warrant shall be cancelled pursuant to subsection 2.2(d).
"Fair Value" per share of Common Stock as of any specified date
shall mean (A) if the Common Stock is publicly traded on such date, the Current
Market Price per share or (B) if the Common Stock is not publicly traded on such
date, (1) the fair market value per share of Common Stock as determined in good
faith by the Board of Directors of the Company and set forth in a written notice
to the Holder or (2) if any such Holder objects in writing to such price as
determined by the Board of Directors within thirty (30) days after receiving
notice of same, the Appraised Value per share as of such date. "Fair Value" as
used herein with respect to any other securities, evidences of indebtedness or
property shall mean (x) if such security is publicly traded on such date, the
Current Market Price of much security or (y) the fair market value of any other
securities, evidences of indebtedness or property as determined in good faith by
the Board of Directors of the Company and set forth in a written notice to the
Holder, provided, that, if the securities, evidences of indebtedness or property
are being issued or delivered by a Related Party in connection with the
transaction, if any such Holder objects in writing to such valuation as
determined by the Board of Directors within thirty (30) days after receiving
notice of same, the Appraised Value of such securities, evidences of
indebtedness or property.
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"Holder" shall mean (a) with respect to this Warrant, Lucent
Technologies, Inc. and any Subsidiary to which this Warrant has been Transferred
pursuant to Section 8.1 and (b) with respect to any shares of Warrant Stock, the
Person in whose name such Warrant Stock is registered on the books of the
Company maintained for such purpose.
"Lien" shall mean any mortgage or deed of trust, pledge,
hypothecation, assignment, deposit arrangement, lien, charge, claim, security
interest, easement or encumbrance, or preference, priority or other security
agreement or preferential arrangement of any kind or nature whatsoever
(including, without limitation, any lease or title retention agreement, any
financing lease having substantially the same economic effect as any of the
foregoing, and the filing of, or agreement to give, any financing statement
perfecting a security interest under the Uniform Commercial Code or comparable
law of any jurisdiction).
"NASD" shall mean the National Association of Securities Dealers,
Inc., or any successor corporation thereto.
"NASDAQ" shall mean the NASDAQ quotation system, or any
successor reporting system.
"Opinion of Counsel" means a written opinion of counsel
experienced in Securities Act, chosen by the Holder of this Warrant or Warrant
Stock issued upon the exercise hereof and reasonably acceptable to the Company.
"Original Issue Date" shall mean the date on which the Original
Warrant was issued, as set forth on the cover page of this Warrant.
"Original Warrant" shall mean the Warrant originally issued by
the Company on the Original Issue Date to Lucent Technologies Inc.
"Other Property" shall have the meaning set forth in Section 4.5
hereof.
"Outstanding" shall mean, when used with reference to Common
Stock, at any date as of which the number of shares thereof is to be determined,
all issued shares of Common Stock, except shares then owned or held by or for
the account of the Company or any Subsidiary thereof, and shall include all
shares issuable in respect of outstanding scrip or any certificates representing
fractional interests in shares of Common Stock. "Outstanding", when used with
respect to Warrant Stock for the purposes of Section 9 hereof shall have the
meaning set forth in Section 9.l(c) hereof.
"Person" shall mean any individual, sole proprietorship,
partnership, limited liability company, joint venture, trust, incorporated
organization, association, corporation, institution, public benefit corporation,
entity or government (whether federal, state, county, city, municipal or
otherwise, including, without limitation, any instrumentality, division, agency,
body or department thereof).
"Piggyback Registration" shall have the meaning set forth in
Section 9.3(a) hereof.
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"Public Securities" shall have the meaning set forth in Section
2.2(e) hereof.
"Qualifying Business Combination" shall mean (a) a sale of all or
substantially all of the assets of the Company in connection with which the
holders of Common Stock receive cash, securities or other property, (b) a sale
of all the outstanding Common Stock of the Company for cash, securities or other
property, (c) a merger or consolidation pursuant to which all of the outstanding
Common Stock of the Company prior to such transaction is converted into cash,
securities or other property; provided that (i) the purchaser of the assets or
Common Stock of the Company in clause (a) or (b) was not a Related Party of the
Company prior to such sale, (ii) no corporation or other entity which is a party
to or whose securities are being delivered in connection with any merger or
consolidation referred to in clause (c) (other than the Company and any
Subsidiary of the Company) was a Related Party of the Company prior to such
transaction, (iii) the terms of such sale, merger or consolidation were
negotiated on an arm's length basis, and (iv) the Company shall have provided
the Holder with written notice in accordance with Section 7.1 of the Qualifying
Business Combination at least 30 days prior to the anticipated closing date
thereof, which notice shall specify the anticipated result under Section 2.2
hereof.
"Qualifying IPO" shall mean a firmly underwritten public offering
of Common Stock of the Company; provided that the Company shall have provided
the Holder with written notice in accordance with Section 7.1 of the Qualifying
IPO at least 30 days prior to the anticipated closing date thereof, which notice
shall specify the anticipated result under Section 2.2 hereof.
"Register", "registered" and "registration" shall refer to a
registration effected by preparing and filing a registration statement or
similar document in compliance with the Securities Act, and the declaration or
ordering by the Commission of effectiveness of such registration statement or
document.
"Registration Expenses" shall have the meaning set forth in
Section 9.6(a) hereof.
"Related Party" means, with respect to the Company: (i) any
Affiliate of the Company that is not a Subsidiary of the Company, (ii) any
officer, director or employee of the Company or any Affiliate of the Company,
(iii) any relative of any person listed in clause (i) or (ii) above or (iv) any
Person directly or indirectly controlled by one or more persons listed in clause
(i), (ii) or (iii) above or with respect to which one or more Persons listed in
clause (i), (ii) or (iii) above directly or indirectly owns any outstanding
capital stock or other equity interests or has any right (whether by way of
bonus or royalty arrangements or otherwise) to receive any share of the revenues
or profits (excluding the ownership or not more than five percent (5%) of any
class of equity securities listed on a national securities exchange or NASDAQ).
"Restricted Common Stock" shall mean shares of Common Stock which
are, or which upon their issuance on the exercise of this Warrant would be,
evidenced by a certificate bearing the restrictive legend set forth in Section
8.2(a) hereof.
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"Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
"Selling Holder" shall mean, with respect to a specified
registration under Section 9 hereof, the Holder whose Registrable Securities are
included in such registration.
"Share Withholding Option" has the meaning set forth in Section
2.1 hereof.
"Stock Purchase Rights" shall mean any options, warrants or other
securities or rights to subscribe to or exercisable for the purchase of shares
of Common Stock or Convertible Securities, whether or not immediately
exercisable.
"Subsequent Issuance" shall mean any sale or issuance by the
Company of Common Stock, Convertible Securities or Stock Purchase Rights after
the Original Issue Date other than:
(i) Any issuance of Warrant Stock upon exercise of the
Warrants.
(ii) Incentive stock arrangements pursuant to which (x)
officers, directors or employees of the Company or (y)
consultants or advisors of the Company who are not Related
Parties of the Company acquire Common Stock, Convertible
Securities or Stock Purchase Rights.
(iii)Any issuance of Common Stock, Convertible Securities
or Stock Purchase Rights in an underwritten public offering.
(iv) Any issuance of Common Stock, Convertible Securities
or Stock Purchase Rights as consideration for the acquisition of
property of any kind in a good faith transaction from a party
which is not directly or indirectly a Related Party.
(v) Any issuance subject to adjustment pursuant to Section
4.1 hereof.
(vi) Any other issuance of Common Stock, Convertible
Securities or Stock Purchase Rights with respect to which the
Holder shall have waived application of the provisions of Section
4 below.
"Subsidiary" means any corporation, partnership, limited
liability company, association or entity (a) more than 50% (by number of votes)
of the voting power of which is at the time owned by the Company or by one or
more Subsidiaries or by the Company and one or more Subsidiaries, or any other
business entity in which the Company or one or more Subsidiaries or the Company
and one or more Subsidiaries own more than a 50% interest either in the profits
or capital of such business entity or (b) whose net earnings, or portions
thereof, are consolidated with the net earnings of the Company and are recorded
on the books of the Company for financial reporting purposes in accordance with
generally accepted accounting principles.
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"Transfer" shall mean any disposition of any Warrant or Warrant
Stock or of any interest in either thereof that would constitute a "sale"
thereof within the meaning of the Securities Act.
"Violation" has the meaning set forth in Section 9.7(a) hereof.
"Warrant Price" shall mean an amount equal to (i) the number of
shares of Common Stock being purchased upon exercise of this Warrant pursuant to
Section 2.1 hereof, multiplied by (ii) the Exercise Price in effect as of the
date of such exercise.
"Warrants" shall mean the Original Warrant and all warrants
issued upon transfer, division or combination of, or in substitution for, such
Original Warrant or any other such Warrant. All Warrants shall at all times be
identical as to terms and conditions and date, except as to the number of shares
of Common Stock for which they may be exercised.
"Warrant Stock" generally shall mean the shares of Common Stock
issued, issuable or both (as the context may require) upon the exercise of
Warrants until such time as such shares of Common Stock have either been (i)
Transferred in a public offering pursuant to a registration statement filed
under the Securities Act or (ii) Transferred in a transaction exempt from the
registration and prospectus delivery requirements of the Securities Act with all
transfer restrictions and restrictive legends with respect to such Common Stock
being removed in connection with such transaction. "Warrant Stock" for the
purposes of Section 9 hereof shall have the meaning set forth in Section 9.1(a)
hereof.
2. EXERCISE OF WARRANT
2.1 Manner of Optional Exercise. (a) From and after the Original
Issue Date and until 5:00 P.M., New York time, on the Expiration Date, the
Holder of this Warrant may from time to time exercise this Warrant, on any
Business Day, for all but not less than all the shares of Common Stock
purchasable hereunder (as determined pursuant to Section 2.3 below). In order to
exercise this Warrant, the Holder shall (i) deliver to the Company at the
Designated Office a written notice of the Holder's election to exercise this
Warrant (an "Exercise Notice"), which Exercise Notice shall be irrevocable
together with this Warrant and (ii) pay to the Company the Warrant Price (the
date on which both such delivery and payment shall have first taken place being
hereinafter sometimes referred to as the "Exercise Date"). Such Exercise Notice
shall be in the form of the subscription form appearing at the end of this
Warrant as Annex A, duly executed by the Holder or its duly authorized agent or
attorney.
(b) Upon receipt of such Exercise Notice, Warrant and payment,
the Company shall, as promptly as practicable, and in any event within five (5)
Business Days thereafter, execute (or cause to be executed) and deliver (or
cause to be delivered) to the Holder a certificate or certificates representing
the aggregate number of full shares of Common Stock issuable upon such exercise,
together with cash in lieu of any fraction of a share, as hereafter provided.
The stock certificate or certificates so delivered shall be, to the extent
possible, in such denomination or denominations as the exercising Holder shall
reasonably request in the Exercise Notice and, subject to compliance with the
provisions of Section 7 of the Co-Sale Agreement among Paradyne Partners, L.P.,
Lucent Technologies Inc. and the Company dated as of the date hereof,
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<PAGE> 9
shall be registered in the name of the Holder or such other name as shall be
designated in the Exercise Notice. This Warrant shall be deemed to have been
exercised and such certificate or certificates shall be deemed to have been
issued, and the Holder or any other Person so designated to be named therein
shall be deemed to have become a holder of record of such shares for all
purposes, as of the Exercise Date.
(c) Payment of the Warrant Price shall be made at the option of
the Holder by one or more of the following methods: (i) by delivery of a
certified or official bank check in the amount of such Warrant Price, or (ii) if
the Common Stock is publicly traded, by instructing the Company to withhold a
number of shares of Warrant Stock then issuable upon exercise of this Warrant
with an aggregate Fair Value equal to such Warrant Price (the "Share Withholding
Option"). In the event of any withholding of Warrant Stock or surrender of
Common Stock where the number of shares whose Fair Value is equal to the Warrant
Price is not a whole number, the number of shares withheld by or surrendered to
the Company shall be rounded up to the nearest whole share and the Company shall
make a cash payment to the Holder based on the incremental fraction of a share
being so withheld by or surrendered to the Company in an amount determined in
accordance with Section 2.4 hereof.
2.2 Consummation of a Qualifying IPO or a Qualifying Business
Combination.
(a) In the event of a Qualifying IPO at an offering price per
share to the public (the "IPO Price") equal to 120% or more of the
Exercise Price, this Warrant shall be automatically deemed to have been
exercised by the Holder immediately prior to the closing of such
Qualifying IPO for the purchase of all shares of Common Stock then
issuable under this Warrant pursuant to the Share Withholding Option
with each share of Warrant Stock so withheld deemed to have a Fair Value
equal to the IPO Price.
(b) In the event of a Qualifying IPO at an IPO Price equal to
less than 120% of the Exercise Price, this Warrant shall remain
outstanding in accordance with its terms; provided, that if at any time
thereafter, the Current Market Price is greater than 120% of the
Exercise Price, then this Warrant may, at the option of the Company, be
deemed to have been exercised by the Holder as of the first business day
on which such test shall have been met for the purchase of all shares of
Common Stock then issuable under this Warrant pursuant to the Share
Withholding Option with each share of Common Stock so withheld deemed to
have a Fair Value equal to the Current Market Price as of such first
business day.
(c) In the event of a Qualifying Business Combination in which
the sole consideration is cash, at a price per share of Common Stock
which is equal to at least the Exercise Price, this Warrant shall be
automatically deemed to have been exercised by the Holder immediately
prior to closing of such Qualifying Business Combination, and the Holder
shall receive cash in an amount equal to (A) the difference between (i)
the cash price per share paid in the Qualifying Business Combination and
(ii) the Exercise Price multiplied by (B) the number of shares then
issuable under the Warrant. The cash price per share for purposes of
subsections 2.2(c), 2.2(d), 2.2(g) and 2.2(h) shall be the highest
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<PAGE> 10
amount of cash received or receivable per share of Common Stock by any
holder of the Common Stock as a result of the Qualifying Business
Combination.
(d) In the event of a Qualifying Business Combination in which
the sole consideration is cash, at a price per share of Common Stock
which is less than Exercise Price, the Holder shall receive neither cash
nor shares of Common Stock in consideration of the Warrant, and the
Warrant shall be cancelled upon the closing of such Qualifying Business
Combination.
(e) In the event of a Qualifying Business Combination at a price
per share of Common Stock which is equal to at least 120% of the
Exercise Price in which the sole consideration is securities which are
listed on a national securities exchange or quoted on the NASDAQ
National Market or any successor market ("Public Securities"), this
Warrant shall be immediately exchanged as of the closing of such
Qualifying Business Combination for the securities which are the
consideration for the Qualifying Business Combination ("Consideration
Securities") with a value equal to (A) the difference between (i) value
of the Consideration Securities per share of Common Stock and (ii) the
Exercise Price, multiplied by (B) the number of shares then issuable
under the Warrant. The price per share of Common Stock for purposes of
subsections 2.2(e), 2.2(f)(i), 2.2(g) and 2.2(h)(i) shall be deemed to
be the Current Market Price of the Consideration Securities (plus any
cash, if applicable) deliverable with respect to each share of Common
Stock as of the closing date of the Qualifying Business Combination and
such Current Market Price shall be deemed to be the value of the
Consideration Securities.
(f) In the event of a Qualifying Business Combination (i) at a
price per share of Common Stock which is less than 120% of the Exercise
Price in which the sole consideration is Public Securities or (ii) in
which the sole consideration is either securities which are not Public
Securities and/or other property, then the Warrant shall be exchanged
for a Warrant to purchase any such Consideration Securities and/or any
such other property (the "New Warrant"). The New Warrant shall have
provisions which are substantially identical to those of the Warrant,
except that the New Warrant shall authorize the Holder to purchase the
amount of any Consideration Securities and/or any such other property
which is calculated by multiplying the amount of any such Consideration
Securities and/or any amount of other property exchanged per share of
Common Stock ("Exchange Ratio") in the Qualifying Business Combination
by the number of shares then issuable under the Warrant. The exercise
price of the New Warrant shall be calculated by dividing the Exercise
Price by the Exchange Ratio of the Qualifying Business Combination.
(g) In the event of a Qualifying Business Combination at a price
per share of Common Stock equal to 120% or more of the Exercise Price in
which consideration is both cash and Public Securities, this Warrant
shall be immediately exchanged for cash and Consideration Securities
with a combined value equal to (A) the difference between (i) the
aggregate price per share (in cash and Public Securities) paid in the
Qualifying Business Combination, appropriately adjusted on a per share
basis and (ii) the Exercise Price multiplied by (B) the number of shares
issuable under the Warrant. The Holder will receive cash and Public
Securities under this subsection 2.2(g) in a ratio determined by
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<PAGE> 11
dividing the amount of each type of consideration which the holders of
the Common Stock receive in the Qualified Business Combination by the
total amount of consideration which the holders of the Common Stock
receive in the Qualified Business Combination.
(h) In the event of a Qualifying Business Combination (i) at a
price per share of Common Stock which is less than 120% of the Exercise
Price in which the consideration is a combination of Public Securities
and cash or (ii) in which the consideration is a combination of
securities other than Public Securities, cash and/or other property,
then the Warrant shall be exchanged for a New Warrant. The New Warrant
shall have provisions which are substantially identical to those of the
Warrant, except that the New Warrant shall authorize the Holder to
purchase the amount of any Consideration Securities and/or amount of
other any other property which is calculated by multiplying the Exchange
Ratio of the Qualifying Business Combination by the number of shares
issuable under the Warrant. The exercise price per amount of any
Consideration Securities and/or amount of any other property of the New
Warrant shall be calculated by reducing the Exercise Price by the amount
of cash per share of Common Stock received by holders of the Common
Stock in the Qualifying Business Combination and then dividing the
resultant number by the Exchange Ratio of the Qualifying Business
Combination; provided that if the cash per share of Common Stock
received as part of the consideration equals or exceeds the Exercise
Price, then the Holder shall receive the Consideration Securities and/or
the amount of any other property which the New Warrant would entitle it
to purchase, and shall receive cash in an amount equal to (A) the excess
of the cash consideration per share of Common Stock over the Exercise
Price (if any) multiplied by (B) the number of shares then issuable
under the Warrant and this Warrant shall be deemed fully exercised.
(i) Whenever the property to be received upon exercise of this
Warrant or the Exercise Price shall be adjusted pursuant to this Section
2.2 (f) or (h), the Company shall, forthwith prepare a certificate to be
executed by the chief financial officer of the Company setting forth, in
reasonable detail, the event requiring the adjustment and the method by
which such adjustment was calculated, specifying the number of shares of
Common Stock for which this Warrant is exercisable and, if applicable,
describing the amount and kind of any property for which this Warrant is
exercisable, and any related change in the Exercise Price, after giving
effect to such adjustment or change. The Company shall promptly cause a
signed copy of such certificate to be delivered to the Holder in
accordance with Section 15.2. The Company shall keep at its principal
office or at the Designated Office, if different, copies of all such
certificates and cause the same to be available for inspection at said
office during normal business hours by the Holder or any prospective
transferee of a Warrant designated by the Holder thereof.
2.3 Payment of Taxes. All shares of Common Stock issuable upon
the exercise of this Warrant pursuant to the terms hereof shall be validly
issued, fully paid and nonassessable, issued without violation of any preemptive
rights and free and clear of all Liens (other than any created by actions of the
Holder). The Company shall pay all expenses in connection with, and all taxes
and other governmental charges that may be imposed with respect to, the issue or
delivery thereof, unless such tax or charge is imposed by law upon the Holder.
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2.4 Fractional Shares. The Company shall not be required to issue
a fractional share of Common Stock upon exercise of any Warrant. As to any
fraction of a share that the Holder of one or more Warrants, the rights under
which are exercised in the same transaction, would otherwise be entitled to
purchase upon such exercise, the Company shall pay a cash adjustment in respect
of such final fraction in an amount equal to the same fraction of (i) the
Current Market Price of one share of Common Stock on the Exercise Date, if the
Common Stock is then publicly traded or (ii) the Book Value per share of Common
Stock based on the most recent available consolidated balance sheet of the
Company, if the Common Stock is not then publicly traded.
2.5 Continued Validity and Application. (a) If shares of Warrant
Stock are issued upon the exercise of this Warrant, the Holder shall continue,
with respect to such shares, to be entitled to all rights and to be subject to
all obligations that are applicable to such Holder by the terms of this Warrant
after the exercise thereof. The Company shall, at the time of any exercise of
this Warrant, upon the request of the Holder, acknowledge in writing, in a form
reasonably satisfactory to such Holder, its continuing obligation to afford to
such Holder such rights referred to in this Section 2.5; provided, however, that
if such Holder shall fail to make any such request, such failure shall not
affect the continuing obligation of the Company to afford to such Holder all
such rights.
3. [INTENTIONALLY OMITTED]
4. ANTIDILUTION PROVISIONS
The number of shares of Common Stock for which this Warrant is
exercisable and the Exercise Price shall be subject to adjustment from time to
time as set forth in this Section 4.
4.1 Stock Dividends, Subdivisions and Combinations. If at any
time the Company shall:
(i) take a record of the holders of its Common Stock for
the purpose of entitling them to receive a dividend payable in,
or other distribution of, additional shares of Common Stock,
(ii) subdivide its outstanding shares of Common Stock into
a larger number of shares of such Common Stock, or
(iii)combine its outstanding shares of Common Stock into
a smaller number of shares of such Common Stock,
then the Exercise Price shall be adjusted to equal the product of the
Exercise Price in effect immediately prior to such event multiplied by a
fraction the numerator of which is equal to the number of shares of
Common Stock Outstanding immediately prior to the adjustment and the
denominator of which is equal to the number of shares of Common Stock
Outstanding immediately after such adjustment.
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4.2 Issuance of Additional Shares of Common Stock. If at any time
the Company shall issue or sell any shares of Common Stock in a Subsequent
Issuance for a consideration per share that is less than the Fair Value per
share in effect immediately prior to such issuance or sale and such Fair Value
is less than the Exercise Price, then, forthwith upon such issuance or sale, the
Exercise Price shall be reduced to the price calculated by multiplying the then
existing Exercise Price by a fraction, the numerator of which shall be the
quotient obtained by dividing (A) the sum of (x) the number of shares of Common
Stock Outstanding plus the number of shares of Common Stock issuable pursuant to
the exercise of any Stock Purchase Rights or the conversion of Convertible
Securities (in each case, immediately prior to such Subsequent Issuance) which
fully diluted number shall be multiplied by the Fair Value per share of Common
Stock immediately prior to such Subsequent Issuance plus (y) the aggregate
consideration (determined in accordance with the provisions of Section 4.6
hereof), if any, received by the Company in connection with such Subsequent
Issuance by (B) the total number of shares of Common Stock Outstanding plus the
number of shares of Common Stock issuable pursuant to the exercise of any Stock
Purchase Rights or the conversion of Convertible Securities (in each case,
immediately after such Subsequent Issuance) and the denominator of which shall
be the Fair Value per share of Common Stock immediately prior to such Subsequent
Issuance.
The provisions of this Section 4.2 shall not apply to (i) any
issuance of Common Stock for which an adjustment is provided for under Section
4.1 or (ii) any issuance or sale of Common Stock pursuant to the exercise of any
Stock Purchase Rights or Convertible Securities.
4.3 Issuances of Stock Purchase Rights and Convertible
Securities. (a) In the event that the Company shall at any time issue, sell or
grant any Stock Purchase Rights to any Person in a Subsequent Issuance, then,
for the purpose of Section 4.2 above, the Company shall be deemed to have issued
at that time a number of shares of Common Stock equal to the maximum number of
shares of Common Stock that are or may become issuable upon exercise of such
Stock Purchase Rights (or upon exercise of any Convertible Securities issuable
upon exercise of such Stock Purchase Rights) for a consideration per share equal
to (i) the aggregate consideration per share (determined in accordance with the
provisions of Section 4.6 hereof) received by the Company in connection with the
issuance, sale or grant of such Stock Purchase Rights plus (ii) the minimum
amount of such consideration per share receivable by the Company in connection
with the exercise of such Stock Purchase Rights (and the exercise of any
Convertible Securities issuable upon exercise of such Stock Purchase Rights).
(b) In the event that the Company shall at any time issue or sell
any Convertible Securities to any Person in a Subsequent Issuance, then, for the
purposes of Section 4.2 above, the Company shall be deemed to have issued at
that time a number of shares of Common Stock equal to the maximum number of
shares of Common Stock that are or may become issuable upon the exercise of the
conversion or exchange rights associated with such Convertible Securities for a
consideration per share equal to (i) the aggregate consideration per share
(determined in accordance with the provisions of Section 4.6 hereof) received by
the Company in connection with the issuance or sale of such Convertible
Securities plus (ii) the minimum amount of such consideration per share
receivable by the Company in connection with the exercise of such conversion or
exchange rights.
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(c) If, at any time after any adjustment of the Exercise Price
shall have been made hereunder as the result of any issuance, sale or grant of
any Stock Purchase Rights or Convertible Securities, the maximum number of
shares issuable upon exercise of such Stock Purchase Rights or of the rights of
conversion or exchange associated with such Convertible Securities shall
increase, or the minimum amount of consideration per share receivable in
connection with such exercise shall decrease, whether by operation of any
antidilution rights pertaining to such Stock Purchase Rights or Convertible
Securities, by agreement of the parties or otherwise, the Exercise Price then in
effect shall first be readjusted to eliminate the effects of the original
issuance, sale or grant of such Stock Purchase Rights or Convertible Securities
on such Exercise Price and then readjusted as if such Stock Purchase Rights or
Convertible Securities had been issued on the effective date of such increase
in number of shares or decrease in consideration, but only if the effect of such
two-step readjustment is to reduce the Exercise Price below the Exercise Price
in effect immediately prior to such increase or decrease.
(d) If, at any time after any adjustment of the Exercise Price
shall have been made hereunder as the result of any issuance, sale or grant of
any Stock Purchase Rights or Convertible Securities, any of such Stock Purchase
Rights or the rights of conversion or exchange associated with such Convertible
Securities shall expire by their terms or any of such Stock Purchase Rights or
Convertible Securities shall be repurchased by the Company or a Subsidiary
thereof for a consideration per underlying share of Common Stock not exceeding
the amount of such consideration received by the Company in connection with the
issuance, sale or grant of such Stock Purchase Rights or Convertible Securities,
the Exercise Price then in effect shall forthwith be increased to the Exercise
Price that would have been in effect if such expiring Stock Purchase Rights or
rights of conversion or exchange or such repurchased Stock Purchase Rights or
Convertible Securities had never been issued. Similarly, if at any time after
any such adjustment of the Exercise Price shall have been made pursuant to
Section 4.2 (i) any additional consideration is received or becomes receivable
by the Company in connection with the issuance or exercise of such Stock
Purchase Rights or Convertible Securities or (ii) there is a reduction in the
conversion ratio applicable to such Convertible Securities so that fewer shares
of Common Stock will be issuable upon the conversion or exchange thereof or
there is a decrease in the number of shares of Common Stock issuable upon
exercise of such Stock Purchase Rights, the Exercise Price then in effect shall
be forthwith readjusted to the Exercise Price that would have been in effect had
such changes taken place at the time that such Stock Purchase Rights or
Convertible Securities were initially issued, granted or sold. In no event shall
any readjustment under this Section 4.3(d) affect the validity of any shares of
Warrant Stock issued upon any exercise of this Warrant prior to such
readjustment, nor shall any such readjustment have the effect of increasing the
Exercise Price above the Exercise Price that would have been in effect if the
related Stock Purchase Rights or Convertible Securities had never been issued.
4.4 Adjustment of Number of Shares Purchasable. Upon any
adjustment of the Exercise Price as provided in Section 4.1, 4.2 or 4.3 hereof,
the Holder hereof shall thereafter be entitled to purchase upon the exercise of
this Warrant, at the Exercise Price resulting from such adjustment, the number
of shares of Common Stock (calculated to the nearest 1/100th of a share)
obtained by multiplying the Exercise Price in effect immediately prior to such
adjustment by the number of shares of Common Stock issuable on the exercise
hereof immediately prior to such adjustment and dividing the product thereof by
the Exercise Price resulting from such adjustment.
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4.5 Reorganization, Reclassification, Merger, Consolidation or
Disposition of Assets. In case the Company shall reorganize its capital,
reclassify its capital stock, consolidate or merge with or into another
corporation (where the Company is not the surviving corporation or where there
is any change whatsoever in, or distribution with respect to, the Outstanding
Common Stock of the Company other than a change in the par value of the Common
Stock or a change in the Common Stock to no par value), or sell, transfer or
otherwise dispose of all or substantially all of its property, assets or
business to another corporation, other than in any such case pursuant to a
Qualifying Business Combination for which Section 2.2 provides a different
result and, pursuant to the terms of such reorganization, reclassification,
merger, consolidation or disposition of assets, (i) shares of capital stock of
the successor or acquiring corporation or of the Company (if it is the surviving
corporation) or (ii) any cash, shares of stock or other securities or property
of any nature whatsoever (including warrants or other subscription or purchase
rights) in addition to or in lieu of capital stock of the successor or acquiring
corporation ("Other Property") are to be received by or distributed to the
holders of Common Stock of the Company who are holders immediately prior to such
transaction, then the Holder of this Warrant shall have the right thereafter to
receive, upon exercise of this Warrant, the number of shares of capital stock of
the successor or acquiring corporation or of the Company, if it is the surviving
corporation, and Other Property receivable upon or as a result of such
reorganization, reclassification, merger, consolidation or disposition of assets
by a holder of the number of shares of Common Stock for which this Warrant is
exercisable immediately prior to such event. In such event, the aggregate
Exercise Price otherwise payable for the shares of Common Stock issuable upon
exercise of this Warrant shall be allocated among the shares of capital stock
and Other Property receivable as a result of such reorganization,
reclassification, merger, consolidation or disposition of assets in proportion
to the respective Fair Values of such shares of capital stock and Other
Property. In case of any such reorganization, reclassification, merger,
consolidation or disposition of assets, the successor or acquiring corporation
(if other than the Company) shall expressly assume the due and punctual
observance and performance of each and every covenant and condition of this
Warrant to be performed and observed by the Company and all the obligations and
liabilities hereunder, subject to such modifications as may be reasonably deemed
appropriate (as determined by resolution of the Board of Directors of the
Company) in order to provide for adjustments of any shares of the common stock
of such successor or acquiring corporation for which this Warrant thus becomes
exercisable, which modifications shall be as equivalent as practicable to the
adjustments provided for in this Section 4. For purposes of this Section 4.5,
"capital stock of the successor or acquiring corporation" shall include stock of
such corporation of any class that is not preferred as to dividends or assets
over any other class of stock of such corporation and that is not subject to
redemption and shall also include any securities that are convertible into or
exchangeable for any such stock, either immediately or upon the arrival of a
specified date or the happening of a specified event and any Warrants or other
rights to subscribe for or purchase any such stock. The foregoing provisions of
this Section 4.5 shall similarly apply to successive reorganizations,
reclassification, mergers, consolidations or disposition of assets.
4.6 Determination of Consideration. For purposes of Sections 4.2,
4.3 and 4.4 hereof, the consideration received and/or receivable by the Company
in connection with the issuance, sale, grant or exercise of additional shares of
Common Stock, Stock Purchase Rights or Convertible Securities, irrespective of
the accounting treatment of such consideration, shall be valued as follows:
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(1) Cash Payment. In the case of cash, the net amount
received by the Company after deduction of any accrued interest or
dividends, but including any underwriting commissions or concessions
paid or allowed by the Company.
(2) Securities or Other Property. In the case of
securities or other property, the Fair Value thereof as of the date
immediately preceding such issuance, sale, grant or exercise.
(3) Allocation Related to Common Stock. In the event
shares of Common Stock are issued or sold together with other securities
or other assets of the Company for a consideration which covers both,
the consideration received (computed as provided in (1) and (2) above)
shall be allocable to such shares of Common Stock and other securities
or other assets in proportion to their respective Fair Values.
(4) Allocation Related to Stock Purchase Rights and
Convertible Securities. In case any Stock Purchase Rights or Convertible
Securities shall be issued or sold together with other securities or
other assets of the Company, together comprising one integral
transaction in which no specific consideration is allocated to the Stock
Purchase Rights or Convertible Securities, the consideration received
shall be allocable to such Stock Purchase Rights or Convertible
Securities and other securities or assets in proportion to their
respective Fair Values.
(5) Dividends in Securities. In case the Company shall
declare a dividend or make any other distribution upon any stock of the
Company payable in either case in Convertible Securities, such
Convertible Securities issuable in payment of such dividend or
distribution shall be deemed to have been issued or sold without
consideration.
(6) Merger Consolidation or Sale of Assets. In case any
shares of Common Stock, Stock Purchase Rights or Convertible Securities
shall be issued in connection with any merger or consolidation in which
the Company is the surviving corporation, the amount of consideration
therefor shall be deemed to be the Fair Value of such portion of the
assets and business of the non-surviving corporation attributable to
such Common Stock, Stock Purchase Rights or Convertible Securities.
4.7 Other Dilutive Events. In case any event shall occur as to
which the other provisions of this Section 4 are not strictly applicable but as
to which the failure to make any adjustment would not fairly protect the
purchase rights represented by this Warrant in accordance with the essential
intent and principles hereof (including, without limitation, the issuance of
securities other than Common Stock which have the right to participate in
distributions to the holders of Common Stock, the granting of "phantom stock"
rights or "stock appreciation rights" (other than as contemplated in clause (ii)
of the definition of Subsequent Issuance) or the repurchase of outstanding
shares of Common Stock, Convertible Securities or Stock Purchase Rights for a
purchase price exceeding the Fair Value thereof), then, in each such case, the
Holder may select an investment banking firm of nationally recognized standing
or a "Big 6" accounting firm reasonably acceptable to the Company to make a
determination as to the adjustment, if any, required to be made on a basis
consistent with the essential intent and
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principles established herein as a result of such event in order to preserve the
purchase rights represented by the Warrants. If the investment bank or
accounting firm selected by the Holder is not reasonably acceptable to the
Company, and the Company and the Holder cannot agree on a mutually acceptable
investment bank or accounting firm, then the Company and the Holder shall each
choose one such investment bank or accounting firm and the respective chosen
firms shall jointly select a third investment bank or accounting firm, which
shall make the determination. The Company and the Holder shall each pay one-half
of the costs and fees of each such investment bank or accounting firm, and the
decision of the investment bank or accounting firm making such determination
shall be final and binding on the Company and the Holder and all affected
holders of Warrant Stock. Promptly after receipt of the opinion of such
investment bank or accounting firm as to any such required adjustments, the
Company shall take any actions necessary to implement same.
4.8 Other Provisions Applicable to Adjustments Under This
Section. The following provisions shall be applicable to the adjustments
provided for pursuant to this Section 4:
(a) When Adjustments To Be Made. The adjustments required by this
Section 4 shall be made whenever and as often as any specified event
requiring such an adjustment shall occur. For the purpose of any such
adjustment, any specified event shall be deemed to have occurred at the
close of business on the date of its occurrence.
(b) Record Date. In case the Company shall take a record of the
holders of the Common Stock for the purpose of entitling them to receive
a dividend or other distribution payable in Common Stock, Convertible
Securities or Stock Purchase Rights, then all references in this Section
4 to the date of the issuance or sale of such shares of Common Stock,
Convertible Securities or Stock Purchase Rights shall be deemed to be
references to such record date.
(c) Fractional Interests. In computing adjustments under this
Section 4, fractional interests in Common Stock shall be taken into
account to the nearest 1/100th of a share.
(d) When Adjustment Not Required. If the Company shall take a
record of the holders of its Common Stock for the purpose of entitling
them to receive a dividend or distribution to which the provisions of
Section 4.1 would apply, but shall, thereafter and before the
distribution to stockholders thereof, legally abandon its plan to pay or
deliver such dividend or distribution, then thereafter no adjustment
shall be required by reason of the taking of such record and any such
adjustment previously made in respect thereof shall be rescinded and
annulled.
(e) Maximum Exercise Price. Except as provided in Section 4.1, at
no time shall the Exercise Price per share of Common Stock exceed the
amount set forth in the first paragraph of the preamble of this Warrant.
(f) Certain Limitations. Notwithstanding anything, herein to the
contrary, the Company agrees not to enter into any transaction that, by
reason of any adjustment under
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Section 4.1, 4.2 or 4.3 above, would cause the Exercise Price to be less
than the par value of the Common Stock, if any, unless the Company first
reduces the par value of the Common Stock to be less than the Exercise
Price that would result from such transaction.
(g) Notice of Adjustments. Whenever the number of shares of
Common Stock for which this Warrant is exercisable or the Exercise Price
shall be adjusted pursuant to this Section 4, the Company shall
forthwith prepare a certificate to be executed by the chief financial
officer of the Company setting forth, in reasonable detail, the event
requiring the adjustment and the method by which such adjustment was
calculated, specifying the number of shares of Common Stock for which
this Warrant is exercisable and (if such adjustment was made pursuant to
Section 4.5) describing the number and kind of any other shares of stock
or Other Property for which this Warrant is exercisable, and any related
change in the Exercise Price, after giving effect to such adjustment or
change. The Company shall promptly cause a signed copy of such
certificate to be delivered to the Holder in accordance with Section
15.2. The Company shall keep at its principal office or at the
Designated Office, if different, copies of all such certificates and
cause the same to be available for inspection at said office during
normal business hours by any Holder or any prospective transferee of a
Warrant designated by a Holder thereof.
(h) Independent Application. Except as otherwise provided herein,
all subsections of this Section 4 are intended to operate independently
of one another (but without duplication). If an event occurs that
requires the application of more than one subsection, all applicable
subsections shall be given independent effect without duplication.
5. NO IMPAIRMENT
The Company shall not by any action, including, without
limitation, amending its charter documents or through any reorganization,
reclassification, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other similar voluntary action, avoid or seek to
avoid the observance or performance of any of the terms of this Warrant, but
will at all times in good faith assist in the carrying out of all such terms and
in the taking of all such actions as may be necessary or appropriate to protect
the rights of the Holder against impairment. Without limiting the generality of
the foregoing, the Company shall take all such action as may be necessary or
appropriate in order that the Company may validly and legally issue fully paid
and nonassessable shares of Common Stock upon the exercise of this Warrant, free
and clear of all Liens, and shall use its best efforts to obtain all such
authorizations, exemptions or consents from any public regulatory body having
jurisdiction thereof as may be necessary to enable the Company to perform its
obligations under this Warrant. The effectiveness of this Section 5 shall
terminate upon the exercise of the Warrant.
6. RESERVATION AND AUTHORIZATION OF COMMON STOCK; REGISTRATION WITH OR
APPROVAL OF ANY GOVERNMENTAL AUTHORITY
From and after the Original Issue Date, the Company shall at all
times reserve and keep available for issuance upon the exercise of the Warrant
such number of its authorized but
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unissued shares of Common Stock as will be sufficient to permit the exercise in
full of the Warrant. All shares of Common Stock issuable pursuant to the terms
hereof, when issued upon exercise of this Warrant with payment therefor in
accordance with the terms hereof, shall be duly and validly issued and fully
paid and nonassessable, not subject to preemptive rights and shall be free and
clear of all Liens. Before taking any action that would result in an adjustment
in the number of shares of Common Stock for which this Warrant is exercisable or
in the Exercise Price, the Company shall obtain all such authorizations or
exemptions thereof, or consents thereto, as may be necessary from any public
regulatory body or bodies having jurisdiction over such action.
7. NOTICE OF CORPORATE ACTIONS, TAKING OF RECORD, TRANSFER BOOKS
7.1 Notices of Corporate Actions. In the event of: (a) any taking
by the Company of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend or distribution, or any right to subscribe for, purchase or otherwise
acquire any shares of capital stock of any class or any other securities, (b)
any capital reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company or any consolidation or
merger involving the Company and any other Person in which the Company is not
the surviving corporation or in which there is any change in, or distribution
with respect to the Outstanding Common Stock of the Company, or any transfer or
other disposition of all or substantially all the assets of the Company to
another Person or (c) any voluntary or involuntary dissolution, liquidation or
winding-up of the Company, (d) any amendment of the Certificate of Incorporation
of the Company, (e) any registration or public offering of Common Stock, or (f)
any Qualifying Business Combination or Qualifying IPO, the Company shall provide
the Holder in accordance with the provisions of Section 15.2 hereof a notice
specifying (i) the date or expected date on which any such record is to be taken
for the purpose of such dividend, distribution or right, and the amount or
expected amount and character or expected character of such dividend,
distribution or right and (ii) the date or expected date on which any such
reorganization, reclassification, recapitalization, consolidation, merger,
transfer, disposition, dissolution, liquidation or winding-up is to take place,
the time or expected time, if any such time is to be fixed, as of which the
holders of record of Common Stock shall be entitled to exchange their shares of
Common Stock for the securities or Other Property deliverable upon such
reorganization, reclassification, recapitalization, consolidation, merger,
transfer, disposition, dissolution, liquidation or winding-up and a description
in reasonable detail of the transaction as known to such date. Such notice shall
be provided to the extent practicable at least thirty (30), but not more than
ninety (90) days prior to the date therein specified. After any initial public
offering, in the event that the Company at any time sends any other Notice to
the holders of its Common Stock, it shall concurrently send a copy of such
notice to the Holder.
7.2 Taking of Record. In the case of all dividends or other
distributions by the Company to the holders of its Common Stock with respect to
which any provision of any Section hereof refers to the taking of a record of
such holders, unless it abandons the dividend or distribution, the Company will
in each such case take such a record and will take such record as of the close
of business on a Business Day.
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7.3 Closing of Transfer Books. The Company shall not at any time,
except upon dissolution, liquidation or winding up of the Company, close its
stock transfer books so as to result in preventing or delaying the exercise or
transfer of any Warrant.
7.4 Application. The provisions of this Section 7 shall terminate
upon exercise of the Warrant.
8. TRANSFER RESTRICTIONS
The Holder, by acceptance of this Warrant, agrees to be bound by
the provisions of this Section 8.
8.1 Restrictions on Transfers. This Warrant shall not be
Transferred by the Holder to any Person other than a Subsidiary which shall be
entitled to the benefits hereof and shall execute an instrument in form
reasonably satisfactory to the Company accepting the obligations of the Holder
hereunder. If at any time, the Subsidiary shall cease to be a Subsidiary of the
Holder, the Subsidiary shall re-transfer the Warrant to the Holder. No shares of
Restricted Common Stock issued upon the exercise hereof shall be Transferred
other than pursuant to an effective registration statement under the Securities
Act or an exemption from the registration provisions thereof. No Transfer of any
such shares of Restricted Common Stock other than pursuant to such an effective
registration statement shall be valid or effective unless (a) the holder of the
securities proposed to be transferred shall have delivered to the Company either
a no-action letter from the Commission or an Opinion of Counsel to the effect
that such proposed Transfer is exempt from the registration requirements of the
Securities Act or (b) such Transfer is being made pursuant to Rule 144 or Rule
144A under the Securities Act and such holder shall have delivered to the
Company a certificate setting forth the basis for applying such Rule to the
proposed Transfer. Each certificate, if any, evidencing such shares of
Restricted Common Stock issued upon any such Transfer, other than in a public
offering pursuant to an effective registration statement, shall bear the
restrictive legend set forth in Section 8.2(a), unless the Holder delivers to
the Company an Opinion of Counsel to the effect that such legend is not required
for the purposes of compliance with the Securities Act. Holders of the
Restricted Common Stock shall not be entitled to Transfer such Restricted Common
Stock except in accordance with this Section 8.1.
8.2 Restrictive Legends. Except as otherwise provided in this
Section 8, each certificate for Warrant Stock initially issued upon the exercise
of this Warrant, and each certificate for Warrant Stock issued to any subsequent
transferee of any such certificate, shall be stamped or otherwise imprinted with
a legend in substantially the following form:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE
SECURITIES LAW. NO TRANSFER OF THE SHARES REPRESENTED BY THIS
CERTIFICATE SHALL BE VALID OR EFFECTIVE UNLESS (A) SUCH TRANSFER IS MADE
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR (B) THE
HOLDER OF THE SECURITIES PROPOSED TO BE TRANSFERRED SHALL HAVE DELIVERED
TO THE COMPANY AN
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OPINION OF COUNSEL EXPERIENCED IN SECURITIES MATTERS TO THE EFFECT THAT
SUCH PROPOSED TRANSFER IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF
THE ACT OR (C) SUCH TRANSFER IS PURSUANT TO RULE 144 OR RULE 144A UNDER
THE ACT AND SUCH HOLDER(S) SHALL HAVE DELIVERED TO THE COMPANY A
CERTIFICATE SETTING FORTH THE BASIS FOR APPLYING SUCH RULE TO THE
PROPOSED TRANSFER.
8.3 Termination of Securities Law Restrictions. Notwithstanding
the foregoing provisions of this Section 8, the restrictions imposed by Section
8.1 upon the transferability of the Restricted Common Stock and the legend
requirements of Section 8.2 shall terminate as to any particular shares of
Restricted Common Stock when the Company shall have received from the Holder
thereof an Opinion of Counsel to the effect that such legend is not required in
order to ensure compliance with the Securities Act.
Wherever the restrictions imposed by this Section shall terminate as to any
share of Restricted Common Stock, as hereinabove provided, the Holder thereof
shall be entitled to receive from the Company, at the Company's expense, a new
certificate representing such Common Stock not bearing the restrictive legend
set forth in Section 8.2(a).
9. REGISTRATION RIGHTS
9.1 Certain Definitions. For the purposes of this Section 9:
(a) "Warrant Stock" shall be deemed to include not only shares of
Common Stock already included in the general definition of such term,
but also (i) any other securities issued as (or issuable upon the
conversion or exercise of any warrant, right or other security which is
issued as) a dividend or other distribution with respect to, or in
exchange by the Company generally for, or in replacement by the Company
generally of, any shares of Warrant Stock and (ii) any securities issued
in exchange for any such Warrant Stock in any merger or reorganization
of the Company or other Qualifying Business Combination, but (A) in
either such case only so long as such securities have not been
registered and Transferred pursuant to the Securities Act or Transferred
in a transaction exempt from the registration and prospectus delivery
requirements of the Securities Act so that all transfer restrictions and
restrictive legends with respect to such securities are removed in
connection with such Transfer and (B) in case of clause (ii), shall be
limited for purposes of Section 9 to no greater registration rights than
are held, directly or indirectly, immediately after a merger,
consolidation or Qualifying Business Combination by Paradyne Partners,
L.P., a Delaware limited partnership, and/or its Affiliates (it being
understood that if Paradyne Partners, L.P. and/or its Affiliates shall
have no such rights, this Section 9 shall terminate upon consummation of
such merger or reorganization or other Qualifying Business Combination).
(b) The Holder shall be deemed to "hold", as of any specified
date, the aggregate of (i) the number of shares of Warrant Stock held by
the Holder as of such date plus (ii) the number of shares of Warrant
Stock issuable upon exercise of the Warrant as of such date.
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(c) The total number of shares of Warrant shock deemed
"outstanding" as of a specified date will be equal to (i) the total
number of shares of Warrant Stock Outstanding as of such date plus (ii)
the number of shares of Warrant Stock issuable upon exercise of the
Warrant as of such date.
(d) "Registrable Securities" shall mean any shares of Warrant
Stock issued or issuable upon exercise of Warrants.
9.2 Demand Registration. (a) In the event that at any time
commencing one year after the consummation of an initial public offering of
Common Stock by the Company, the Company receives a written request from the
Holder (the "Demanding Holder") that the Company file a registration statement
under the Securities Act for the sale or other disposition of Registrable
Securities (a "Demand Registration"), the Company shall take the actions set
forth in this Section 9.2.
(b) Following receipt of such a request for a Demand
Registration, the Company shall:
(1) File the requested registration statement with the
Commission as promptly as practicable, and shall use the Company's best
efforts to have the registration declared effective under the Securities
Act as soon as reasonably practicable, in each instance giving due
regard to the need to prepare current financial statements, conduct due
diligence and complete other actions that are reasonably necessary to
effect a registered public offering; and
(2) Use the Company's best efforts to keep the such
registration statement Continuously Effective for up to 270 days or
until such earlier date as of which all Registrable Securities covered
by such registration statement shall have been disposed of in the manner
described in the registration statement. Notwithstanding the foregoing,
if for any reason the effectiveness of a Demand Registration is
suspended or postponed as permitted by Subsection (d) below, the
foregoing period shall be extended by the aggregate number of days of
such suspension or postponement.
(c) The Company shall not be required to effect a registration of
Registrable Securities pursuant to a Demand Registration: (i) on more than one
occasion or (ii) at any time within six months after the effective date of any
registration statement filed by the Company under the Securities Act for any
offering of Common Stock (other than a registration statement on Form S-4 or
Form S-8 or any successor forms). For purposes of this Subsection (c),
registration shall not be deemed to have been effected (i) unless a registration
statement with respect thereto has become effective, (ii) if after such
registration statement has become effective, such registration or the related
offer, sale or distribution of Registrable Securities thereunder is interfered
with by any stop order, injunction or other order or requirement of the
Commission or other governmental agency or court for any reason not attributable
to the Selling Holder and such interference is not thereafter eliminated or
(iii) if any condition to closing specified in the underwriting agreement with
regard to the absence of a material adverse change in the business, condition,
operations or prospects (or items of similar import) of the Company entered into
in connection with such registration is not satisfied or waived. If the Company
shall
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have complied with its obligations under this Section 9, a right to demand
a registration pursuant to this Section 9.2 shall be deemed to have been
satisfied upon the earlier of (x) the date as of which all of the Registrable
Securities included therein shall have been disposed of pursuant to the
registration statement and (y) the date as of which such Demand Registration
shall have been Continuously Effective for a period of 270 days, provided no
stop order or similar order, or proceedings for such an order, is thereafter
entered or initiated.
(d) The Company shall be entitled to postpone for up to 90 days
the filing of any Demand Registration statement otherwise required to be
prepared and filed pursuant to this Section 9.2, if the Board of Directors of
the Company determines, in its good faith reasonable judgment (with the
concurrence of the managing underwriter, if any), that such registration and the
Transfer of Warrant Stock contemplated thereby would materially interfere with,
or require premature disclosure of, any financing, acquisition or reorganization
involving the Company or any of its wholly owned subsidiaries and the Company
promptly gives the Demanding Holder notice of such determination; provided,
however, that the Company shall not have postponed pursuant to this Subsection
(d) the filing of any other Demand Registration statement otherwise required to
be prepared and filed pursuant to this Section 9.2 during the 12 month period
ended on the date of the relevant request pursuant to Subsection (a) above.
(e) A registration pursuant to this Section 9.2 shall be on such
appropriate registration form of the Commission as shall (i) be selected by the
Company and be reasonably acceptable to the Selling Holder and (ii) permit the
disposition of the Warrant Stock in accordance with the intended method or
methods of disposition specified in the request made pursuant to Subsection (a)
above. If any registration pursuant to this Section 9.2 involves an underwritten
offering (whether on a "firm", "best efforts or "all reasonable efforts" basis
or otherwise), or an agented offering, the Selling Holder shall have the right
to select the underwriter or underwriters and manager or managers to administer
such underwritten offering or the placement agent or agents for such agented
offering; provided, however, that each Person so selected shall be reasonably
acceptable to the Company.
9.3 Piggyback Registration. (a) If at any time the Company
proposes to register (including for this purpose a registration effected by the
Company for shareholders of the Company other than the Holder) securities under
the Securities Act in connection with the public offering solely for cash on
Form S-1, S-2 or S-3 (or any replacement or successor forms), the Company shall
promptly give the Holder written notice of such registration (a "Piggyback
Registration"). Upon the written request of the Holder given within 20 days
following the date of such notice, the Company shall cause to be included in
such registration statement and use its best efforts to be registered under the
Securities Act all the Registrable Securities that the Holder shall have
requested to be registered; provided, however, that such right of inclusion
shall not apply to any registration statement covering an underwritten offering
of convertible debt securities, unless the managing underwriter expressly
consents thereto. The Company shall have the absolute right to withdraw or cease
to prepare or file any registration statement for any offering referred to in
this Section 9.3 without any obligation or liability to the Holder.
(b) If the managing underwriter shall advise the Company in
writing (with a copy to the Selling Holder) that, in its opinion, the amount or
type of Registrable Securities requested to be included in such registration
would materially adversely affect such offering, or
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the timing thereof, then the Company will include in such registration, to the
extent of the amount and type which the Company is so advised can be sold
without such material adverse effect in such offering: First, all securities
proposed to be sold by the Company for its own account; second, the Warrant
Stock requested to be included in such registration by the Holder pursuant to
this Section 9.3, and all other securities being registered pursuant to the
exercise of contractual rights comparable to the rights granted in this Section
9.3, pro rata based on the estimated gross proceeds from the sale thereof; and
third, all other securities requested to be included in such registration.
(c) The Holder shall be entitled to have its Registrable
Securities included in an unlimited number of Piggyback Registrations pursuant
to this Section 9.3.
9.4 Registration Procedures. Whenever required under Section 9.2
or Section 9.3 hereof to effect the registration of any Registrable Securities,
the Company shall, as expeditiously as practicable:
(a) Prepare and file with the Commission a registration statement
with respect to such Registrable Securities and use the Company's best efforts
to cause such registration statement to become effective; provided, however,
that before filing a registration statement or prospectus or any amendments or
supplements thereto, including documents incorporated by reference after the
initial filing of the registration statement and prior to effectiveness thereof,
the Company shall furnish to counsel for the Holder copies of all such documents
in the form substantially as proposed to be filed with the Commission prior to
filing for review and comment by such counsel.
(b) Prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Securities Act and rules thereunder with respect to the
disposition of all securities covered by such registration statement. If the
registration is for an underwritten offering, the Company shall amend the
registration statement or supplement the prospectus whenever required by the
terms of the underwriting agreement entered into pursuant to Section 9.4(f). In
the event that any Registrable Securities included in a registration statement
subject to, or required by, this Agreement remain unsold at the end of the
period during which the Company is obligated to use its best efforts to maintain
the effectiveness of such registration statement, the Company may file a
post-effective amendment to the registration statement for the purpose of
removing such Registrable Securities from registered status.
(c) Furnish to the Selling Holder of Registrable Securities,
without charge, such numbers of copies of the registration statement, any
pre-effective or post-effective amendment thereto, the prospectus, including
each preliminary prospectus and any amendments or supplements thereto, in each
case in conformity with the requirements of the Securities Act and the rules
thereunder, and such other related documents as such Selling Holder may
reasonably request in order to facilitate the disposition of Registrable
Securities owned by such Selling Holder.
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(d) Use the Company's best efforts (i) to register and qualify
the securities covered by such registration statement under such other
securities or Blue Sky laws of such states or jurisdictions as shall be
reasonably requested by the managing underwriter (as applicable, or if
inapplicable, the Selling Holder), and (ii) to obtain the withdrawal of any
order suspending the effectiveness of a registration statement, or the lifting
of any suspension of the qualification (or exemption from qualification) of the
offer and transfer of any of the Registrable Securities in any jurisdiction, at
the earliest possible moment; provided, however, that the Company shall not be
required in connection therewith or as a condition thereto to qualify to do
business or to file a general consent to service of process in any such states
or jurisdictions.
(e) In the event of any underwritten or agented offering, enter
into and perform the Company's obligations under an underwriting or agency
agreement (including indemnification and contribution obligations of
underwriters or agents), in usual and customary form, with the managing
underwriter or underwriters of or agents for such offering. The Company shall
also cooperate with the Selling Holder and the managing underwriter for such
offering in the marketing of the Warrant Stock, including making available the
Company's officers, accountants, counsel, premises, books and records for such
purpose, but the Company shall not be required to incur any material
out-of-pocket expense pursuant to this sentence.
(f) Promptly notify the Selling Holder of any stop order issued
or threatened to be issued by the Commission in connection therewith (and take
all reasonable actions required to prevent the entry of such stop order or to
remove it if entered).
(g) Make generally available to the Company's security holders
copies of all periodic reports, proxy statements, and other information referred
to in Section 9.9(a) and an earnings statement satisfying the provisions of
Section 11(a) of the Securities Act no later than 90 days following the end of
the 12-month period beginning with the first month of the Company's first fiscal
quarter commencing after the effective date of each registration statement filed
pursuant to this Section 9.
(h) Make available for inspection by the Selling Holder, any
underwriter participating in such offering and the representatives of such
Selling Holder and underwriter, all financial and other information as shall be
reasonably requested by them, and provide the Selling Holder, any underwriter
participating in such offering and the representatives of the Selling Holder and
underwriter the opportunity to discuss the business affairs of the Company with
its principal executives and independent public accountants who have certified
the audited financial statements included in such registration statement, in
each case all as necessary to enable them to exercise their due diligence
responsibility under the Securities Act; provided, however, that information
that the Company determines, in good faith, to be confidential and which the
Company advises such Person in writing, is confidential shall not be disclosed
unless such Person signs a confidentiality agreement reasonably satisfactory to
the Company or the Selling Holder of Registrable Securities agrees to be
responsible for such Person's breach of confidentiality on terms reasonably
satisfactory to the Company.
(i) Use the Company's best efforts to obtain a so-called "comfort
letter" from its independent public accountants, and legal opinions of counsel
to the Company addressed to the Selling Holder, in customary form and covering
such matters of the type customarily covered
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by such letters, and in a form that shall be reasonably satisfactory to the
Selling Holder. The Company shall furnish to the Selling Holder a signed
counterpart of any such comfort letter or legal opinion. Delivery of any such
opinion or comfort letter shall be subject to the recipient furnishing such
written representations or acknowledgements as are customarily provided by
selling shareholders who receive such comfort letters or opinions.
(j) Provide and cause to be maintained a transfer agent and
registrar for all Registrable Securities covered by such registration statement
from and after a date not later than the effective date of such registration
statement.
(k) Use all reasonable efforts to cause the Registrable
Securities covered by such registration statement (i) if the Common Stock is
then listed on a securities exchange or included for quotation in a recognized
trading market, to continue to be so listed or included for a reasonable period
of time after the offering, and (ii) to be registered with or approved by such
other United States or state governmental agencies or authorities as may be
necessary by virtue of the business and operations of the Company to enable the
Selling Holder of Registrable Securities to consummate the disposition of such
Registrable Securities.
(l) Use the Company's reasonable efforts to provide a CUSIP
number for the Common Stock prior to the effective date of the first
registration statement including Registrable Securities.
(m) Take such other actions as are reasonably required in order
to expedite or facilitate the disposition of Registrable Securities included in
each such registration.
9.5 Selling Holder's Obligations. It shall be a condition
precedent to the obligations of the Company to take any action pursuant to this
Section 9 with respect to the Registrable Securities of the Selling Holder that
such Selling Holder shall:
(a) Furnish to the Company such information regarding such
Selling Holder, the number of Registrable Securities owned by it, and the
intended method of disposition of such securities as shall be required to effect
the registration of such Selling Holders Registrable Securities, and to
cooperate with the Company in preparing such registration;
(b) Agree to sell their Registrable Securities to the
underwriters at the same price and on substantially the same terms and
conditions as the Company or the other Persons on whose behalf the registration
statement was being filed have agreed to sell their securities, and to execute
the underwriting agreement agreed to by such Selling Holder (in the case of a
registration under Section 9.2) or the Company (in the case of a registration
under Section 9.3).
9.6 Expenses of Registration. Expenses incurred in connection
with registrations under this Section 9 shall be allocated and paid as follows:
(a) With respect to a Demand Registration, the Company shall bear
and pay all expenses incurred in connection with any registration, filing, or
qualification of Registrable Securities with respect to such Demand Registration
for the Selling Holder, including all registration, filing and NASD fees, all
fees and expenses of complying with securities or blue sky laws, all word
processing, duplicating and printing expenses, messenger and delivery
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expenses, the reasonable fees and disbursements of counsel for the Company, and
of the Company's independent public accountants, including the expenses of "cold
comfort" letters required by or incident to such performance and compliance, and
the reasonable fees and disbursements of one firm of counsel for the Selling
Holder of Registrable Securities in an amount not to exceed $25,000 (the
"Registration Expenses"), but excluding underwriting discounts and commissions
relating to Registrable Securities provided, however, that the Company shall not
be required to pay for any expenses of any registration proceeding begun
pursuant to Section 9.2 if the registration is subsequently withdrawn at the
request of the Selling Holder (in which case the Selling Holder shall bear such
expense), unless the Holder agrees that such withdrawn registration shall
constitute the exercise of its one demand registration under Section 9.2 hereof.
(b) The Company shall bear and pay all Registration Expenses
incurred in connection with any Piggyback Registrations pursuant to Section 9.3
for the Selling Holder, but excluding underwriting discounts and commissions
relating to Registrable Securities (which shall be paid on a pro rata basis by
the Selling Holder of Registrable Securities).
(c) Any failure of the Company to pay any Registration Expenses
as required by this Section 9.6 shall not relieve the Company of its obligations
under this Section 9.
9.7 Indemnification; Contribution. If any Registrable Securities
are included in a registration statement under this Section 9:
(a) To the extent permitted by applicable law, the Company shall
indemnify and hold harmless the Selling Holder, each Person, if any, who
controls such Selling Holder within the meaning of the Securities Act, and each
officer, director, partner, and employee of such Selling Holder and such
controlling Person, against any and all losses, claims, damages, liabilities and
expenses (joint or several), including attorneys' fees and disbursements and
expenses of investigation, incurred by such party pursuant to any actual or
threatened action, suit, proceeding or investigation, or to which any of the
foregoing Persons may become subject under the Securities Act, the Exchange Act
or other federal or state laws, insofar as such losses, claims, damages,
liabilities and expenses arise out of or are based upon any of the following
statements, omissions or violations (collectively a "Violation"):
(i) Any untrue statement or alleged untrue statement of a
material fact contained in such registration statement, including
any preliminary prospectus or final prospectus contained therein,
or any amendments or supplements thereto;
(ii) The omission or alleged omission to state in such
registration statement, including any preliminary prospectus or
final prospectus contained therein, or any amendments or
supplements thereto, a material fact required to be stated
therein, or necessary to make the statements therein not
misleading; or
(iii) Any violation or alleged violation by the Company of
the Securities Act, the Exchange Act, any applicable state
securities law or any rule or regulation promulgated under the
Securities Act, the Exchange Act or any applicable state
securities law in connection with such registration statement,
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including any preliminary prospectus or final prospectus
contained therein, or any amendments or supplements thereto;
provided, however, that the indemnification required by this Section 9.7(a)
shall not apply to amounts paid in settlement of any such loss, claim, damage,
liability or expense if such settlement is effected without the consent of the
Company (which consent shall not be unreasonably withheld), nor shall the
Company be liable in any such case for any such loss, claim, damage, liability
or expense to the extent that it has solely arisen out of or is based upon a
Violation which occurred in reliance upon and in conformity with written
information furnished to the Company by the indemnified party expressly for use
in connection with such registration; provided, further, that the indemnity
agreement contained in this Section 9.7(a) shall not apply to any underwriter to
the extent that any such loss is based on or arises out of an untrue statement
or alleged untrue statement of a material fact, or an omission or alleged
omission to state a material fact, contained in or omitted from any preliminary
prospectus if the final prospectus shall correct such untrue statement or
alleged untrue statement, or such omission or alleged omission, and a copy of
the final prospectus has not been sent or given to such person at or prior to
the confirmation of sale to such person if such underwriter was under an
obligation to deliver such final prospectus and failed to do so. The Company
shall also indemnify underwriters, selling brokers, dealer managers and similar
securities industry professionals participating in the distribution, their
officers, directors, agents and employees and each person who controls such
persons (within the meaning of Section 15 of the Securities Act or Section 20 of
the Exchange Act) to the same extent as provided above with respect to the
indemnification of the Selling Holder.
(b) To the extent permitted by applicable law, the Selling Holder
shall indemnify and hold harmless the Company, each of its directors, each of
its officers who shall have signed the registration statement, and each Person,
if any, who controls the Company within the meaning of the Securities Act,
against any and all losses, claims, damages, liabilities and expenses (joint and
several), including attorneys' fees and disbursements and expenses of
investigation, incurred by such party pursuant to any actual or threatened
action, suit, proceeding or investigation, or to which any of the foregoing
Persons may otherwise become subject under the Securities Act, the Exchange Act
or other federal or state laws, to the extent that such losses, claims, damages,
liabilities and expenses have solely arisen out of or are based upon a Violation
that occurred in reliance upon and in conformity with written information
furnished by such Selling Holder expressly for use in connection with such
registration, provided, however, that (x) the indemnification required by this
Section 9.7(b) shall not apply to amounts paid in settlement of any such loss,
claim, damage, liability or expense if settlement is effected without the
consent of the Selling Holder of Registrable Securities, which consent shall not
be unreasonably withheld, and (y) in no event shall the amount of any indemnity
under this Section 9.7(b) exceed the net proceeds from the applicable offering
received by such Selling Holder.
(c) Promptly after receipt by an indemnified party under this
Section 9.7 of notice of the commencement of any action, suit, proceeding,
investigation or threat thereof made in writing for which such indemnified party
may make a claim under this Section 9.7, such indemnified party shall deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the
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indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties. The failure to deliver written notice to the
indemnifying party within a reasonable time following the commencement of any
such action, if prejudicial to its ability to defend such action, shall relieve
such indemnifying party of any liability to the indemnified party under this
Section 9.7 but shall not relieve the indemnifying party of any liability that
it may have to any indemnified party otherwise than pursuant to this Section
9.7. Any fees and expenses incurred by the indemnified party (including any fees
and expenses incurred in connection with investigating or preparing to defend
such action or proceeding) shall be paid to the indemnified party, as incurred,
within thirty (30) days of written notice thereof to the indemnifying party
(regardless of whether it is ultimately determined that an indemnified party is
not entitled to indemnification hereunder). Any such indemnified party shall
have the right to employ separate counsel in any such action, claim or
proceeding and to participate in the defense thereof, but the fees and expenses
of such counsel shall be the expenses of such indemnified party unless (i) the
indemnifying party has agreed to pay such fees and expenses or (ii) the
indemnifying party shall have failed to promptly assume the defense of such
action, claim or proceeding or (iii) the named parties to any such action, claim
or proceeding (including any impleaded parties) include both such indemnified
party and the indemnifying party, and such indemnified party shall have been
advised by counsel that there may be one or more legal defenses available to it
which are different from or in addition to those available to the indemnifying
party and that the assertion of such defenses would create a conflict of
interest such that counsel employed by the indemnifying party could not
faithfully represent the indemnified party (in which case, if such indemnified
party notifies the indemnifying party in writing that it elects to employ
separate counsel at the expense of the indemnifying party, the indemnifying
party shall not have the right to assume the defense of such action, claim or
proceeding on behalf of such indemnified party, it being understood, however,
that the indemnifying party shall not, in connection with any one such action,
claim or proceeding or separate but substantially similar or related actions,
claims or proceedings in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the reasonable fees and expenses of
more than one separate firm of attorneys (together with appropriate local
counsel) at any time for all such indemnified parties, unless in the reasonable
judgment of such indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
action, claim or proceeding, in which event the indemnifying party shall be
obligated to pay the fees and expenses of such additional counsel or counsels).
No indemnifying party shall be liable to an indemnified party for any settlement
of any action, proceeding or claim without the written consent of the
indemnifying party, which consent shall not be unreasonably withheld.
(d) If the indemnification required by this Section 9.7 from the
indemnifying party is unavailable to an indemnified party hereunder in respect
of any losses, claims, damages, liabilities or expenses referred to in this
Section 9.7:
(i) The indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable
by such indemnified party as a result of such losses, claims,
damages, liabilities or expenses in such proportion as is
appropriate to reflect the relative fault of the indemnifying
party and indemnified parties in connection with the actions
which resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable
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<PAGE> 30
considerations. The relative fault of such indemnifying party
and indemnified parties shall be determined by reference to,
among other things, whether any Violation has been committed by,
or relates to information supplied by, such indemnifying party
or indemnified parties, and the parties' relative intent,
knowledge, access to information and opportunity to correct or
prevent such Violation. The amount paid or payable by a party as
a result of the losses, claims, damages, liabilities and
expenses referred to above shall be deemed to include, subject
to the limitations set forth in Section 9.7(a) and Section
9.7(b), any legal or other fees or expenses reasonably incurred
by such party in connection with any investigation or
proceeding.
(ii) The parties hereto agree that it would not be just
and equitable if contribution pursuant to this Section 9.7(d)
were determined by pro rata allocation or by any other method of
allocation which does not take into account the equitable
considerations referred to in Section 9.7(d)(i) above. No Person
guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to
contribution from any Person who was not guilty of such
fraudulent misrepresentation.
(e) If indemnification is available under this Section 9.7, the
indemnifying parties shall indemnify each indemnified party to the full extent
provided in this Section 9.7 without regard to the relative fault of such
indemnifying party or indemnified party or any other equitable consideration
referred to in Section 9.7(d) above.
(f) The indemnification required by this Section 9.7 shall be
made by periodic payments of the amount thereof during the course of the
investigation or defense, as and when bills are received or expense, loss,
damage or liability is incurred.
(g) The obligations of the Company and the Selling Holder of
Registrable Securities under this Section 9.7 shall survive the completion of
any offering of Registrable Securities pursuant to a registration statement
under this Section 9, and otherwise.
9.8 Holdback. The Holder entitled pursuant to this Section 9 to
have Registrable Securities included in a registration statement prepared
pursuant to this Section 9, if so requested by the managing underwriter in
connection with an offering of any Registrable Securities, shall not effect any
public sale or distribution of shares of Common Stock, Convertible Securities or
Stock Purchase Rights (excluding any sale pursuant to Rule 144 or Rule 144A
under the Securities Act and any sale as part of such underwritten or agented
registration), during the 5-day period prior to, and during the 90-day (or in
the case of an initial public offering of the Company's Common Stock, 180-day)
period beginning on, the date such registration statement is declared effective
under the Securities Act by the Commission, provided that such Holder is timely
notified of such effective date in writing by the Company or such managing
underwriter.
9.9 Additional Covenants of the Company. The Company hereby
agrees and covenants as follows:
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(a) The Company shall file as and when applicable, on a timely
basis, all reports required to be filed by it under the Exchange Act. In
addition, promptly upon the request of the Holder, the Company shall provide the
Holder with such financial statements, reports and other information as may be
required to permit the Holder to Transfer shares of Registrable Securities to
Qualified Institutional Investors pursuant to Rule 144A of the Securities Act.
(b) The Company shall not, directly or indirectly, (x) enter into
any merger, consolidation or reorganization in which the Company shall not be
the surviving corporation or (y) Transfer or agree to Transfer all or
substantially all the Company's assets, unless prior to such merger,
consolidation, reorganization or asset Transfer, the surviving corporation or
the Transferee, respectively, shall have agreed in writing to assume the
obligations of the Company under this Agreement, limited as provided in Section
9.1(a) and for that purpose references hereunder to "Registrable Securities"
shall be deemed to include the securities which the Holder would be entitled to
receive in exchange for Registrable Securities pursuant to any such merger,
consolidation or reorganization.
10. LOSS OR MUTILATION
Upon receipt by the Company from the Holder of evidence
reasonably satisfactory to it of the ownership of and the loss, theft,
destruction or mutilation of this Warrant and an indemnity reasonably
satisfactory to it (it being understood that the written indemnification
agreement of or affidavit of loss of Lucent Technologies Inc. shall be a
sufficient indemnity) and, in case of mutilation, upon surrender and
cancellation hereof, the Company will execute and deliver in lieu hereof a new
Warrant of like tenor to such Holder; provided, however, in the case of
mutilation, no indemnity shall be required if this Warrant in identifiable form
is surrendered to the Company for cancellation.
11. OFFICE OF THE COMPANY
As long as any of the Warrants remain outstanding, the Company
shall maintain an office or agency, which may be the principal executive offices
of the Company (the "Designated Office"), where the Warrants may be presented
for exercise, registration of transfer, division or combination as provided in
this Warrant. Such Designated Office shall initially be the office of the
Company at 8545 126 Avenue North, Largo, Florida 33773, Attention: President.
The Company may from time to time change the Designated Office to another office
of the Company or its agent within the United States by notice given to the
registered holder of Warrants at least ten (10) Business Days prior to the
effective date of such change.
12. FINANCIAL AND BUSINESS INFORMATION
(a) Until the Expiration Date or the Closing of an initial public
offering of the Common Stock, whichever first occurs, the Company shall deliver
to the Holder one copy of each of the following items:
(i) as soon as available, and in any event within
forty-five (45) days after the end of each of the first three
quarters of each fiscal year, unaudited interim consolidated
balance sheets of the Company and its Subsidiaries as at the end
of such quarter and the related consolidated statements of
income, of the
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Company and its Subsidiaries as at the end of and for such
quarter, setting forth in each case in comparative form the
corresponding figures for and as at the end of the corresponding
quarter of the preceding fiscal year, all in reasonable detail
and certified by a principal financial officer of the Company,
as prepared in accordance with generally accepted accounting
principles consistently applied (subject to year end adjustments
and the absence of footnotes), and fairly presenting the
consolidated financial position and results of operations of the
Company and its Subsidiaries for such periods;
(ii) within ninety (90) days after the end of each fiscal
year of the Company, consolidated balance sheets of the Company
and its Subsidiaries as at the end of such year and the related
consolidated statements of income, stockholders' equity and
changes in financial position of the Company and its Subsidiaries
for such fiscal year, setting forth in each case in comparative
form the consolidated figures for the previous fiscal year, all
in reasonable detail and accompanied by a report thereon of
independent public accountants of recognized national standing
selected by the Company, which report shall state that such
consolidated financial statements present fairly the financial
position of the Company and its Subsidiaries as at the dates
indicated and the results of their operations and changes in
their financial position for the periods indicated in conformity
with generally accepted accounting principles applied on a basis
consistent with prior years (except as otherwise specified in
such report) and that the audit by such accountants in connection
with such consolidated financial statements has been made in
accordance with generally accepted auditing standards or such
other similar language as in then in general usage by independent
public accountants;
(iii) promptly upon their becoming available, copies of
all financial statements, reports, notices and proxy statements
sent or made available by the Company to the holders of any class
of its securities generally or by any Subsidiary of the Company
to the holders of any class of its securities generally; and
(iv) with reasonable promptness, such other information
relating to the Company and its Subsidiaries as the Holder may,
from time to time, reasonably request.
(b) Until the closing of an initial public offering of the Common
Stock, the Holder will keep confidential and not use for any purpose except to
evaluate the status of its investment any such information which has not
previously been made publicly available.
13. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to the Holder as
follows:
13.1 Organization. As of the Original Issue Date and as of the
date of issuance of this Warrant (if different from the Original Issue Date),
the Company was a corporation duly
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organized, validly existing and in good standing under the laws of the State of
Delaware, with all requisite power to own its properties and assets and to
conduct its business as then conducted, and was duly qualified as a foreign
corporation and was in good standing in all other jurisdictions in which such
qualification was then required.
13.2 Capitalization. (a) As of the Original Issue Date, the
Company authorized capital stock consisted of: (i) 4,000,000 shares of Common
Stock, of which 850,000 shares were issued and outstanding and 150,000 shares
were reserved for issuance upon exercise of the Original Warrant, and (ii)
1,000,000 shares of preferred stock, none of which have been issued or reserved.
All of the outstanding shares of capital stock of the Company have been duly
authorized and validly issued, are fully paid and nonassessable, free of
preemptive rights and have been offered and issued without violation of the
Securities Act or any applicable state securities or blue sky law or any
preemptive rights of any person. As of the Original Issue Date, all of the
issued and outstanding shares of Common Stock of the Company were owned
beneficially and of record by Paradyne Partners, L.P.
(b) As of the Original Issue Date: (i) there were no issued or
outstanding Convertible Securities; (ii) there were no issued or outstanding
Stock Purchase Rights other than the Warrant and options and other stock based
employee incentive awards of a type described in clause (ii) of the definition
of Subsequent Issuance set forth herein; (iii) the Company was not a party to
any agreement or understanding pursuant to which it is obligated to purchase or
redeem any shares of its capital stock or any Convertible Securities or Stock
Purchase Rights and was not otherwise under any obligation to repurchase, redeem
or otherwise acquire any shares of its capital stock or any Convertible
Securities or Stock Purchase Rights; (iv) the Company was not a party to any
agreement or understanding pursuant to which it is obligated to register any
shares of its capital stock or other securities under the Securities Act or any
state securities laws; and (v) to the best knowledge of the Company, no
securities holder of the Company was a party to any agreement providing for any
call or put option, right of first refusal or offer or other right to acquire or
dispose of any shares of the Company's capital stock or any Convertible
Securities or Stock Purchase Rights.
13.3 Valid Issuance of Warrant and Warrant Stock. (a) This
Warrant has been duly executed and delivered by the Company, has been duly
authorized and validly issued free and clear of all Liens (other than those
caused or created by the Holder), is fully paid and non-assessable, and
constitutes the legal, valid and binding obligation of the Company, enforceable
in accordance with its terms, except as may be limited by bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights generally
and subject to general principles of equity.
(b) The shares of Warrant Stock issuable upon exercise of this
Warrant have been duly authorized and reserved for issuance and, when issued in
accordance with the terms of this Warrant, will be validly issued, fully paid
and non-assessable, free and clear of all liens, encumbrances, equities and
claims and without violation of any preemptive rights.
13.4 Authority. As of the date of issuance of this Warrant, the
Company had full legal right, power and authority to issue this Warrant and to
perform all its obligations hereunder. The execution, delivery and performance
of this Warrant by the Company have all
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been duly authorized by the Board of Directors of the Company and, where
required, the shareholders of the company. As of the date of issuance of this
Warrant, no consent, waiver or authorization of, or filing with any other Person
(including without limitation, any Governmental Authority) is required in
connection with any of the foregoing or the validity or enforceability against
the Company of this Warrant;
13.5 No Conflict. The execution, delivery and performance of this
Warrant do not and will not, with or without the passage of time or the giving
of notice or both, (i) conflict with or violate any provision of the Company's
Certificate of Incorporation, By-laws or Contractual Obligation, (ii) conflict
with or violate any Requirement of Law in effect on the date hereof, (iii)
result in, or require, the creation or imposition of any Lien on any of its
properties or revenues pursuant to any Requirement of Law in effect on the date
hereof or (iv) require any action by or in respect of, or filing with, any
governmental body, agency or official as of the date hereof.
13A. REPRESENTATION OF THE HOLDER
By its acceptance of this Warrant, the Holder represents and
warrants that it understands that the Warrant has not been and any Warrant Stock
will not be registered under the Securities Act and each is or will be
characterized as "restricted securities" under the federal securities laws,
inasmuch as it is being acquired from the Company in a transaction not involving
a public offering and that under such laws and applicable regulations the
Warrant and the Warrant Stock may be resold without registration under the
Securities Act only in certain circumstances. In this connection, the Holder
represents and warrants that it is aware of and understands Rule 144 under the
Securities Act, as presently in effect. The Holder further represents and
warrants that it is acquiring the Warrant and the Warrant Stock solely for
investment for its own account and not with the view to, or for resale in
connection with, any distribution thereof and that it understands that the
Warrant and the Warrant Stock has not been registered under the Securities Act
by reason of exemptions therefrom which depend upon, among other things, the
bona fide nature of its investment intent as expressed herein and as explicitly
acknowledged hereby.
14. RELATED PARTY TRANSACTIONS
So long as this Warrant remains outstanding, until the initial
public offering of the Company's Common Stock, the Company shall not, nor shall
it permit any of its subsidiaries to, 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 the Company as would be obtainable
in a comparable arm's length transaction with a Person that is not a Related
Party. This Article 14 shall not apply to any issuance by the Company of Common
Stock, Convertible Securities or Stock Purchase Rights that is subject to
Article 4, that is for Fair Value or more or that is excluded from the
definition of Subsequent Issuance.
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15. MISCELLANEOUS
15.1 Nonwaiver. No course of dealing or any delay or failure to
exercise any right hereunder on the part of the Company or the Holder shall
operate as a waiver of such right or otherwise prejudice the rights, powers or
remedies of such Person.
15.2 Notice Generally. Any notice, demand, request, consent,
approval, declaration, delivery or communication hereunder to be made pursuant
to the provisions of this Warrant shall be sufficiently given or made if in
writing and either delivered in person or sent by registered or certified mail,
return receipt requested, postage prepaid, addressed as follows:
(a) if to the Holder of this Warrant or of Warrant Stock issued
upon the exercise hereof, at its last known address appearing on the
books of the Company maintained for such purpose;
(b) if to the Company, at its Designated Office, with a copy to
TPG Partners, L.P., 201 Main Street, Suite 2420, Fort Worth, Texas
76102, Attention: Richard A. Ekleberry.
or at such other address as may be substituted by notice given as herein
provided. The giving of any notice required hereunder may be waived in writing
by the party entitled to receive such notice. Every notice, demand, request,
consent, approval, declaration, delivery or other communication hereunder shall
be deemed to have been duly given or served on the date on which personally
delivered or three (3) Business Days after the same shall have been deposited in
the United States mail, or one (1) Business Day after the same shall have been
delivered to Federal Express or another overnight courier service.
15.3 Indemnification. If the Company fails to make, when due, any
payments or deliveries provided for in this Warrant, the Company shall pay to
the Holder hereof (a) interest at the Agreed Rate on any amounts due and owing
to such Holder and (b) such further amounts as shall be sufficient to cover any
costs and expenses including, but not limited to, reasonable attorneys, fees and
expenses incurred by such Holder in collecting any amounts due hereunder. The
Company shall indemnify, save and hold harmless the Holder hereof and the
Holders of any Warrant Stock issued upon the exercise hereof from and against
any and all reasonable attorneys' and accountants' fees and expenses, court
costs and all other out-of-pocket litigation expenses incurred in connection
with or arising from a Company Default. This indemnification provision shall be
in addition to the rights of such Holder to bring an action against the Company
for breach of contract based on such Company Default.
15.4 Limitation of Liability. No provision hereof, in the absence
of affirmative action by the Holder to purchase shares of Common Stock, and no
enumeration herein of the rights or privileges of the Holder hereof, shall give
rise to any liability of such Holder to pay the Exercise Price for any Warrant
Stock other than pursuant to an exercise of this Warrant or any liability as a
stockholder of the Company, whether such liability is asserted by the Company or
by creditors of the Company.
15.5 Remedies. Each Holder of Warrants and/or Warrant Stock, in
addition to being entitled to exercise its rights granted by law, including
recovery of damages, shall be
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entitled to specific performance of its rights provided under this Warrant. The
Company agrees that monetary damages would not be adequate compensation for any
loss incurred by reason of a breach by it of the provisions of this Warrant and
hereby agrees, in an action for specific performance, to waive the defense that
a remedy at law would be adequate.
15.6 Successors and Assigns. Subject to the provisions of
Sections 8.1 and 8.2, this Warrant and the rights evidenced hereby shall inure
to the benefit of and be binding upon the successors of the Company and the
permitted successors and assigns of the Holder hereof. The provisions of this
Warrant are intended to be for the benefit of the Holder, and shall be
enforceable by such Holder.
15.7 Amendment. This Warrant may be modified or amended or the
provisions hereof waived with the written consent of the Company and the Holder.
15.8 Severability. Wherever possible, each provision of this
Warrant shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Warrant shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Warrant.
15.9 Headings. The headings used in this Warrant are for the
convenience of reference only and shall not, for any purpose, be deemed a part
of this Warrant.
15.10 GOVERNING LAW; JURISDICTION. IN ALL RESPECTS, INCLUDING ALL
MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, THIS WARRANT AND THE
OBLIGATIONS ARISING HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS
MADE AND PERFORMED IN SUCH STATE.
IN WITNESS WHEREOF, the Company has caused this Warrant to be
duly executed and its corporate seal to be impressed hereon and attested by its
Secretary or an Assistant Secretary.
CAP ACQUISITION CORP.
By:
------------------------------
Name:
Title:
[SEAL]
Attest:
By:
------------------------------------
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Name:
Title:
ACKNOWLEDGED AND AGREED TO BY
LUCENT TECHNOLOGIES INC.,
AS HOLDER OF THE FOREGOING WARRANT
By:
-------------------------------------
Name:
Title:
37
<PAGE> 38
ANNEX A
SUBSCRIPTION FORM
[To be executed only upon exercise of Warrant]
The undersigned registered owner of this Warrant irrevocably
exercises this Warrant for the purchase of ______________________ shares Common
Stock of CAP ACQUISITION CORP. and herewith makes payment therefor, all at the
price and on the terms and conditions specified in this Warrant and requests
that certificates for the shares of Common Stock hereby purchased (and any
securities or other property issuable upon such exercise) be issued in the name
of and delivered to ______________________ whose address is
____________________________________________ and, if such shares of Common Stock
shall not include all of the shares of Common Stock issuable as provided in this
Warrant, that a new Warrant of like tenor and date for the balance of the shares
of Common Stock issuable hereunder be delivered to the undersigned. The Holder,
by its exercise of the Warrant, makes the representation set forth in Section
13A. of the Warrant in respect of the Warrant Stock as of the date hereof.
-----------------------------------
(Name of Registered Owner)
-----------------------------------
(Signature of Registered Owner)
-----------------------------------
(Street Address)
-----------------------------------
(City) (State) (Zip Code)
NOTICE: The signature on this subscription must correspond with the name
as written upon the face of the within Warrant in every
particular, without alteration or enlargement or any change
whatsoever.
Dated: ___________, 19__
<PAGE> 39
GLOBESPAN, INC.
CERTIFICATE OF SECRETARY
The undersigned, Robert McMullan, hereby certifies as follows:
1. He is the duly elected, qualified and acting Secretary of
GlobeSpan, Inc., a Delaware corporation (the "Company").
2. The following is a true and correct copy of the amendment to the
warrant held by Lucent Technologies Inc, dated July 31, 1996:
WARRANT. The parties agree that the definition of "Expiration Date" set
forth in SECTION 1 ("DEFINITIONS") of the Warrant to Purchase Common
Stock of CAP Acquisition Corp. (also referred to as Warrant No. 1)
entered into on July 31, 1996, by and between CAP Acquisition Corp. and
Lucent Technologies Inc. shall be deleted in its entirety and replaced
with the following:
"Expiration Date" shall mean the earlier of (i) June 30, 2001, or (ii)
the date on which the Warrant shall be cancelled pursuant to subsection
2.2(d).
IN WITNESS WHEREOF, the undersigned has executed this Certificate
this 27th day of May, 1999.
By: /s/ Robert McMullan
--------------------------------
Robert McMullan, Secretary
<PAGE> 1
EXHIBIT 10.17
TAX MATTERS AGREEMENT
THIS TAX MATTERS AGREEMENT (this "Agreement") is entered into as
of July 31, 1996, by and among LUCENT TECHNOLOGIES INC., a Delaware corporation
("Lucent"), AT&T PARADYNE CORPORATION, a Delaware corporation and a wholly-owned
subsidiary of Lucent ("Paradyne"), PARADYNE PARTNERS, L.P., a Delaware limited
partnership (the "Partnership"), PARADYNE ACQUISITION CORP., a Delaware
corporation and a wholly-owned subsidiary of the Partnership ("PAC"), RENTAL
ACQUISITION CORP., a Delaware corporation and a wholly-owned subsidiary of the
Partnership ("RentalCo"), CAP ACQUISITION CORP., a Delaware corporation and a
wholly-owned subsidiary of the Partnership ("CAPCo"), and LEASE ACQUISITION
CORP., a Delaware corporation and a wholly-owned subsidiary of PAC ("LeaseCo").
The Partnership, PAC, RentalCo, CAPCo and LeaseCo are sometimes referred to
collectively in this Agreement as the "Acquisition Entities." Certain other
capitalized terms used in this Agreement are defined in Exhibit A. Capitalized
terms which are not defined in this Agreement or in Exhibit A shall have the
meanings ascribed to them in the Purchase Agreement.
RECITALS
A. Pursuant to the Purchase Agreement, RentalCo, CAPCo and
LeaseCo are purchasing certain assets from Paradyne, CAPCo is purchasing certain
assets from Lucent, and PAC is purchasing all of the outstanding capital stock
of Paradyne (the "Paradyne Shares") from Lucent.
B. Lucent, Paradyne and the Acquisition Entities desire to set
forth herein their mutual agreements with respect to certain Tax matters,
including the allocation of responsibility for the payment of federal, state,
local and foreign Taxes.
AGREEMENT
The Parties agree as follows:
SECTION 1. Liability for Taxes
1.1 (a) Except as otherwise provided in Section 4.3, Lucent
shall be liable for all Taxes (i) imposed on Lucent and its Affiliates, other
than Taxes imposed on the Acquired Companies or for which the Acquired Companies
may otherwise be liable, for any taxable year, (ii) imposed on the Acquired
Companies, or for which the Acquired Companies may otherwise be liable, solely
as a result of being members of the Lucent Group (which for purposes of this
sentence includes the Acquired Companies) pursuant to Treasury Regulations
Section 1.1502-6 or analogous state, local or foreign laws for any taxable year,
or (iii) imposed on the Acquired Companies, or for which the Acquired Companies
may otherwise be liable, for any Pre-Closing Tax Period, including any Code
Section 481 adjustments resulting from a change of accounting method by the
Acquired Companies prior to the close of the Closing Date.
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(b) Lucent shall be entitled to any refund of Taxes for
which it is liable pursuant to this Section 1.1.
1.2 (a) Paradyne shall be liable for all Taxes imposed on the
Acquired Companies, or for which the Acquired Companies may otherwise be liable,
for any Post-Closing Tax Period.
(b) Paradyne shall be entitled to any refund of Taxes for
which it is liable pursuant to this Section 1.2.
1.3 For purposes of this Agreement, whenever it is necessary to
determine the liability for Taxes of the Acquired Companies for a portion of any
Straddle Period, the determination of the Taxes of the Acquired Companies for
the portion of the Straddle Period ending on and including, and the portion of
the Straddle Period beginning after, the Closing Date shall be determined by
assuming that the Straddle Period consisted of two taxable years or periods, one
of which ended at the close of the Closing Date and the other of which began at
the beginning of the day following the Closing Date, and items of income, gain,
deduction, loss or credit of the Acquired Companies for the Straddle Period
shall be allocated between such two taxable years or periods on a "closing of
the books" basis by assuming that the books of the Acquired Companies were
closed as of the close of the Closing Date: provided, however, that exemptions,
allowances or deductions that are calculated on an annual basis shall be
apportioned between such two taxable years or periods on a daily basis.
SECTION 2. Asset Sales
2.1 RentalCo has purchased or will purchase assets from Paradyne
in accordance with Section 1.1 of the Purchase Agreement. The Parties have
agreed to allocate the purchase price set forth in Section 1.1(b) of the
Purchase Agreement among the corresponding assets in the manner set forth in
Section 1.1(d) of the Purchase Agreement. RentalCo, Paradyne and Lucent shall
cooperate in the preparation of Treasury Form 8594 for timely filing with each
of their respective federal income tax returns and any comparable foreign, state
or local tax filings.
2.2 CAPCo has purchased or will purchase assets from Paradyne and
Lucent, Paradyne and Lucent have or will enter into assignment and assumption
agreements with CAPCo as to certain liabilities, in each case in accordance with
Section 1.3 of the Purchase Agreement. CAPCo, Lucent and Paradyne have agreed to
allocate the purchase price set forth in Sections 1.3(b) and 1.3(d) of the
Purchase Agreement among the corresponding assets in the manner set forth in
Section 1.3(f) of the Purchase Agreement. CAPCo, Paradyne and Lucent shall
cooperate in the preparation of Treasury Form 8594 for timely filing with each
of their respective federal income tax returns and any comparable foreign, state
or local tax filings.
2.3 LeaseCo has purchased or will purchase assets from Paradyne
in accordance with Section 1.2 of the Purchase Agreement. LeaseCo and Paradyne
have agreed to allocate the purchase price set forth in Section 1.2(b) of the
Purchase Agreement among the corresponding assets in the manner set forth in
Section 1.2(c) of the Purchase Agreement. LeaseCo, Paradyne and Lucent shall
cooperate in the preparation of Treasury Form 8594 for
2
<PAGE> 3
timely filing with each of their respective federal income tax returns and any
comparable foreign, state or local tax filings.
SECTION 3. Section 338 Election
3.1 PAC and Lucent shall join in an election to have the
provisions of Section 338(h)(10) of the Code and similar provisions of foreign,
state or local law ("Section 338 Elections") apply to the acquisition of the
Paradyne Shares and the shares of Ark Electronic Products, Inc, ("ARK"). PAC and
Lucent shall timely prepare and file Treasury Form 8023-A, together with any
schedules or attachments thereto, and any other forms, returns, statements or
documents required to be submitted to any foreign, federal, state or local
Taxing Authority in connection with the Section 338 Elections. To the extent
that AT&T is required to execute any such form as the parent of the Lucent
Group, which for purposes of this sentence includes the Acquired Companies,
Lucent shall cause AT&T to execute such form(s).
3.2 The allocation of the purchase price (the "Stock
Purchase Price") specified in Section 1.5(b) of the Purchase Agreement among the
Residual Assets of Paradyne and the assets of ARK shall be made in the manner
set forth in Section 1.5(d) of the Purchase Agreement.
3.3 Lucent shall be responsible for and shall pay any
income, franchise or similar taxes based on net revenue (and shall be entitled
to the benefit of any losses) arising as a result of the Section 338 Elections.
SECTION 4. Tax Covenants
4.1 The Acquisition Entities covenant that they will not
cause or permit any of the Acquired Companies (i) to take any action on the
Closing Date, other than in the ordinary course of business or otherwise
specified in the Purchase Agreement, that could give rise to any Tax liability
of Lucent or the Lucent Group, (ii) to make any election or deemed election
under Section 338 of the Code with respect to the Acquired Companies other than
as specified in this Agreement, or (iii) to make or change any Tax election,
amend any Tax Return or take any position on any Tax Return, take any action,
omit to take any action or enter into any transaction that results in any
increased Tax liability or reduction of any Tax Asset of Lucent or the Lucent
Group in respect of any Pre-Closing Tax Period. The Acquisition Entities agree
that Lucent and the Lucent Group are to have no liability for any Tax resulting
from a breach of the covenants contained in the preceding sentence, and the
Acquisition Entities agree to indemnify and hold harmless Lucent and the Lucent
Group against any such Tax or reduction in a Tax Asset. Lucent agrees to give
prompt notice to the Partnership of the assertion of any claim, or the
commencement of any action or proceeding arising from any such breach and in
respect of which indemnification may be sought under this Section 4.1. The
Partnership or the applicable Acquisition Entity may participate in and assume
the defense of any such suit, action or proceeding at its own expense. If the
Partnership or the applicable Acquisition Entity assumes such defense, Lucent
shall have the right (but not the duty) to participate in the defense thereof
and to employ counsel, at its own expense, separate from the counsel employed by
the Partnership or the applicable Acquisition Entity. Whether or not Lucent
chooses to defend or prosecute any claim, the Parties shall cooperate in the
defense or prosecution thereof.
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<PAGE> 4
4.2 The Acquisition Entities shall promptly pay or shall
cause prompt payment to be made to Lucent of all refunds of Taxes and interest
thereon received by any of the Acquisition Entities or the Acquired Companies
attributable to Taxes paid by Lucent or the Acquired Companies (or any
predecessor or Affiliate of Lucent) with respect to any Pre-Closing Tax Period.
4.3 Except as provided in the Purchase Agreement or the
Additional Agreements, no transfer, documentary, sales, use, stamp,
registration, withholding or other similar Taxes (including any penalties and
interest) incurred in connection with the transactions contemplated by Sections
1.1, 1.2, 1.3, 1.4 and 1.5 of the Purchase Agreement and the Section 338
Elections shall be borne or required to be paid by Lucent. Except as provided in
the Purchase Agreement or the Additional Agreements, the Acquisition Entities
will, at their own expense, file all necessary Tax Returns and other
documentation with respect to the Taxes enumerated in the preceding sentence,
and, if required by applicable law, Lucent will, and will cause its Affiliates
to, join in the execution of any such Tax Returns and other documentation. The
purchase prices set forth in the Purchase Agreement will not be reduced by any
of the Taxes enumerated in this Section 4.3.
4.4 If Lucent shall determine after the Closing that it is
desirable to file an amended Tax Return for any of the Acquired Companies with
respect to any Pre-Closing Tax Period, Lucent shall prepare and submit to PAC
the amended Tax Return, other than a return included in the Acquired Companies
ultimate parent corporation's consolidated federal or unitary state filing, and
PAC shall cause such return to be filed within thirty (30) days after receipt
thereof. PAC agrees not to permit the Acquired Companies to file any amended Tax
Return with respect to a Pre-Closing Tax Period without the express, prior
written consent of Lucent.
4.5 PAC shall give written notice to Lucent of any
notification of audit of a Tax Return for any of the Acquired Companies for any
Pre-Closing Tax Period or proposed adjustments to any items included in such a
return promptly after receipt of notification of the audit or adjustments.
Lucent shall be entitled, at its expense, to participate in all conferences,
meetings and proceedings with Taxing Authorities, or in appearances before any
court, pertaining to such audit or adjustments, and, subject to Section 6.4, to
direct the manner in which all claims, audits, adjustments or proceedings are
conducted and resolved by settlement or otherwise. PAC shall cause the Acquired
Companies to cooperate with Lucent and take such action and execute such
agreements and documents as Lucent shall reasonably request in order to carry
out the foregoing. Except with the prior written consent of Lucent, PAC shall
not permit the Acquired Companies to enter into any agreement after the date
hereof extending the statute of limitations or settling any asserted adjustments
with respect to or affecting any Pre-Closing Tax Period.
SECTION 5. Cooperation on Tax Matters
5.1 The Acquisition Entities and Lucent agree to furnish or
cause to be furnished to each other, upon request, as promptly as practicable,
such information (including access to books and records) and assistance relating
to any of the Acquired Companies as is reasonably necessary for the filing of
any Tax Return, for the preparation for any audit, and for
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<PAGE> 5
the prosecution or defense of any claim, suit or proceeding relating to any
proposed adjustment. Except as otherwise provided in this Agreement, the
Acquisition Entities and Lucent shall cooperate with each other in the conduct
of any audit or other proceedings involving any of the Acquired Companies for
any Tax purposes (but only to the extent such audit or other proceeding will
impact the Tax liability of the other Party) and each shall execute and deliver
such powers of attorney and other documents as are necessary to carry out the
intent of this subsection. The Acquisition Entities and Lucent agree to retain
or cause to be retained all relevant books and records pertinent to the Acquired
Companies until the applicable period for Tax assessment under applicable law
(giving effect to any and all extensions or waivers) has expired, and to abide
by or cause the abidance with all record retention agreements entered into with
any Taxing Authority. The Acquisition Entities and Lucent each agree to give the
other reasonable notice prior to discarding or destroying any such books and
records relating to Tax matters and, if a Party so requests, the Party proposing
to discard or destroy such records shall allow the other Party to take
possession of such books and records. Notwithstanding the foregoing provisions
of this Section 5.1, the Parties shall have no obligation to retain books and
records pertinent to the Acquired Companies for more than ten (10) years or to
notify the other Party prior to discarding and destroying books and records
which are ten (10) years old or older.
5.2 The Acquisition Entities and Lucent further agree, upon
request, to provide the other Party with all information that such Party may be
required to report pursuant to Section 6043 of the Code and all Treasury
Department Regulations promulgated thereunder.
5.3 Each of the Parties shall keep confidential, and shall
cause its Affiliates and Representatives to keep confidential, and shall not use
or disclose and shall cause its Affiliates and Representatives not to use or
disclose, to any other Person, any non-public document or other non-public
information provided to such Party pursuant to this Agreement; provided,
however, that each of the Parties may use the information provided to it
pursuant to this Agreement for the purposes set forth in the first sentence of
Section 5.1.
SECTION 6. Indemnification
6.1 Lucent shall indemnify and hold harmless the Acquisition
Entities against (a) any and all Taxes for which Lucent is liable pursuant to
Sections 1.1 and 3.3 of this Agreement ("Lucent's Taxes"), (b) any and all
Damages from the breach by Lucent of any representation, warranty or covenant of
Lucent contained in this Agreement, and (c) any interest and penalties and
reasonable attorneys' fees, accountants' fees and other expenses arising out of
or incident to the failure of Lucent to pay Lucent's Taxes, or otherwise fulfill
the obligations of Lucent, in accordance with the provisions of this Agreement.
6.2 The Partnership shall indemnify and hold harmless Lucent
and its Affiliates against (a) any and all Taxes for which Paradyne or any of
the Acquisition Entities are liable pursuant to Section 1.2 of this Agreement
(the "Partnership's Taxes"), (b) any and all Taxes for which Lucent is to have
no liability under Section 4.3 of this Agreement, (c) any and all Damages from
the breach by any of the Acquisition Entities of any representation, warranty or
covenant of the Acquisition Entities (or any of them) contained in this
Agreement, and (d) any interest and penalties and reasonable attorneys' fees,
accountants' fees and other expenses arising out of or incident to the failure
of the Acquisition Entities to pay the Partnership's Taxes,
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<PAGE> 6
or otherwise fulfill the obligations of the Acquisition Entities, in accordance
with the provisions of this Agreement.
6.3 A Party ("Indemnitee") seeking indemnification under
this Section 6 shall notify the other Party ("Indemnitor") in writing of the
estimated amount of the indemnification obligation together with a reasonably
detailed explanation of the Tax liability to which it relates. Except as
otherwise provided in this Agreement, Indemnitor shall make payment to
Indemnitee or the applicable Taxing Authority (as determined by Indemnitee) of
such estimated amount on or before the later of (a) thirty (30) days prior to
the date such Taxes are due and payable by Indemnitee or its Affiliate, which
date shall be stated in the written notification to Indemnitor, or (b) thirty
(30) days following the date of receipt by Indemnitor of such written notice.
6.4 (a) If any assessment, adjustment, claim, demand, suit,
action, litigation, proceeding or audit ("Claim or Demand") for Taxes in respect
of which indemnification may be sought pursuant to this Section 6 is asserted in
writing against a Party or any of its Affiliates, Indemnitee shall notify
Indemnitor of such Claim or Demand within thirty (30) days of receipt thereof,
or such earlier time that would allow Indemnitor to timely respond to such Claim
or Demand, and shall give Indemnitor such information with respect thereto as
Indemnitor may reasonably request. The failure of Indemnitee to provide timely
notice to Indemnitor of a Claim or Demand in accordance with this Section 6.4(a)
shall not serve to eliminate or limit Indemnitor's obligations under this
Section 6 unless such failure materially prejudices Indemnitor. Indemnitor may
discharge, at any time, its indemnification obligation under this Section 6 by
paying to Indemnitee or the applicable Taxing Authority (as determined by
Indemnitee) the amount of the Taxes, together with any interest and penalties
and any other amounts due under this Section 6, calculated on the date of such
payment.
(b) Indemnitor may, at its own expense, participate
in and, upon notice to Indemnitee, assume the defense of any Claim or Demand. If
Indemnitor assumes such defense, Indemnitor shall have no obligation to make a
payment under this Section 6 until a final determination has been made and all
rights of appeal have expired. If Indemnitor assumes such defense, Indemnitor
shall have the right to control such defense in all respects; provided that
Indemnitee shall have the right (but not the duty) to participate in the defense
thereof and to employ counsel, at its own expense, separate from the counsel
employed by Indemnitor. If Indemnitor assumes such defense, Indemnitor shall
consult with Indemnitee regarding significant decisions related to the defense,
but Indemnitor shall have the sole and exclusive right to make such decisions.
If Indemnitor assumes such defense (as indicated by written notice to
Indemnitee), neither Indemnitee nor its Affiliates shall pay such Taxes until
(a) a final determination has been made and all rights of appeal have expired,
or (b) Indemnitor has consented to such payment. Whether or not Indemnitor
chooses to defend or prosecute any claim, all of the Parties shall cooperate in
the defense or prosecution thereof.
(c) Notwithstanding anything in this Agreement to the
contrary, Indemnitor shall not settle or compromise any Claim or Demand without
the consent of Indemnitee unless (A) such settlement or compromise involves no
finding or admission of any violation or breach by Indemnitee of any right of
any other Person or any Legal Requirement (other than a violation or breach by
any Acquired Company on or before the Closing Date of any
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<PAGE> 7
Legal Requirements relating to Taxes), (B) such settlement or compromise has no
material effect on any other claims which are pending against Indemnitee or
likely will be brought against Indemnitee in the future, and (C) the sole relief
provided in connection with such settlement or compromise is a monetary payment
that is paid in full by Indemnitor.
6.5 If Indemnitor fails to provide written notice to
Indemnitee of Indemnitor's assumption of the defense of any Claim or Demand
within twenty (20) days after written notice of such Claim or Demand from
Indemnitee, Indemnitee may pay such Tax or otherwise settle such Claim or Demand
and obtain indemnification from Indemnitor for such liability in accordance with
this Section 6.
6.6 A Party shall not be liable under this Agreement for any
Tax (i) which was paid without such Party's prior written consent or otherwise
in accordance with the provisions of this Agreement, (ii) which was the subject
of any settlements effected without the prior written consent of such Party or
otherwise in accordance with the provisions of this Agreement, or (iii)
resulting from any Claim or Demand in which such Party was not permitted an
opportunity to defend or participate in the manner provided in this Agreement.
6.7 So long as the period for filing an amended Tax Return
remains open, any payment by one Party to another Party under this Agreement
will be deemed to be an adjustment to the Purchase Price unless, under
applicable law, such payment is not treated as received by such other Party. In
all other cases, such payments shall be treated by the Parties under applicable
principles of Tax law.
SECTION 7. Miscellaneous Provisions
7.1 Notices
Any notice or other communication required or permitted to be delivered
to any Party shall be in writing and shall be deemed properly delivered, given
and received when delivered (by hand, by registered mail, by courier or express
delivery service or by facsimile) to the address or facsimile telephone number
set forth beneath the name of such Party below (or to such other address or
facsimile telephone number as such Party shall have specified in a written
notice given to the other Parties):
if to Lucent:
10 Independence Boulevard
Warren, New Jersey 07059
Attention: Mr. William Osl, Jr.
Fax: (908) 580-6088
with a copy to:
Room A2046
131 Morristown Road
Basking Ridge, New Jersey 07920
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Attention: W. Preston Granbery, Esq.
Fax: (908) 953-4657
if to Paradyne, the Partnership or the Acquisition
Entities:
201 Main Street
Suite 2420
Fort Worth, Texas 76102
Fax: (817) 871-4010
Attention: Richard A. Ekleberry, Esq.
7.2 Headings
The bold-faced section headings contained in this Agreement are for
convenience of reference only, shall not be deemed to be a part of this
Agreement and shall not be referred to in connection with the construction or
interpretation of this Agreement.
7.3 Counterparts
This Agreement may be executed in several counterparts, each of which
shall constitute an original and all of which, when taken together, shall
constitute one agreement.
7.4 Governing Law; Venue
This Agreement shall be construed in accordance with, and governed in
all respects by, the internal laws of the State of New York (without giving
effect to principles of conflicts of laws).
7.5 Successors and Assigns
Except as otherwise provided in this Agreement, this Agreement shall be
binding upon and shall inure to the benefit of the Parties and their respective
successors and assigns (if any). Lucent may not assign its rights and delegate
its obligations under this Agreement without the prior written consent of the
Partnership. Each of the Acquisition Entities may freely assign any or all of
its rights under this Agreement, in whole or in part, to any Person without
obtaining the consent or approval of any other Party or of any other Person.
7.6 Amendments
This Agreement may not be amended, modified, altered or supplemented
other than by means of a written instrument duly executed and delivered on
behalf of all of the Parties.
7.7 Entire Agreement
This Agreement and the other agreements referred to herein set forth
the entire understanding of the Parties relating to the subject matter hereof
and thereof and supersede all prior agreements and understandings among or
between any of the Parties relating to the subject matter hereof and thereof.
Nothing contained in this Agreement shall limit the rights or
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<PAGE> 9
obligations of any party under the Purchase Agreement or any of the Additional
Agreements nor shall any right or obligation of any Party under this Agreement
be limited by any provision of the Purchase Agreement or any of the Additional
Agreements.
7.8 Construction
(a) For purposes of this Agreement, whenever the context
requires: the singular number shall include the plural, and vice versa; the
masculine gender shall include the feminine and neuter genders; the feminine
gender shall include the masculine and neuter genders; and the neuter gender
shall include the masculine and feminine genders.
(b) The Parties agree that any rule of construction to the
effect that ambiguities are to be resolved against the drafting Party shall not
be applied in the construction or interpretation of this Agreement.
(c) As used in this Agreement, the words "include" and
"including," and variations thereof, shall not be deemed to be terms of
limitation, but rather shall be deemed to be followed by the words "without
limitation."
(d) Except as otherwise indicated, all references in this
Agreement to "Sections" and "Exhibits" are intended to refer to Sections of this
Agreement and Exhibits to this Agreement.
7.9 Survival
Notwithstanding anything in this Agreement to the contrary, the
provisions of this Agreement shall survive for the full period of all statutes
of limitations (giving effect to any waiver, mitigation or extension thereof).
9
<PAGE> 10
IN WITNESS WHEREOF, the Parties have caused this Agreement to be
executed and delivered as of the date first above written.
LUCENT TECHNOLOGIES INC.
a Delaware corporation
By:
-------------------------------------
William F. OSI, JR.
Vice President
AT&T PARADYNE CORPORATION
a Delaware corporation
By:
-------------------------------------
William F. OSI, Jr.
Authorized Agent
PARADYNE PARTNERS, L.P.
a Delaware limited partnership
By: Paradyne GenPar Corp.,
a Texas corporation, its
sole general partner
By:
-------------------------------------
David Stanton
President
PARADYNE ACQUISITION CORP.,
a Delaware corporation
By:
-------------------------------------
David Stanton
President
<PAGE> 11
RENTAL ACQUISITION CORP.,
a Delaware corporation
By:
-------------------------------------
David Stanton
President
CAP ACQUISITION CORP.,
a Delaware corporation
By:
-------------------------------------
David Stanton
President
LEASE ACQUISITION CORP.,
a Delaware corporation
By:
-------------------------------------
David Stanton
President
<PAGE> 12
Exhibit A
CERTAIN DEFINITIONS
For purposes of this Agreement, the following definitions shall
apply.
AFFILIATE. "Affiliate" shall mean with respect to any Person, any
Person directly or indirectly controlling, controlled by, or under common
control with, such other Person.
ASSET SALES. "Asset Sales" shall mean the asset sales
contemplated by Sections 1.1, 1.2 and 1.3 of the Purchase Agreement.
CODE. "Code" means the United States Internal Revenue Code of
1986, as amended.
GOVERNMENTAL BODY. "Governmental Body" shall mean any: (a)
nation, state, commonwealth, province, territory, county, municipality, district
or other jurisdiction of any nature; (b) federal, state, local, municipal,
foreign or other government; or (c) governmental or quasi-governmental authority
of any nature (including any governmental division, department, agency,
commission, instrumentality, official, organization, unit, body or entity and
any court or other tribunal).
LUCENT GROUP. "Lucent Group" means, with respect to federal
income Taxes, the affiliated group of corporations (as defined in Section
1504(a) of the Code) of which Lucent is a member and, with respect to state
income or franchise taxes, the consolidated, combined or unitary group of which
Lucent or any of its Affiliates is a member. For purposes of this Agreement, the
Lucent Group shall not include the Acquired Companies.
PARTY OR PARTIES. "Party" or "Parties" refers to Lucent, Paradyne
and the Acquisition Entities or any one of them.
POST-CLOSING TAX PERIOD. "Post-Closing Tax Period" means (i) with
respect to net income taxes, or franchise taxes based on net income, including
alternative or add-on minimum tax, any tax period ending after the close of the
Closing Date, (ii) with respect to any Straddle Period, that portion that
portion of the Straddle Period beginning after the close of the Closing Date,
and (ii) with respect to all other Taxes, any period after the close of the
Closing Date.
PRE-CLOSING TAX PERIOD. "Pre-Closing Tax Period" means (i) with
respect to net income taxes, or franchise taxes based on net income, including
alternative or add-on minimum tax, any tax period ending on or before the close
of the Closing Date, (ii) with respect to any Straddle Period, that portion of
the Straddle Period ending at the close of the Closing Date, and (iii) with
respect to all other Taxes, any period before the close of the Closing Date.
PURCHASE AGREEMENT. "Purchase Agreement" shall mean the Purchase
Agreement, dated June 18, 1996, made by and among Lucent, Paradyne and the
Acquisition Entities, as amended.
i
<PAGE> 13
RESIDUAL ASSETS. "Residual Assets" shall mean the assets of
Paradyne remaining after the Asset Sales, related distributions by Paradyne to
Lucent and the distribution of promissory notes contemplated by Section 1.4 of
the Purchase Agreement.
STRADDLE PERIOD. "Straddle Period" means any tax period beginning
on or before the Closing Date and ending after the close of the Closing Date.
TAX OR TAXES. "Tax" or "Taxes" shall mean any tax (including any
income tax, franchise tax, capital gains tax, gross receipts tax, value-added
tax, surtax, excise tax, ad valorem tax, transfer tax, stamp tax, sales tax, use
tax, property tax, business tax, withholding tax or payroll tax), levy
assessment, tariff, duty (including any customs duty), deficiency or fee, and
any related charge or amount (including any fine, penalty or interest), imposed,
assessed or collected by or under the authority of any Governmental Body.
TAX ASSET. "Tax Asset" means any net operating loss, net capital
loss, investment tax credit, foreign tax credit, charitable deduction, basis
increase or any other credit or tax attribute which could reduce Taxes
(including, without limitation, deductions and credits related to alternative
minimum taxes).
TAXING AUTHORITY. "Taxing Authority" means any Governmental Body
charged with the duty or authority to administer or collect any Tax.
TAX RETURN. "Tax Return" shall mean any return (including any
information return), report, statement, declaration, estimate, schedule, notice,
notification, form, election, certificate or other document or information filed
with or submitted to, or required to be filed with or submitted to, any
Governmental Body in connection with the determination, assessment, collection
or payment of any Tax or in connection with the administration, implementation
or enforcement of or compliance with any legal requirement relating to any Tax.
ii
<PAGE> 1
The reverse stock split and recapitalization described in Note 14 to the
financial statements has not been consummated at May 27, 1999. When it has been
consummated, we expect to be in a position to render the following consent.
/s/ PRICEWATERHOUSECOOPERS LLP
--------------------------------------
PricewaterhouseCoopers LLP
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated February 12, 1999, except
as to Note 14 which is as of March 12, 1999, relating to the financial
statements of GlobeSpan, Inc., which appears in such Prospectus. We also consent
to the use in the Prospectus of our report dated August 28, 1998 relating to the
financial statements of The Advanced Transmission Technology Division of AT&T
Paradyne Corporation, which appears in such Prospectus. We also consent to the
references to us under the headings "Experts" and "Selected Financial Data" in
such Prospectus. However, it should be noted that PricewaterhouseCoopers LLP has
not prepared or certified such "Selected Financial Data."
Florham Park, New Jersey
May 27, 1999
