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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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COMMISSION FILE NUMBER 000-26401
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GLOBESPAN, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 75-2658218
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
100 SCHULZ DRIVE, RED BANK, NEW JERSEY 07701 07701
(Address of principal executive offices) (Zip Code)
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(732) 345-7500
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $0.001
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. /X/ Yes No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of voting Common Stock held by non-affiliates of
the registrant based on the closing price for the Common Stock on the Nasdaq
National Market on March 21(st), 2000 was approximately $4,274,677,880. As of
March 21(st), 2000, 62,293,556 shares of Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the Proxy Statement to be filed in connection with the
2000 Annual Meeting of Stockholders are incorporated by reference into Part III
of this Form 10-K Report where indicated.
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GLOBESPAN, INC.
FORM 10-K
DECEMBER 31, 1999
TABLE OF CONTENTS
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ITEM PAGE NO.
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PART I
1. Business.................................................... 2
2. Properties.................................................. 16
3. Legal Proceedings........................................... 16
4. Submission of Matters to a Vote of Security Holders......... 16
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 16
6. Selected Financial Data..................................... 17
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 18
7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 36
8. Financial Statements and Supplementary Data................. 36
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 36
PART III
10. Directors and Executive Officers of the Registrant.......... 36
11. Executive Compensation...................................... 36
12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 36
13. Certain Relationships and Related Transactions.............. 36
PART IV
14. Exhibits, Financial Statement Schedule, and Reports on Form
8-K......................................................... 37
Signatures.................................................. 38
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PART I
ITEM 1. BUSINESS
GENERAL
GlobeSpan, Inc., ("GlobeSpan," the "Company," "we," "our" or "us"), 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).
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 system
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.
INDUSTRY OVERVIEW
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.
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 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, traditional regional telephone companies were the almost
exclusive operators of the local loop. To address the demand for high-speed data
transmission, these service providers primarily offered high-speed data
transmission at transmission rates of up to 128 Kbps and 1.5 Mbps, depending
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on the technology used to transmit the data. These services have generally
achieved limited success due to complexity and the high cost of deployment.
The Telecommunications Act of 1996 has enabled new entrants, such as
competitive local exchange carriers, to offer high-speed data transmission
services. These new carriers, as well as the traditional regional telephone
companies, 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.
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
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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 traditional telecommunications service providers, such as the
regional telephone companies, have accelerated their investments primarily in
ADSL technologies because ADSL appeared most appropriate for residential
subscribers. The new competitive exchange carriers, in contrast, have focused on
providing competitively priced, high-speed data transmission services to
business customers. These new carriers 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. 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
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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 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.
MORE THAN TWO MILLION CHIP SETS SOLD. We have established a proven track
record, having shipped more than two 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 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.
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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 and improve
this capability.
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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
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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 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 repeated 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 standard T1.418-2000 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.
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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.
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.992.1
for 8Mbps DMT line code configuration (commonly called G.dmt) and G.992.2 for
the 1.5 Mbps DMT line code configuration (commonly called G.lite).
The following table summarizes our DSL product families, their key
functions, data transmission rates and introduction dates.
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PRODUCT DATA INTRO.
FAMILY FUNCTION TRANSMISSION RATES DATE
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G2237........... Common single channel high density T1 (1.544 Mbps) and up to 2.32.Mbps 4Q99
platform for HDSL2 and SDSL 2B1Q
symmetric.
G2216........... High density SDSL 2B1Q with integrated ATM Up to 2.32.Mbps 3Q99
and serial interface.
G2237........... Dual channel HDSL2 with HDLC T1(1.544 Mbps) 2Q99
functionality.
G2237........... Dual channel HDSL2 with integrated ATM T1(1.544 Mbps) 2Q99
Interface for Symmetric transmission over
one wire pair.
GS9070.......... ASIC chip used to connect our G2710, Not Applicable 1Q99
G7060, or G7061 chip sets to PCI bus and
V.90 voice band modems for PC
applications.
G7070........... Multi-mode RADSL single channel chip set Downstream--90 Kbps to 8.0 Mbps 4Q98
for asymmetric transmission over one wire Upstream--45 Kbps to 1.1 Mbps
pair using DMT or CAP line code. Includes
integrated framer.
G7060........... RADSL single channel chip set for Downstream--90 Kbps to 8.0 Mbps 4Q98
asymmetric transmission over one wire pair Upstream--45 Kbps to 1.1 Mbps
using DMT line code. Includes integrated
framer.
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PRODUCT DATA INTRO.
FAMILY FUNCTION TRANSMISSION RATES DATE
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G7061........... RADSL (G.lite) single channel chip set for Downstream--90 Kbps to 1.5 Mbps 4Q98
asymmetric transmission over one wire pair Upstream--45 Kbps to 540 Kbps
using DMT line code. Includes integrated
framer.
G2237........... HDSL2 single channel chip set for T1 (1.544 Mbps)/ 4Q98
symmetric transmission over one wire pair E1 (2.048 Mbps)
using PAM line code. Includes integrated
framer.
G2232........... SDSL single or dual channel chip set for T1 (1.544 Mbps)/ 4Q98
symmetric transmission over one wire pair E1 (2.048 Mbps)
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 Upstream--45 Kbps to 1.1 Mbps
using CAP line code. Includes integrated
framer.
G2213........... HDSL dual channel chip set for symmetric T1 (1.544 Mbps)/ 3Q98
transmission over two wire pairs using CAP E1 (2.048 Mbps)
line code. Includes integrated framer.
G2212........... HDSL dual channel chip set for symmetric T1 (1.544 Mbps)/ 3Q98
transmission over two wire pairs using E1 (2.048 Mbps)
2B1Q line code. Includes integrated framer
and analog front end.
MDT-x6-01....... MSDSL single channel chip set for 144 Kbps to 1.1 Mbps 3Q98
symmetric transmission over one wire pair
using 2B1Q line code.
HDT-12-0x....... HDSL single channel chip set for symmetric T1 (1.544 Mbps)/ 4Q97
transmission over two wire pairs using E1 (2.048 Mbps)
2B1Q line code.
MDT-x4-01....... MSDSL single channel chip set for 144 Kbps to 2.3 Mbps 2Q97
symmetric transmission over one wire pair
using CAP line code.
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
PRODUCT DATA INTRO.
FAMILY FUNCTION TRANSMISSION RATES DATE
- ------- ------------------------------------------ --------------------------------------- --------
<S> <C> <C> <C>
SDT-32-03....... SDSL single channel chip set for symmetric T1 (1.544 Mbps)/ 1Q97
transmission over one wire pair using CAP E1 (2.048 Mbps)
line code.
HDT-13-0x....... HDSL single channel chip set for symmetric T1 (1.544 Mbps)/ 2Q96
transmission over two wire pairs using CAP E1 (2.048 Mbps)
line code.
RDT-x0-01....... RADSL single channel chip set for Downstream--90 Kbps to 7.2 Mbps 2Q96
asymmetric transmission over one wire pair Upstream--45 Kbps to 1.1 Mbps
using CAP line code.
</TABLE>
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 34 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 150 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 150 companies that manufacture data
communications products. Customers from which we recognized at least $2,000,000
in revenues in 1999 include Ascom Hasler AG, Cisco Systems, Intel Corporation,
Lucent Technologies, Inc., NEC Corporation, and Paradyne Corporation. 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.
11
<PAGE>
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 years ended December 31, 1999, 1998 and 1997, our
customers who individually represented at least five percent of our net revenues
accounted for 60.6%, 70.1% and 72.6%, respectively, of our total net revenues.
In 1999, our top three customers were Cisco Systems, Lucent Technologies and
Ascom Hasler AG, which accounted for 41.6%, 7.1% and 6.2% 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 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. 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.
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 commencement of operations in August 1996, we have
invested significant resources to expand our research and development group. As
of December 31, 1999, approximately 78 of our approximately 144 research and
development engineers had advanced degrees, including approximately 25 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 2000, 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 years ended December 31, 1999, 1998 and 1997 were
$26.5 million, $18.7 million and $8.4 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. Presently, we
depend primarily 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
12
<PAGE>
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 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
the chip sets presently manufactured by Lucent, such a new manufacturer 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.
In order to enhance our ability to obtain sufficient quantities of chip sets
to meet our growing product needs, we have been engaged in the process of
negotiating and/or exploring prospective supply agreements with other leading
chip suppliers. In this regard, we entered into an agreement with United
Mircoelectronics Corporation ("UMC") to supply certain of our chip sets. The UMC
agreement, which became effective in December 1999, provides us with the ability
to obtain delivery of specified chip sets in accordance with the agreement's
terms, upon our providing of binding forecasts to UMC. Although the UMC
agreement provides for a term of five years, with subsequent one year renewals,
the supplier may cancel the agreement upon 12 months' advance notice to us.
While, in such an event, UMC would still be required to fill our orders for
commercially reasonable quantities of product during the twelve month notice
period, the termination of this agreement by UMC could cause a disruption to our
business. To further provide us with greater chip supply capacity, we are in the
process of finalizing an agreement with Taiwan Semiconductor Manufacturing Co.
and continue our efforts to seek agreements with other chip manufacturers.
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, 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
13
<PAGE>
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 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 had recently begun employment with one of our competitors.
Our lawsuit alleged misappropriation of trade secrets. See "Litigation."
We rely in part on patents to protect our intellectual property. We have 35
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 65 utility patent applications and 33 provisional
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.
14
<PAGE>
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 December 31, 1999, we had 214 full-time employees, including 144
employees engaged in research and development, 36 engaged in sales and marketing
and 34 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.
SUBSEQUENT EVENTS
STOCK SPLIT
On January 21, 2000, the Company's board of directors approved a 3-for-1
stock split applicable to all issued and outstanding shares of our common stock
par value $0.001. This 3-for-1 stock split was effected in the form of a stock
dividend and became effective on February 25, 2000 when stockholders of record
received two additional shares of common stock for each outstanding share of
common stock held as of the record date. All share, stock option and stock
warrant information included in this Annual Report on Form 10-K have been
restated for all periods to reflect this stock split.
ACQUISITIONS
On January 31, 2000, the Company acquired all of the issued and outstanding
shares of Ficon Technologies, Inc. ("Ficon"), a leading provider of solutions in
the areas of IP, ATM and Voice over Packet, which enable service providers to
build next generation communications infrastructure. The transaction will be
accounted for as a purchase transaction. The Company acquired such shares by
paying $5.0 million in cash and the right for Ficon shareholders to receive up
to a maximum of 1,959,999 shares of the Company's common stock based upon the
continued employment of certain Ficon shareholders and the completion of
development milestones mutually agreed to by the parties.
On February 24, 2000, the Company acquired certain assets and employees of
the Microelectronics Group of PairGain Technologies, Inc. ("PairGain"),
designers of integrated circuits and software for DSL applications. The
transaction will be accounted for as a purchase transaction. The Company paid
3,243,591 shares of its common stock and issued to PairGain a $90.0 million
subordinated redeemable convertible note (the "Note"). The Note may, within the
first six months after its issue, be redeemed at the option of the Company in
cash, or thereafter be converted at the option of PairGain, into 2,919,237
shares of the Company's common stock. The Note matures in seven years and bears
interest at an annual rate of 5.0% accrued and payable at the earlier of
maturity or redemption.
15
<PAGE>
ITEM 2. 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
that any additional space required will be available to us on commercially
reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
In June 1998, we filed suit against Hanan Herzberg, Selvaraj Seetharaman and
Xiao-Feng Qi in the Superior Court of New Jersey seeking compensatory damages,
costs and attorneys' fees and injunctive relief based on allegations of
misappropriation of trade secrets. In April 1998, the defendants terminated
their employment with our company and subsequently began employment with Level
One Communications, a competitor in the DSL industry. No counterclaim was
asserted against us. On June 16, 1999, the Superior Court of New Jersey issued a
final judgment in favor of GlobeSpan and against the defendants, ordering
injunctive and other relief against the defendants. The defendants have appealed
the judgement in GlobeSpan's favor in the Appellate Division. No decision or
hearing date has been set with regard to this appeal. GlobeSpan continues to
believe that this matter will not have a material adverse effect on our results
of operations or financial condition and, while we can not predict the outcome
of defendants' appeal, we are optimistic that the judgement in our favor will be
upheld in all material respects by the Appellate Division.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the year ended
December 31, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the Nasdaq National Market System
under the symbol of GSPN. The following table sets forth, for the periods
indicated, the low and high bid prices per share for the Company's Common Stock
as reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
1999 LOW HIGH
- ---- -------- --------
<S> <C> <C>
Second Quarter.............................................. 8.79 14.38
Third Quarter............................................... 14.33 39.42
Fourth Quarter.............................................. 16.33 30.96
</TABLE>
As of March 21, 2000 there were approximately 2,000 holders of record of the
Company's Common Stock and the last reported sales price of the Company's common
Stock was $115.00 per share.
DIVIDEND POLICY
No cash dividends have been paid on the Common Stock. The Company currently
intends to retain all future earnings, if any, for use in its business and does
not anticipate paying any cash dividends on its Common Stock in the foreseeable
future.
16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data as of December 31, 1998 and 1999, and
for the seven months ended July 31, 1996, the five months ended December 31,
1996 and the years ended December 31, 1997, 1998 and 1999, was derived from
financial statements audited by PricewaterhouseCoopers LLP, independent
accountants. The selected financial data for the years ended December 31, 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
Form 10-K.
<TABLE>
<CAPTION>
PREDECESSOR COMPANY THE COMPANY,
------------------------- ---------------------------------------
SEVEN FIVE
MONTHS MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 31, JULY 31, DECEMBER 31, DECEMBER 31,
1995 1996 1996 1997 1998 1999
------------ ---------- ------------ ---------- ------------ -----------
(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.............................. $ 6,685 $ 1,597 $ 2,360 $ 22,546 $ 31,464 $ 56,220
Cost of sales............................. -- -- 496 7,565 9,882 20,879
Cost of sales related to termination
charge.................................. -- -- -- -- -- 1,119
---------- ---------- ---------- ---------- ----------- -----------
Gross profit.............................. 6,685 1,597 1,864 14,981 21,582 34,222
Operating expenses
Research and development, net........... 3,725 2,524 1,616 8,358 18,694 26,531
Selling, general and administrative..... 2,195 1,492 644 4,572 10,217 14,389
Amortization and other.................. -- -- 404 1,000 583 --
---------- ---------- ---------- ---------- ----------- -----------
Total operating expenses.............. 5,920 4,016 2,664 13,930 29,494 40,920
---------- ---------- ---------- ---------- ----------- -----------
(Loss) income from operations............. 765 (2,419) (800) 1,051 (7,912) (6,698)
Interest income (expense), net............ -- -- -- 91 (134) 1,133
---------- ---------- ---------- ---------- ----------- -----------
(Loss) income before income taxes......... 765 (2,419) (800) 1,142 (8,046) (5,565)
Provision (benefit) for income taxes...... -- -- -- 300 (217) --
---------- ---------- ---------- ---------- ----------- -----------
Net (loss) income......................... 765 (2,419) (800) 842 (7,829) (5,565)
Preferred stock deemed dividend and
accretion............................... -- -- -- -- -- (3,466)
---------- ---------- ---------- ---------- ----------- -----------
Net loss attributable to common
stockholders............................ $ 765 $ (2,419) $ (800) $ 842 $ (7,829) $ (9,031)
========== ========== ========== ========== =========== ===========
Other comprehensive loss:
Unrealized loss on marketable
securities.............................. -- -- -- -- -- (22)
---------- ---------- ---------- ---------- ----------- -----------
Comprehensive loss applicable to common
stockholders............................ $ 765 $ (2,419) $ (800) $ 842 $ (7,829) $ (9,053)
========== ========== ========== ========== =========== ===========
(Loss) earnings per share:
Basic................................... $ (0.02) $ 0.02 $ (0.22) $ (0.19)
========== ========== =========== ===========
Diluted................................. $ (0.02) $ 0.02 $ (0.22) $ (0.19)
========== ========== =========== ===========
Shares used in computing (loss) earnings
per share:
Basic................................... 34,312,500 34,546,614 36,254,133 46,612,752
Diluted................................. 34,312,500 38,119,296 36,254,133 46,612,752
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
-------- --------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 12 $ 24,657
Working capital (deficit).............................. (2,655) 44,616
Total assets........................................... 13,430 70,991
Long-term liabilities, less current portion............ 5,506 443
Retained earnings (accumulated deficit)................ (7,787) (13,352)
Total stockholders' equity (deficit)................... (1,293) 55,433
</TABLE>
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<PAGE>
See Note 11 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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING COMMENTARY SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS AND RELATED NOTES CONTAINED ELSEWHERE IN THIS FORM 10-K. THE
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THESE STATEMENTS RELATE TO FUTURE EVENTS OR OUR FUTURE FINANCIAL
PERFORMANCE. IN MANY CASES, YOU CAN IDENTIFY FORWARD-LOOKING STATEMENTS BY
TERMINOLOGY SUCH AS "MAY," "WILL," "SHOULD," "EXPECTS," "PLANS," "ANTICIPATES,"
"BELIEVES," "ESTIMATES," "PREDICTS," "POTENTIAL," "INTEND" OR "CONTINUE," OR THE
NEGATIVE OF SUCH TERMS AND OTHER COMPARABLE TERMINOLOGY. THESE STATEMENTS ARE
ONLY PREDICTIONS. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF A VARIETY OF
FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH UNDER "RISK FACTORS" AND
ELSEWHERE IN THIS FORM 10-K.
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 two 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.
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 0.4% 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. Product returns 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 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 93 employees at December 31, 1997 to 214 employees at
18
<PAGE>
December 31, 1999. In particular, during this period we hired 71 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 years ended December 31, 1999, 1998 and
1997, our customers who individually represented at least five percent of our
net revenues accounted for 60.6%, 70.1% and 72.6%, respectively, of our net
revenues. In 1999, our top three customers were Cisco Systems, Lucent
Technologies and Ascom Hasler AG, which accounted for 41.6%, 7.1% and 6.2% 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 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. 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 1999, approximately 47% of our net revenues were derived from customers
outside of the United States, of which 9.1% were derived from customers based in
Europe, 23.2% were derived from customers based in Asia and 14.7% were derived
from customers based in other international markets. 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 1997, approximately 49.2% of our net revenues
were derived from customers outside of the United States, of which 17.5% were
derived from customers based in Europe, 30.9% were derived from customers based
in Asia and 0.8% 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 and future products. Further, our gross margins are impacted by our
customer concentration and
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<PAGE>
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 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.
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>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues................................................ $56,220 $31,464 $22,546
Cost of sales............................................... 20,879 9,882 7,565
Cost of sales related to termination charge................. 1,119 -- --
------- ------- -------
Gross profit................................................ 34,222 21,582 14,981
Operating expenses..........................................
Research and Development.................................. 26,531 18,694 8,358
Selling, general and administrative....................... 14,389 10,217 4,572
Amortization and Other.................................... -- 583 1,000
------- ------- -------
Total operating expenses................................ 40,920 29,494 13,930
------- ------- -------
(Loss) income from operations............................... (6,698) (7,912) 1,051
Interest income (expense), net.............................. 1,133 (134) 91
------- ------- -------
(Loss) income before income taxes........................... (5,565) (8,046) 1,142
Provision (benefit) for income taxes........................ -- (217) 300
------- ------- -------
Net (loss) income........................................... $(5,565) $(7,829) $ 842
======= ======= =======
</TABLE>
20
<PAGE>
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>
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues...................................... 100.0% 100.0% 100.0%
Cost of sales..................................... 37.1 31.4 33.6
Cost of sales related to termination charge....... 2.0 0.0 0.0
----- ----- -----
Gross profit...................................... 60.9 68.6 66.4
----- ----- -----
Operating expenses:
Research and development........................ 47.2 59.4 37.1
Selling, general and administrative............. 25.6 32.5 20.3
Amortization and other.......................... 0.0 1.9 4.4
----- ----- -----
Total operating expenses...................... 72.8 93.8 61.8
----- ----- -----
(Loss) income from operations..................... (11.9) (25.1) 4.7
Interest income (expense), net.................... 2.0 (0.4) 0.4
----- ----- -----
(Loss) income before income taxes................. (9.9) (25.6) 5.1
Provision (benefit) for income taxes.............. 0.0 (0.7) 1.3
----- ----- -----
Net (loss) income................................. (9.9)% (24.9)% 3.8%
===== ===== =====
</TABLE>
RESULTS OF OPERATIONS IN THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NET REVENUES. Our net revenues from product sales are recognized upon
shipment of DSL chip sets and reference design guides. Our net revenues were
$56.2 million, $31.5 million, and $22.5 million in the years ended December 31,
1999, 1998 and 1997, respectively. These amounts represent increases of 78.7%
from 1998 to 1999, and 39.6% from 1997 to 1998. The increase in revenues 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 47.0%, 32.6% and
49.2% of our net revenues in the years ended December 31, 1999, 1998 and 1997,
respectively. Net revenues from customers outside of North America increased as
a percentage of net revenues from 1998 to 1999 primarily due to a shift in the
manufacturing of product by domestic customers to offshore facilities. 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
$34.2 million, $21.6 million and $15.0 million in the years ended December 31,
1999, 1998 and 1997, respectively. These amounts represent an increase of 58.6%
from 1998 to 1999, and 44.1% from 1997 to 1998. Our gross margin was 60.9%,
68.6% and 66.4% in the years ended December 31, 1999, 1998 and 1997,
respectively. The decrease in gross margin from 1998 to 1999 was due to a number
of factors, including pressures on average selling prices and customer and
product mix. 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
21
<PAGE>
the result of higher unit sales. 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 was recorded as
termination charge. This cost was expensed as a cost of sales and 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. In 2000, we expect our
research and development expenditures to continue to increase due to planned
increases in personnel, material cost, and depreciation resulting from higher
capital expenditures. Our research and development expenditures were
$26.5 million, $18.7 million and $8.4 million, in the years ended December 31,
1999, 1998 and 1997, respectively. These amounts represent increases of 41.9%
from 1998 to 1999 and 124% from 1997 to 1998. Research and development
expenditures represented 47.2%, 59.4% and 37.1% of net revenues in the years
ended December 31, 1999, 1998 and 1997, respectively. In 1999, the decrease in
research and development expenditures as a percentage of revenues was due to our
increased revenue. 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.
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 $14.4 million,
$10.2 million and $4.6 million in the years ended December 31, 1999, 1998 and
1997, respectively. These amounts represent increases of 40.8% from 1998 to
1999, and 123% from 1997 to 1998. Selling, general and administrative expense
represented 25.6%, 32.5% and 20.3% of net revenues in the years ended
December 31, 1999, 1998 and 1997, respectively. The increase in dollars in 1999
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.
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 $0.0 million, $0.6 million and $1.0 million in the years ended
December 31, 1999, 1998 and 1997, respectively. These amounts represent a
decrease of 41.7% from 1997 to 1998.
INTEREST INCOME (EXPENSE), NET. Interest income (expense), net is comprised
of interest earned on invested cash, net of interest expense from bank
borrowings and other debt, and other non-operating expenses. Interest income
increased by $1.3 million for the year ended December 31, 1999 due to higher
levels of invested cash.
INCOME TAXES. We use the asset and liability method of accounting for
income taxes prescribed by Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes (see Note 10 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
22
<PAGE>
carry-back for taxes paid in 1997. During 1999 and 1998, the Company incurred
losses and therefore has established a full valuation allowance against its net
deferred tax asset.
RECENT ACCOUNTING PRONOUCEMENT
In December 1999 the Securities and Exchange Commissions issued Staff
Accounting Bulletin 101 (SAB 101), as amended in March 2000, which summarizes
the staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. The Company will adopt SAB 101 in
the second quarter of 2000 and believes that adoption will not have a
significant effect on its consolidated results of operations or financial
position.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations from initial
contributions of capital, funds generated by the sale of equity securities and
borrowings under our lines of credit, and from the sale of preferred and common
stock. Sales of equity securities include $49.7 million of net proceeds from our
June 1999 initial public offering of common stock and $11.2 million of net
proceeds from our May 1999 private placement of Series A redeemable convertible
preferred stock, which converted into common stock upon the completion of our
initial public offering. As of December 31, 1999 we had a working capital of
approximately $44.6 million and $24.7 million in cash and equivalents. The
company believes that cash and cash equivalents will be sufficient to meet its
operating needs for the next twelve months.
Net cash used in operating activities was $12.8 million and $3.4 million in
the years ended December 31, 1999 and 1998, respectively. Net cash generated by
operating activities was $0.9 million in the year ended December 31, 1997. The
increase from 1998 to 1999 and from 1997 to 1998 in operating activities was
primarily due to the timing of expenditures.
Net cash used in investing activities was $16.8 million, 4.8 million and
$3.4 million in the years ended December 31, 1999, 1998 and 1997, respectively.
The amount related to investment in marketable securities and preferred stock
was $15.6 million in 1999. The amounts related to capital expenditures to
support our expanded operations were $1.2 million, $4.8 million and
$3.4 million in the years ended December 31, 1999, 1998 and 1997, respectively.
We expect to increase our capital expenditures to exceed $5.0 million in 2000 to
support further expansion of operations.
Net cash provided by financing activities was $54.2 million, $7.3 million
and $0.06 million in the years ended December 31, 1999, 1998 and 1997,
respectively, and was provided by bank borrowings, other debt and issuance of
common and preferred stock.
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. In late 1999, the
Company completed its Year 2000 compliance project. As a result of the Company's
efforts, the Company experienced no significant disruptions related to Year
2000. The Company is not aware of any material problems resulting from Year 2000
issues, either with its products, its internal systems, or the products and
services of suppliers. The incremental costs related to the Year 2000 project
were not material to the Company's results of operations, financial position or
cash flows. The Company will continue to monitor throughout the year 2000 its
critical computer applications, and those of its suppliers, to ensure that any
latent Year 2000 matters that may arise are addressed promptly.
23
<PAGE>
RISK FACTORS
WE HAVE ONLY BEEN OPERATING AS AN INDEPENDENT COMPANY SINCE AUGUST 1996, AND
THIS LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE OUR PROSPECTS
We have only been operating as an independent company since August 1996, and
we only began shipping chip sets in volume in January 1997. We have not had a
long history of generating significant revenues. Many of our chip sets have only
recently been introduced. As a result of our limited operating history, we have
limited historical financial data that can be used in evaluating our business
and its prospects and in projecting future operating results. You must consider
our prospects in light of the risks, expenses and difficulties we might
encounter because we are at an early stage of development in a new and rapidly
evolving market.
OUR QUARTERLY OPERATING RESULTS WILL FLUCTUATE BECAUSE OF MANY FACTORS, AND MAY
CAUSE OUR STOCK PRICE TO FLUCTUATE
Our revenues and operating results have varied in the past and are likely to
vary in the future from quarter to quarter. As a result, we believe that
period-to-period comparisons of our operating results are not necessarily
meaningful. Investors should not rely on the results of any one quarter or
series of quarters as an indication of our future performance.
It is likely that in some future quarter or quarters our operating results
will be below the expectations of public market analysts or investors. In such
event, the market price of our common stock may decline significantly.
These variations in our operating results will likely to be caused by
factors related to the operation of our business, including:
- Variations in the timing and size of chip set orders from, and shipments
to, our existing and new customers;
- Loss of a significant customer, or a significant decrease in purchases by
significant customers, such as Cisco Systems or Lucent Technologies;
- 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.
24
<PAGE>
These variations will also be caused by other factors affecting our
business, many of which are substantially outside of the control of our
management, including:
- Costs associated with future litigation, including litigation relating to
the use or ownership of intellectual property;
- Acquisition costs or other non-recurring charges in connection with the
acquisition of companies, products or technologies;
- Foreign currency and exchange rate fluctuations which may make our
dollar-denominated products more expensive in foreign markets or could
expose us to currency rate fluctuation risks if our sales become
denominated in foreign currencies; and
- General global economic conditions which could adversely affect sales to
our customers.
WE EXPECT THAT PRICE COMPETITION AMONG DSL CHIP SET SUPPLIERS AND VOLUME
PURCHASES BY LARGE CUSTOMERS WILL REDUCE OUR GROSS MARGINS IN THE FUTURE
We expect that price competition among DSL chip set suppliers and volume
purchases of our chip sets at discounted prices will reduce our gross margins in
the future. We anticipate that average per unit selling prices of DSL chip sets
will continue to decline as product technologies mature. Since we do not
manufacture our own products, we may be unable to reduce our manufacturing costs
in response to declining average per unit selling prices. Many of our
competitors are larger with greater resources and therefore may be able to
achieve greater economies of scale and would be less vulnerable to price
competition.
Further, we expect that average per unit selling prices of our chip sets
will decrease in the future due to volume discounts to our large customers.
These declines in average per unit selling prices will generally lead to
declines in gross margins for these products.
WE HAVE A HISTORY OF LOSSES, AND WE EXPECT TO INCUR LOSSES IN THE FUTURE
Our failure to significantly increase our revenues would result in
continuing losses. We incurred net losses of attributable to common stockholders
of $9.0 million and $7.8 million in the years December 31, 1999 and 1998,
respectively, and earned net income of $0.8 million in the year December 31,
1997. We expect to incur net losses for the foreseeable future, and these losses
may be substantial. Further, we expect to incur substantial negative cash flow
in the future. Because of continuing substantial capital expenditures and
product development, sales, marketing and administrative expenses, we will need
to generate significant quarterly revenues to achieve profitability and positive
cash flow. Even if we do achieve profitability and positive cash flow, we may
not be able to sustain or increase profitability or cash flow on a quarterly or
annual basis.
THE LOSS OF ONE OR MORE OF OUR KEY CUSTOMERS WOULD RESULT IN A LOSS OF A
SIGNIFICANT AMOUNT OF OUR REVENUES
A relatively small number of customers account for a large percentage of our
net revenues. Our business will be seriously harmed if we do not generate as
much revenue as we expect from these customers, or experience a loss of any of
our significant customers, particularly Cisco Systems, or suffer a substantial
reduction in orders from such customers. In the years ended December 31, 1999,
1998 and 1997, our customers who individually represented at least five percent
of our net revenues accounted for 60.6%, 70.1% and 72.6%, respectively, of our
net revenues. In 1999, our top three customers were Cisco Systems, Lucent
Technologies and Ascom Hasler AG, which accounted for 41.6%, 7.1% and 6.2% of
our net revenues, respectively. In 1998, our top three customers were Cisco
Systems, NEC Corporation and Ascorn Hasler AG, which accounted for 48.3%, 12.6%
and 9.2% of our net revenues, respectively. In 1997, our top three customers
were LG Information & Communications, Ascom Hasler
25
<PAGE>
AG and Westell Technologies, which accounted for 21.4%, 12.5% and 9.6% 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, Lucent
Technologies, 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;
- Changes in customer demands; and
- Evolving industry standards.
26
<PAGE>
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 (2BlQ), carrierless amplitude phase
modulation (CAP), discrete multitone modulation (DMT) and pulse amplitude
modulation (PAM). To date, most large volume DSL service deployments have used
the 2BIQ and CAP line codes. Recently, U.S. and international standards bodies
have defined additional standards specifications which incorporate the DMT and
PAM line codes for DSL applications. Although we have recently introduced
products based on these standards, the majority of our product revenues to date
have come from the sale of chip sets that use the CAP line code.
LUCENT TECHNOLOGIES GRANTED TO US INTELLECTUAL PROPERTY RIGHTS THAT ARE SUBJECT
TO RESTRICTIONS, AND THE SCOPE, OR DISPUTES ABOUT THE SCOPE, OF THESE
RESTRICTIONS COULD HARM OUR ABILITY TO SELL OUR PRODUCTS
Upon our formation, Lucent Technologies granted to us a number of
intellectual property rights. All of these rights are subject to various
restrictions and/or conditions. We believe that we currently have all the
intellectual property rights from Lucent Technologies that we need to continue
to conduct our business. We also believe that we are exercising the rights
granted to us by Lucent Technologies within the scope of the applicable
restrictions and/or conditions. Nevertheless, the provisions of the agreement
describing the scope of the license and immunity rights and restrictions are
ambiguous and Lucent Technologies might not agree with our interpretations. If
Lucent Technologies adopts a conflicting interpretation or otherwise asserts
that we do not have the rights we think we have, we will need to defend
ourselves or negotiate for additional rights. It is even possible that we could
be prevented from selling some of our products that depend on these rights or
immunities. In any case, the process of negotiation or defense would be
time-consuming and expensive, and whether or not it is successful would have a
negative impact on our ability to conduct our business.
LUCENT TECHNOLOGIES MANUFACTURES SUBSTANTIALLY ALL OF OUR CHIP SETS, AND ANY
DISRUPTION IN THIS RELATIONSHIP COULD PREVENT US FROM SELLING OUR PRODUCTS
We do not own or operate a semiconductor fabrication facility. We depend on
Lucent Technologies to timely deliver to us sufficient quantities of
fully-assembled and tested chip sets on a turnkey basis. We have had a series of
manufacturing arrangements with Lucent Technologies, the latest of which became
effective in March 1999. This agreement, however, does not guarantee that Lucent
Technologies will adequately fill our orders for current chip sets (either in
quantity or timing), or that we will be able to negotiate mutually satisfactory
terms for manufacturing our future chip sets. Any disruption in availability of
our products would have a serious adverse impact on our business. If we are
required for any reason to seek a new manufacturer of our chip sets, a new
manufacturer of our chip sets may not be available and in any event switching to
a new manufacturer would require six months or more and would involve
significant expense and disruption to our business. From time to time there are
shortages in worldwide foundry capacity. Such shortages, if they occur, could
make it more difficult for us to find a new manufacturer of our chip sets if our
relationship with Lucent Technologies is terminated for any reason. In order to
enhance our ability to obtain sufficient quantities of chip sets to meet our
growing product needs, we have been engaged in the process of negotiating and/or
exploring prospective supply agreements with other leading chip suppliers. In
this regard, we entered into an agreement with United Microelectronics
Corporation ("UMC") to supply certain of our chip sets. The UMC agreement, which
became effective in December 1999, provides us with the ability to obtain
delivery of specified chip sets in accordance with the agreement's terms, upon
our
27
<PAGE>
providing of binding forecasts to UMC. Although the UMC agreement provides for a
term of five years, with subsequent one year renewals, the supplier may cancel
the agreement upon 12 months' advance notice to us. While, in such an event, UMC
would still be required to fill our orders for commercially reasonable
quantities of product during the twelve month notice period, the termination of
this agreement by UMC could cause a disruption to our business. To further
provide us with greater chip supply capacity, we are in the process of
finalizing an agreement with Taiwan Semiconductor Manufacturing Co. and continue
our efforts to seek agreements with other chip manufacturers. None of these
other prospective agreements, however, would provide us with a guarantee that
our orders for chip sets will be adequately filled.
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 competitor and a
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.
28
<PAGE>
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. 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 acquired by Texas Instruments) stating that
they believe that they own a number of patents that are required to be compliant
with the American National Standards Institute (ANSI) standard specification
T1.413. This industry standard is based on the DMT line code. We have introduced
products that we believe are compliant with this industry standard, and we may
be required to obtain a license to these Amati Corporation patents. We are
currently evaluating the patents and proposed licensing terms. If these patents
are valid and essential to the implementation of products that are compliant
with this industry standard, then Amati Corporation may be required to offer us
a license on commercially reasonable, non-discriminatory terms. Because there
are currently no established terms for such a license, we may be unable to agree
with Amati Corporation on acceptable license terms. If these patents are valid,
but not essential to the implementation of products that are compliant with this
industry standard, and they apply to our products and we do not modify our
products so they become non-infringing, then Amati Corporation would not be
obligated to offer us a license on reasonable terms or at all. If we are not
able to agree on license terms and as a result fail to obtain a required
license, then we could be sued and potentially be liable for substantial
monetary damages or have the sale of our products stopped by an injunction. We
could also be subject to similar claims like the Amati Corporation claim by
third parties in the future.
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. Inquiries with
respect to the coverage of our intellectual property could develop into
litigation. In the event of an adverse ruling for an intellectual property
infringement claim, we could be required to obtain a license or pay substantial
damages or have the sale of our products stopped by an injunction. In addition,
if a customer of our chip sets cannot acquire a required license on commercially
reasonable terms, that customer may choose not to use our chip sets. We have
obligations to indemnify our customers under some circumstances for infringement
of third-party intellectual property rights. From time to time we receive
letters from customers inquiring as to the scope of these indemnity rights; for
example, in June 1999, we received a letter from Paradyne Corporation (a
customer and affiliated company), informing us that Paradyne had received a
letter from a third-party suggesting that some of the third-party's patents may
be infringed by Paradyne products. We evaluate all letters of this nature to
determine whether we have an indemnity obligation and take appropriate steps.
For example, our preliminary review of the letter from Paradyne and the claims
made by the third-party suggests that the third-party's patents, if infringed,
would be infringed by technology used by our suppliers (with whom we have
reciprocal indemnity agreements) and not by our
29
<PAGE>
technology, and, therefore, there is no material risk to us; we will continue
our review of this (and all other) claims, and take additional steps, if
appropriate. If any claims from third-parties required us to indemnify customers
(including Paradyne) under our agreements, the costs could be substantial and
our business could be harmed.
DESPITE OUR EFFORTS TO PROTECT OUR INTELLECTUAL PROPERTY, THIRD PARTIES MAY GAIN
ACCESS TO OUR PROPRIETARY TECHNOLOGY AND USE IT TO COMPETE WITH US
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or obtain and use information that
we regard as proprietary. For example, in June 1998, we filed suit against three
former employees who began employment with one of our competitors.
We rely primarily on a combination of patents, copyrights, trademarks, trade
secret laws, contractual provisions, licenses and maskwork protection under the
Federal Semiconductor Chip Protection Act of 1984 to protect our intellectual
property. In particular, we rely on these measures to protect our intellectual
property because, as a fabless semiconductor company, we have third parties,
including competitors such as Lucent Technologies, manufacture our chip sets. We
also enter into confidentiality agreements with our employees, consultants and
customers and seek to control access to, and distribution of, our other
proprietary information. There is no guarantee that such safeguards will protect
our intellectual property and other valuable competitive information.
In connection with our private placement of Series A preferred stock to
Intel Corporation, we agreed not to sue Intel Corporation for any violation by
it of our patent rights. This agreement terminates if Intel Corporation sues us
for any infringement by us of its patent rights. This agreement not to sue could
enable Intel Corporation to compete more effectively against us.
OUR EFFORTS TO PROTECT OUR INTELLECTUAL PROPERTY MAY BE LESS EFFECTIVE IN SOME
FOREIGN COUNTRIES WHERE INTELLECTUAL PROPERTY RIGHTS ARE NOT WELL PROTECTED BY
LAW OR ENFORCEMENT
The laws of some foreign countries do not protect our proprietary rights to
as great an extent as do the laws of the 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;
30
<PAGE>
- Product migration plans; and
- Technical support.
We believe our principal competitors include Alcatel, Analog Devices,
Centilliurn Technology Corporation, Conexant Systems, Level One Communications,
Lucent Technologies, MetaLink, Motorola and Texas Instruments. In addition to
these competitors, there have been growing numbers of announcements by other
integrated circuit companies that they intend to enter the DSL chip set market.
Many of our competitors have greater name recognition, their own
manufacturing capabilities, significantly greater financial and technical
resources, and the sales, marketing and distribution strengths that are normally
associated with large multinational companies. These competitors may also have
pre-existing relationships with our customers or potential customers. These
competitors may compete effectively with us because of the above-listed factors
and because they more quickly introduce new technologies, more rapidly or
effectively address customer requirements or devote greater resources to the
promotion and sale of their products than we do. Further, in the event of a
manufacturing capacity shortage, these competitors may be able to manufacture
products when we are unable to do so.
Further, many of our customers face competition from companies, such as
Orckit Communications, 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.
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<PAGE>
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 Lucent
Technologies, to design our chip sets into their DSL products. We further rely
on these products to be successful, and if they are not, we will not sell our
chip sets in volume quantities. Accordingly, we must correctly anticipate the
price, performance and functionality requirements of these DSL equipment--
manufacturers. We must also successfully develop products that meet these
requirements and make such products available on a timely basis and in
sufficient quantities. Further, if there is consolidation in the DSL equipment
manufacturing industry, or if a small number of DSL equipment manufacturers
otherwise dominate the market for DSL equipment, then our success will depend
upon our ability to establish and maintain relationships with these market
leaders. If we do not anticipate trends in the DSL market and meet the
requirements of DSL equipment manufacturers, or if we do not successfully
establish and maintain relationships with leading DSL equipment manufacturers,
then our business, financial condition and results of operations will be
seriously harmed.
SUBSTANTIAL SALES OF OUR CHIP SETS WILL NOT OCCUR UNLESS TELECOMMUNICATIONS
SERVICE PROVIDERS INITIATE SUBSTANTIAL DEPLOYMENT OF DSL SERVICES
The success of our products is dependent upon the decision by
telecommunications service providers to deploy DSL technologies and the timing
of the deployment. Factors that will impact such deployment include:
- A prolonged approval process, including laboratory tests, technical
trials, marketing trials, initial commercial deployment and full
commercial deployment;
- The development of a viable business model for DSL services, including the
capability to market, sell, install and maintain DSL services;
- Cost constraints, such as installation costs and space and power
requirements at the telecommunications service provider's central office;
- Varying and uncertain conditions of the local loop, including the size and
length of the copper wire, electrical interference and interference with
existing voice and data telecommunications services;
- Challenges of interoperability among DSL equipment manufacturers'
products;
- Evolving industry standards for DSL technologies; and
- Government regulation.
Although a number of telecommunications service providers have commenced
commercial deployment of DSL services using DSL products that incorporate our
chip sets, if these telecommunications service providers do not expand their
deployment of DSL services, or if additional telecommunications service
providers do not offer DSL services on a timely basis, then our business,
financial condition and results of operations will be seriously harmed.
THE RECENT RAPID EXPANSION IN OUR OPERATIONS HAS PLACED A STRAIN ON OUR
MANAGEMENT AND PERSONNEL AND OTHER RESOURCES
The recent rapid expansion in our operations has placed a strain on our
management and personnel and other resources. If we do not successfully manage
our business, financial condition and results of operations will be seriously
harmed. Further, from December 31, 1997 to December 31, 1999, we increased from
93 to 214 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
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<PAGE>
accommodate this expansion of operations, we must continue to implement and
improve information systems, procedures and controls and expand, train, motivate
and manage our work force.
SALES TO CUSTOMERS BASED OUTSIDE OF THE UNITED STATES HAVE ACCOUNTED FOR A
SIGNIFICANT PORTION OF OUR REVENUES, WHICH EXPOSES US TO INHERENT RISKS OF
INTERNATIONAL BUSINESS
The following table shows the percentage of our net revenues which we
derived from sales to customers based outside of the United States for the time
periods indicated:
<TABLE>
<CAPTION>
TIME PERIOD PERCENTAGE OF NET REVENUES
- ----------- --------------------------
<S> <C>
Year Ended December 31, 1999.......................... 47.0%
Year Ended December 31, 1998.......................... 32.6%
Year Ended December 31, 1997.......................... 49.2%
</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 years ended December 31, 1999, 1998 and 1997, 23.2%, 9.4% and 30.9%,
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
33
<PAGE>
agreed to indemnify our customers in some circumstances against liability from
defects in our products. A successful product liability claim could seriously
harm our business, financial condition and results of operations.
WE WILL CONTINUE TO BE CONTROLLED BY A PRINCIPAL STOCKHOLDER, WHICH MAY HAVE THE
EFFECT OF PREVENTING OR DELAYING A CHANGE OF CONTROL OF OUR COMPANY, AND THE
INTERESTS OF THE PRINCIPAL STOCKHOLDER MAY NOT ALWAYS COINCIDE WITH THOSE OF
OUR STOCKHOLDERS
Our executive officers and directors and their affiliates own, in the
aggregate, approximately 4.4% of our outstanding common stock.
Entities affiliated with Texas Pacific Group own approximately 40.3% of
GlobeSpan and are able to exercise control over GlobeSpan subject to the
fiduciary duties of its representatives on the board of directors under Delaware
law. The interests of Texas Pacific Group, may not always coincide with our
interests or the interests of other stockholders. Texas Pacific Group, through
its representatives on the board of directors, could cause us to enter into
transactions or agreements which we would not otherwise consider absent Texas
Pacific Group's influence.
Our current board of directors consists of Ms. Connor and Messrs. Coulter,
Deb, Epley, Faggin, Geday, Geeslin and Stanton. Our board of directors has also
created an Executive Committee consisting of Messrs. Coulter, Deb, Epley, Geday
and Stanton. 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. Accordingly, our continuing supplier relationship with
Paradyne Corporation, and any other potential business dealings between Paradyne
Corporation and us, could create conflicts of interest for the GlobeSpan
directors.
We have waived in our amended and restated certificate of incorporation the
application to us of section 203 of the Delaware General Corporation Law.
Section 203 of the Delaware General Corporation Law is a statute that generally
prohibits an "interested stockholder" from engaging in a "business combination"
with a corporation for three years following the time this person became an
interested stockholder. An "interested stockholder" is defined generally as a
person owning 15% or more of a corporation's voting stock or an affiliate or
associate of that person. A "business combination" is defined to include a
variety of transactions, including mergers and sales of 10% or more of a
corporation's assets. A business combination with an interested stockholder is
allowed, however, if the business combination is approved by at least 66.6% of
the shares held by the corporation's disinterested stockholders. By waiving
Section 203, it will be easier for us to enter into transactions with our
significant stockholders, including Texas Pacific Group, without giving our
disinterested stockholders the opportunity to approve the transaction.
ALTHOUGH WE ARE NOT PRIMARILY A SUPPLIER OF SOFTWARE, OUR 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. In late 1999, the
Company completed its Year 2000 compliance project. As a result of the Company's
efforts, the Company experienced no significant disruptions related to Year
2000. The Company is not aware of any material problems resulting from Year 2000
issues, either with its products, its internal systems, or the products and
services of suppliers. The incremental costs related to the Year 2000 project
were not material to the Company's results of operations, financial position or
cash flows. The Company will continue to monitor throughout the year 2000 its
critical computer applications, and those of its suppliers, to ensure that any
latent Year 2000 matters that may arise are addressed promptly.
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<PAGE>
WE HAVE CERTAIN ANTITAKEOVER DEFENSES THAT COULD DELAY OR PREVENT AN ACQUISITION
OF OUR COMPANY
Certain provisions of our certificate of incorporation and bylaws and the
provisions of Delaware law could have the effect of delaying, deferring or
preventing an acquisition of GlobeSpan. For example, we have authorized but
unissued shares of preferred stock which could be used to fend off a takeover
attempt, our stockholders may not take actions by written consent, our
stockholders are limited in their ability to make proposals at stockholder
meetings and our directors may be removed only for cause and upon the
affirmative vote of at least 80% of our outstanding voting shares.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL WHICH MIGHT NOT BE AVAILABLE OR WHICH,
IF AVAILABLE, WOULD BE ON TERMS ADVERSE TO OUR RECENT PUBLIC OFFERING
We expect the net proceeds from our recent public offering, our current cash
and cash equivalents and cash from commercial borrowing availability under
credit facilities will meet our working capital and capital expenditure needs
for at least one year. After that, we may need to raise additional funds, and we
cannot be certain that we will be able to obtain additional financing on
favorable terms, if at all. We may also require additional capital for the
acquisition of businesses, products and technologies that are complementary to
ours. Further, if we issue equity securities, the ownership percentage of our
stockholders would be reduced, and the new equity securities may have rights,
preferences or privileges senior to those existing holders of our common stock.
If we cannot raise needed funds on acceptable terms, we may not be able to
develop or enhance our products, take advantage of future opportunities or
respond to competitive pressures or unanticipated requirements, which could
seriously harm our business, operating results and financial condition.
OUR STOCK PRICE MAY BE VOLATILE OR THINLY TRADED, WHICH MIGHT MAKE IT DIFFICULT
FOR STOCKHOLDERS TO SELL THEIR SHARES
The market price of our common stock will likely fluctuate significantly in
response to the following factors, some of which are beyond our control:
- Variations in our quarterly operating results;
- Changes in financial estimates of our revenues and operating results by
securities analysts;
- Changes in market valuations of integrated circuit companies;
- Announcements by us of significant contracts, acquisitions, strategic
partnerships, joint ventures or capital commitments;
- Loss 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.
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<PAGE>
WE COULD BE SUBJECT TO CLASS ACTION LITIGATION DUE TO STOCK PRICE VOLATILITY,
WHICH, IF IT OCCURS, WILL DISTRACT MANAGEMENT AND RESULT IN SUBSTANTIAL COSTS,
AND COULD RESULT IN JUDGMENTS AGAINST US
In the past, securities class action litigation has often been brought
against companies following periods of volatility in the market price of their
securities. We may be the target of similar litigation in the future. Securities
litigation could result in substantial costs and divert management's attention
and resources, which could cause serious harm to our business, financial
condition and results of operations.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to immaterial levels of market risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the financial statements of the Company included herein and listed under
the heading "(a)(1) Financial Statements" of Part IV Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. ANNUAL DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference to the sections of the Company's proxy statement
for the 2000 Annual Meeting of Shareholders entitled "Election of Directors."
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the sections of the Company's proxy statement
for the 2000 Annual Meeting of Stockholders entitled "Executive Compensation,"
"Compensation Committee Report," "Certain Transactions" and "Compensation of
Directors."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the section of the Company's proxy statement
for the 2000 Annual Meeting of Stockholders entitled "Stock Ownership of
Principal Shareholders and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the section of the Company's proxy statement
for the 2000 Annual Meeting of Stockholders entitled "Certain Transactions."
36
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements- The following financial statements are included
at the indicated page of this Form 10-K and incorporated into this
Item 14(a)(1) by reference:
<TABLE>
<S> <C>
Report of Independent Accountants........................... F-1
Balance Sheets.............................................. F-2
Statements of Operations.................................... F-3
Statements of Changes in Stockholders' Equity............... F-4
Statements of Cash Flows.................................... F-5
Notes to Financial Statements............................... F-6
</TABLE>
(a)(2) Financial Statement Schedules
All schedules have been omitted since they are either not applicable or not
required, or because the information required is included in the financial
statements and notes thereto.
(a)(3) Exhibits--See Index to Exhibits
(b) Reports on Form 8-K--The Company has filed the following reports on
Form 8-K since December 31, 1999:
January 26, 2000 to report Other Events under Item 5 of Form 8-K; and
March 10, 2000 to report Acquisition or Disposition of Assets under
Item 2 of Form 8-K.
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<PAGE>
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 (deficit) and cash flows present
fairly, in all material respects, the financial position of GlobeSpan, Inc. (the
"Company") as of December 31, 1999 and 1998, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States. 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 auditing standards generally accepted in the United States,
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.
PricewaterhouseCoopers LLP
Florham Park, New Jersey
February 1, 2000, except as to Note 17 which is as of February 25, 2000
F-1
<PAGE>
GLOBESPAN, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $24,657 $ 12
Short-term investments.................................... 12,011 --
Accounts receivable, less allowance for doubtful accounts
of $337 and $61, respectively........................... 9,160 3,823
Accounts receivable from affiliates....................... 146 73
Inventories............................................... 10,656 912
Prepaid income taxes...................................... 190 1,178
Prepaid expenses and other current assets................. 2,911 564
------- -------
Total current assets.................................... 59,731 6,562
Property and equipment, net................................. 5,853 6,680
Other assets................................................ 5,407 188
------- -------
Total assets............................................ $70,991 $13,430
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under line of credit........................... $ -- $ 2,466
Accounts payable.......................................... 4,333 2,131
Accounts payable to affiliates............................ 80 327
Accrued expenses and other liabilities.................... 2,049 1,482
Payroll and benefit related liabilities................... 7,688 2,519
Current portion of capital lease obligations.............. 965 292
------- -------
Total current liabilities............................... 15,115 9,217
------- -------
Subordinated note payable to Communication Partners, L.P.... -- 5,000
Capital lease obligations, less current portion............. 443 506
------- -------
Total liabilities....................................... 15,558 14,723
------- -------
Commitments and contingencies (Note 14)
Stockholders' equity:
Preferred stock, par value $0.001; 10,000,000 shares
authorized;
none issued or outstanding.............................. -- --
Common stock, par value $0.001; 100,000,000 shares
authorized; 58,134,678, 36,795,795 shares issued and
outstanding, respectively............................... 58 37
Stock purchase warrant.................................... 1 3,654
Additional paid-in capital................................ 77,378 3,604
Notes receivable from stock sales......................... (7,412) (725)
Deferred stock compensation............................... (1,218) (76)
Accumulated other comprehensive loss...................... (22) --
Accumulated deficit....................................... (13,352) (7,787)
------- -------
Total stockholders' equity (deficit).................... 55,433 (1,293)
------- -------
Total liabilities and stockholders' equity.............. $70,991 $13,430
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
GLOBESPAN, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenues............................................. $ 56,220 $ 31,464 $ 22,546
Cost of sales............................................ 20,879 9,882 7,565
Cost of sales related to termination charge.............. 1,119 -- --
---------- ---------- ----------
Gross profit............................................. 34,222 21,582 14,981
---------- ---------- ----------
Operating expenses:
Research and development............................... 26,531 18,694 8,358
Selling, general and administrative.................... 14,389 10,217 4,572
Amortization and other................................. -- 583 1,000
---------- ---------- ----------
Total operating expenses............................. 40,920 29,494 13,930
---------- ---------- ----------
(Loss) income from operations............................ (6,698) (7,912) 1,051
Interest income.......................................... 1,581 55 91
Interest expense......................................... (448) (189) --
---------- ---------- ----------
(Loss) income before income taxes........................ (5,565) (8,046) 1,142
Provision (benefit) for income taxes..................... -- (217) 300
---------- ---------- ----------
Net (loss) income........................................ (5,565) (7,829) 842
Preferred stock deemed dividend and accretion............ (3,466) -- --
---------- ---------- ----------
Net loss attributable to common stockholders............. $ (9,031) $ (7,829) $ 842
========== ========== ==========
Other comprehensive loss:
Unrealized loss on marketable securities................. (22) -- --
---------- ---------- ----------
Comprehensive loss applicable to common stockholders..... $ (9,053) $ (7,829) $ 842
========== ========== ==========
(Loss) earnings per share:
Basic.................................................. $ (0.19) $ (0.22) $ 0.02
========== ========== ==========
Diluted................................................ $ (0.19) $ (0.22) $ 0.02
========== ========== ==========
Shares used in computing net (loss) earnings per share
Basic.................................................. 46,612,752 36,254,133 34,546,614
Diluted................................................ 46,612,752 36,254,133 38,119,296
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
GLOBESPAN, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NOTES ACCUMULATED
COMMON STOCK STOCK ADDITIONAL RECEIVABLE DEFERRED OTHER
--------------------- PURCHASE PAID-IN FROM STOCK COMPREHENSIVE
SHARES AMOUNT WARRANT CAPITAL STOCK SALES COMPENSATION LOSS
---------- -------- --------- ---------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance--December 31, 1996......... 34,312,500 $34 $ 1 $ 6,072 $ -- $ -- $ --
Net income.......................
Asset allocation charge.......... 244
Exercise of employee stock
options........................ 2,547,522 3 846 (794)
Non-employee stock options....... 52 (52)
---------- --- ------- ------- ------- ------- ----
Balance--December 31, 1997......... 36,860,022 $37 $ 1 $ 7,214 $ (794) $ (52) $ --
Net loss.........................
Distribution to Communication
Partners, L.P. (Note 9)........ 3,653 (3,653)
Exercise of employee stock
options........................ 127,962 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... (192,189) (64) 64
---------- --- ------- ------- ------- ------- ----
Balance--December 31, 1998......... 36,795,795 $37 $ 3,654 $ 3,604 $ (725) $ (76)
Net loss.........................
Issuance of common stock due to
initial public offering, net of
costs.......................... 11,212,500 11 49,729
Net exercise of warrants......... 2,173,500 2 (3,653) 3,651
Forgiveness of subordinated loan
to Communication Partners,
L.P............................ 100
Issuance of common stock and
exercise of stock options...... 3,568,521 4 7,091 (6,775)
Issuance and conversion of Series
A preferred stock, net of
costs.......................... 4,384,362 4 14,601
Preferred dividend attributable
to beneficial conversion
feature........................ (2,616)
Stock options issued at less than
fair market value.............. 1,218 (1,162)
Amortization of non-employee
stock options.................. 20
Repayment of notes receivable.... 336
Interest earned on notes
receivable..................... (248)
Accumulated other comprehensive
loss........................... (22)
---------- --- ------- ------- ------- ------- ----
Balance--December 31, 1999......... 58,134,678 $58 $ 1 $77,378 $(7,412) $(1,218) $(22)
========== === ======= ======= ======= ======= ====
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
------------ -------------
<S> <C> <C>
Balance--December 31, 1996......... $ (800) $ 5,307
Net income....................... 842 842
Asset allocation charge.......... 244
Exercise of employee stock
options........................ 55
Non-employee stock options....... --
-------- -------
Balance--December 31, 1997......... $ 42 $ 6,448
Net loss......................... (7,829) (7,829)
Distribution to Communication
Partners, L.P. (Note 9)........ --
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--December 31, 1998......... $ (7,787) $(1,293)
Net loss......................... (5,565) (5,565)
Issuance of common stock due to
initial public offering, net of
costs.......................... 49,740
Net exercise of warrants......... --
Forgiveness of subordinated loan
to Communication Partners,
L.P............................ 100
Issuance of common stock and
exercise of stock options...... 320
Issuance and conversion of Series
A preferred stock, net of
costs.......................... 14,605
Preferred dividend attributable
to beneficial conversion
feature........................ (2,616)
Stock options issued at less than
fair market value.............. 56
Amortization of non-employee
stock options.................. 20
Repayment of notes receivable.... 336
Interest earned on notes
receivable..................... (248)
Accumulated other comprehensive
loss........................... (22)
-------- -------
Balance--December 31, 1999......... $(13,352) $55,433
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
GLOBESPAN, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Cash flow (used in) provided by operating activities:
Net (loss) income......................................... $ (5,565) $(7,829) $ 842
Adjustments to reconcile net (loss) income to cash (used
in) provided by operating activities:
Deferred income taxes................................... -- 500 (500)
Provision for bad debts................................. 276 12 49
Provision for inventory obsolescence.................... -- 95 --
Amortization and depreciation........................... 3,513 2,657 1,702
Changes in assets and liabilities:
(Increase) decrease in accounts receivable.............. (5,686) 1,059 (3,315)
(Increase) in inventories............................... (9,744) (888) (119)
(Increase) in prepaid expenses and other assets......... (3,278) (1,698) (229)
Increase (decrease) in accounts payable................. 1,955 (194) 1,589
Increase in accrued expenses and other current
liabilities........................................... 5,736 2,886 874
--------- ------- -------
Net cash (used in) provided by operating activities......... (12,793) (3,400) 893
--------- ------- -------
Cash flows used in investing activities:
Capital expenditures...................................... (1,229) (4,810) (3,359)
Purchases of marketable securities........................ (111,087) -- --
Proceeds from sale/maturities of marketable securities.... 97,564 -- --
Investment in preferred stock............................. (2,000) -- --
--------- ------- -------
Net cash used in investing activities....................... (16,752) (4,810) (3,359)
--------- ------- -------
Cash flows provided by financing activities:
(Repayments of) proceeds from borrowings under
subordinated
note payable............................................ (4,900) 5,000 --
(Repayments of) proceeds from borrowings under line of
credit.................................................. (2,466) 2,466 --
Proceeds from issuance of common and preferred stock...... 62,049 61 55
Interest on and proceeds from repayment of notes
receivable.............................................. 88 5 --
Repayments of capital lease borrowings.................... (581) (185) --
--------- ------- -------
Net cash provided by financing activities................... 54,190 7,347 55
--------- ------- -------
Net increase (decrease) in cash and cash equivalents........ 24,645 (863) (2,411)
Cash and cash equivalents at beginning of period............ 12 875 3,286
--------- ------- -------
Cash and cash equivalents at end of period.................. $ 24,657 $ 12 $ 875
========= ======= =======
Supplemental disclosure of cash flow Information:
Cash paid:
Interest................................................ $ 442 $ 145 $ --
========= ======= =======
Income taxes............................................ $ -- $ 492 $ 1,000
========= ======= =======
Supplemental noncash financing activities:
Conversion of preferred stock into common stock........... $ 12,000 $ -- $ --
========= ======= =======
Notes receivable for sale of stock........................ $ 7,023 $ -- $ 794
========= ======= =======
Forgiveness of subordinated note payable.................. $ 100 $ -- $ --
========= ======= =======
Equipment acquired under capital lease.................... $ 1,191 $ 861 $ --
========= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
GLOBESPAN, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
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.
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 9 and 15. As of
December 31, 1998 and December 31, 1999, Communication Partners, L.P. owned 93%
and 59%, respectively, 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
F-6
<PAGE>
GLOBESPAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION (CONTINUED)
manufacturers of DSL equipment for incorporation into products which are sold to
telecommunications service providers and end users. On June 23, 1999, the
Company completed its initial public offering ("IPO") of 11,212,500 shares of
common stock at $5.00 per share. Net proceeds received by the Company, after
deducting offering costs, totaled $49.7 million.
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-7
<PAGE>
GLOBESPAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 $1,000
and $583 for the years ended December 31, 1997 and 1998, respectively. As of
December 31, 1998 this core technology was fully amortized.
The recoverability of carrying values was 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.
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 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.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE
INCOME ("FAS No. 130"). This statement requires companies to classify items of
other comprehensive income by their nature in the financial statements and
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of the
statement of operations. FAS No. 130 is effective for financial statements
issued for fiscal years beginning after December 15,
F-8
<PAGE>
GLOBESPAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
1997. The Company adopted FAS No. 130 in the 1998. The Company reported other
comprehensive loss of $22 and $0 for the years ended December 31, 1999 and 1998,
respectively.
LONG-LIVED ASSETS
The impairment of long-lived assets is assessed by Management using factors
including probable comparable fair market values, anticipated future cash flows,
and the aggregate value of the related businesses taken as a whole. These
factors are periodically reviewed to determine whether current events or
circumstances required adjustments to carrying values or estimated useful lives
of fixed or intangible assets in accordance with the provisions of FAS No. 121,
"Accounting for the Impairment of Long-Lived Assets."
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. In
March 1999, the board of directors approved a 1 for 3 reverse 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 17).
RECENT ACCOUNTING PRONOUCEMENT
In December 1999 the Securities and Exchange Commissions issued Staff
Accounting Bulletin 101 (SAB 101), as amended in March 2000, which summarizes
the staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. The Company will adopt SAB 101 in
the second quarter of 2000 and believes that adoption will not have a
significant effect on its consolidated results of operations or financial
position.
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 not subject to collateral
requirements. At December 31, 1999, 1998 and 1997, five of the Company's
customers accounted for $6,473 (67.1%), $3,492 (91.3%) and $3,582 (79.2%) of net
accounts receivable, respectively.
F-9
<PAGE>
GLOBESPAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
3. CONCENTRATION OF RISK AND CUSTOMER INFORMATION (CONTINUED)
Sales to three customers amounted to approximately $30,854 (54.9%), $22,042
(70.1%) and $9,818 (43.5%) of total revenues for the years ended December 31,
1999, 1998 and 1997, respectively. Revenues from customers who represented more
than 10% of net revenues were as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------------------
1999 1998 1997
-------- ---------- --------
<S> <C> <C> <C>
Net revenues:
Customer A................................... $ -- $ -- $4,832
Customer B................................... -- -- 2,811
Customer C................................... 23,185 15,190 --
Customer D................................... -- 3,974 --
</TABLE>
The Company's sales to overseas customers are denominated in the U.S.
dollar. Revenues by geographic region for the years ended December 31, 1999,
1998 and 1997 were as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net revenues:
United States.................................. $29,760 $21,214 $11,458
Europe......................................... 5,091 3,712 3,940
Mexico/Latin America........................... 7,725 3,063 98
Asia........................................... 13,061 2,973 6,964
Australia...................................... 583 502 86
------- ------- -------
$56,220 $31,464 $22,546
======= ======= =======
</TABLE>
A single vendor manufactures substantially all of the chip sets sold by the
Company. Purchases from this vendor approximated 75%, 81% and 98%, of total
inventory purchases for the years ended December 31, 1999, 1998 and 1997,
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 has entered into technology licensing and right to use
agreements whereby the Company received fees for the use and/or sale of specific
patented technology. Revenues from these agreements amounted to $119, $310 and
$1,931 for the years ended December 31, 1999, 1998 and 1997, respectively. (See
Note 15).
F-10
<PAGE>
GLOBESPAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
-------- --------
<S> <C> <C>
Computers and equipment.................................. $ 5,604 $ 5,110
Office furniture and fixtures............................ 156 131
Software................................................. 2,668 1,991
Leasehold improvements................................... 1,132 1,099
Property under capital leases............................ 2,052 861
------- -------
11,612 9,192
Less: accumulated depreciation........................... (5,759) (2,512)
------- -------
$ 5,853 $ 6,680
======= =======
</TABLE>
Included in operating expenses is depreciation expense of $3,247, $2,054 and
$702 for the years ended December 31, 1999, 1998 and 1997, respectively.
Accumulated amortization on assets accounted for as capital leases, amounted to
approximately $484 and $47 as of December 31, 1999 and 1998, respectively.
6. MARKETABLE SECURITIES
Marketable securities are included in cash equivalents, short-term
investments and other long-term assets, as appropriate. At December 31, 1999,
marketable securities totaling $13,545 were available-for-sale and recorded at
fair value:
<TABLE>
<CAPTION>
GROSS UNREALIZED GROSS UNREALIZED UNREALIZED
COST HOLDING GAINS HOLDING LOSSES MARKET VALUE
---- ---------------- ---------------- ------------
<S> <C> <C> <C>
$13,545 $0 $22 $13,523
</TABLE>
There were no marketable securities at December 31, 1998.
7. DEFINED CONTRIBUTION PLAN
The Company participates in a 401(k) plan covering substantially all
employees, which was maintained by Paradyne until June 1999. 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 $242, $348 for the years ended
December 31, 1997 and 1998, respectively. In addition, the Company accrued $179
for discretionary contributions as of December 31, 1998. Contributions to the
plan paid by the Company amounted to approximately $541 for the year ended
December 31, 1999.
8. TERMINATION OF BANKAMERICA BUSINESS CREDIT LINE OF CREDIT
Effective September 30, 1999, a termination agreement and mutual release was
signed by BankAmerica Business Credit and the Company with regard to a
$5.0 million revolving line of credit
F-11
<PAGE>
GLOBESPAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8. TERMINATION OF BANKAMERICA BUSINESS CREDIT LINE OF CREDIT (CONTINUED)
(the "Credit Line"), which bore interest at the bank's prime rate plus 1.5%. The
Credit Line contained certain financial covenants and restrictions as to various
matters including our ability to pay cash dividends or to effect mergers or
acquisitions, incur certain other indebtedness or to make certain investments
without the bank's prior approval. The Company was in compliance with such
financial covenants and restrictions at the time of termination of the
agreement. Borrowings under the Credit Line were collateralized by substantially
all of the Company's assets. The Credit Line was scheduled to expire in
May 2003.
9. STOCK PURCHASE WARRANT
In connection with the Company's inception (see Note 1), the Company issued
a warrant to acquire 3,937,500 shares of its common stock at an exercise price
of $2.24 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 which was
due on 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 15).
Upon the closing of the initial public offering, the outstanding warrant to
purchase common stock issued to Lucent Technologies was net exercised for
2,173,500 shares of common stock.
10. INCOME TAXES
Deferred tax assets are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
-------- --------
<S> <C> <C>
Amortization of intangibles.............................. $ 616 $ 670
Depreciation............................................. (48) (190)
Accrued expenses......................................... 219 386
Other.................................................... 136 25
Inventory obsolescence reserve........................... 38 38
Net operating loss carryforwards......................... 3,965 2,121
------- -------
4,926 3,050
------- -------
Less valuation allowance................................. (4,926) (3,050)
------- -------
Net deferred tax asset................................... $ -- $ --
======= =======
</TABLE>
F-12
<PAGE>
GLOBESPAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
10. INCOME TAXES (CONTINUED)
The Company anticipates continuing investments to research and development
and corporate infrastructure in advance of revenues. As such, as of
December 31, 1999 and 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>
YEARS ENDED
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal.......................................... $ -- $ (649) $ 700
State............................................ -- (23) 100
------- ------- -----
-- (672) 800
------- ------- -----
Deferred:
Federal.......................................... (1,595) (1,834) (172)
State............................................ (281) (761) (60)
Change in valuation allowance.................... 1,876 3,050 (268)
------- ------- -----
-- 455 (500)
------- ------- -----
Income tax provision (benefit)..................... $ -- $ (217) $ 300
======= ======= =====
</TABLE>
The Company has generated net operating loss carryforwards of approximately
$3,051 and $14,330 as of December 31, 1998 and December 31, 1999, respectively,
which are due to expire between 2018 and 2019. 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>
YEARS ENDED
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
U.S. statutory rate.................................... (34.0)% (34.0)% 34.0%
State taxes............................................ (5.9) (6.6) 2.0
Other.................................................. 0.0 0.0 6.3
Net operating loss utilized............................ 0.0 0.0 (10.0)
Change in valuation allowance.......................... 39.9 37.9 (6.0)
------ ----- -----
Effective tax rate..................................... 0.0% (2.7)% 26.3%
====== ===== =====
</TABLE>
F-13
<PAGE>
GLOBESPAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
11. 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. 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 is required to be computed using the treasury stock method.
The computations of Basic EPS and Diluted EPS for the years ended
December 31, 1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999
Net loss.................................................. $(5,565)
Preferred stock dividend and accretion.................... (3,466)
-------
Basic EPS:
Loss attributable to common stockholders................ (9,031) 46,612,752 (0.19)
Effect of dilutive stock options........................ -- -- --
------- ---------- ------
Diluted EPS:
Income available to common stockholders plus assumed
conversions........................................... $(9,031) 46,612,752 $(0.19)
======= ========== ======
YEAR ENDED DECEMBER 31, 1998
Net loss.................................................. $(7,829)
Basic EPS:
Loss attributable to common stockholders................ (7,829) 36,254,133 (0.22)
Effect of dilutive stock options........................ -- -- --
------- ---------- ------
Diluted EPS:
Loss attributable to common stockholders plus assumed
conversions........................................... $(7,829) 36,254,133 $(0.22)
======= ========== ======
YEAR ENDED DECEMBER 31, 1997
Net income................................................ $ 842
Basic EPS:
Income available to common stockholders................. 842 34,546,614 0.02
Effect of dilutive stock options........................ -- 3,572,682 --
------- ---------- ------
Diluted EPS:
Income available to common stockholders................. $ 842 38,119,296 $ 0.02
======= ========== ======
</TABLE>
As of December 31, 1999 and 1998, the Company had outstanding options,
restricted stock and a warrant to purchase an aggregate 8,572,575 and 10,122,543
shares of common stock, respectively, which
F-14
<PAGE>
GLOBESPAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
11. EARNINGS PER SHARE (CONTINUED)
were not included in the calculation of earnings per share for such periods, due
to the anti-dilutive nature of these instruments.
12. STOCKHOLDERS' EQUITY
In March 1999, the Company's board of directors approved the amendment of
the certificate of incorporation to increase 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 increase in the authorized preferred shares
was approved by the Company's stockholders in May 1999 and was executed on
June 18, 1999.
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 was convertible,
at the option of the holder, into shares of common stock at any time after the
date of issuance at a conversion rate of $8.211 per share and automatically
converted upon consummation of the company's IPO. Holders of Series A Stock were
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 were not cumulative. In the
event of a liquidation, dissolution or winding up of the Company, holders of the
Series A Stock were entitled to a distribution ratably with other common
stockholders of the Company, on an as-if converted basis. The Series A Stock
carried voting rights equal to one vote per share, on an as-converted basis. In
addition, the Company was precluded from certain specific corporate actions
without the consent of at least 66.6% of the holders of the Series A Stock.
In May 1999, the Company completed the sale of an aggregate 1,461,454 shares
of Series A Stock and warrants to purchase an aggregate 900,000 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 $5.00 per share for the first
225,000 shares, $6.25 per share for the second 225,000 shares, $7.50 per share
for the third 225,000 shares and $8.75 per share for the last 225,000 shares.
Since the issuance of the aforementioned Series A Stock included a
non-detachable conversion feature, that was "in-the-money" at the date of
issuance and was immediately exercisable, the Company recognized a charge of
approximately $2.6 million for the beneficial conversion feature attributable to
the common stockholders for the year ended December 31, 1999. In addition, the
carrying value of the Series A Stock was accreted to its redemption value in
1999. The accretion which totaled $0.9 million, and the beneficial conversion
feature related to the Series A Stock have been included in the net loss
attributable to common stockholders for the year ended December 31, 1999.
Upon consummation of the IPO, the Series A Stock converted to 4,384,362
shares of common stock.
F-15
<PAGE>
GLOBESPAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
13. STOCK OPTION PLANS AND EMPLOYEE STOCK PURCHASE PLAN
1996 EQUITY INCENTIVE 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 10,165,899 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 December 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 192,189 shares under
such provision. No shares had been repurchased during the year ended
December 31, 1999. At December 31, 1997, 1998 and 1999, there were 1,260,000,
506,250 and 2,249,784 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 fixed rates ranging from 5.22% 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 issuance.
1999 SUPPLEMENTAL STOCK OPTION PLAN
In December 1999, the Company's board of directors approved the adoption of
the 1999 Supplemental Stock Option Plan (the "1999 Supplemental Plan"). Upon
adoption of the 1999 Supplemental Plan, the Company reserved 6,000,000 shares of
its common stock, for issuance under the 1999 Supplemental Plan. Under the 1999
Supplemental Plan, the Company may grant incentive or nonqualified stock options
to non-officer employees and consultants. The 1999 Supplemental Plan will be
administered by the Compensation Committee of the board of directors in
accordance with the terms of the 1999 Supplemental Plan.
1999 EQUITY INCENTIVE PLAN
In March 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. Upon adoption of the 1999 Plan with the
closing of the Company's IPO, the Company reserved 3,000,000 shares of its
common stock, together with the shares of common stock remaining
F-16
<PAGE>
GLOBESPAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
13. STOCK OPTION PLANS AND EMPLOYEE STOCK PURCHASE PLAN (CONTINUED)
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 3,000,000 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 OPTION PLAN
In March 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. The Company reserved 750,000 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 Director Plan provides for automatic grants to non-employee
directors of the Company at defined intervals. Each non-employee director of the
Company was granted an option to purchase 30,000 shares of common stock at the
fair market value at the date in which the non-employee director was appointed
or at $5.00 with the consummation of the Company's IPO, an additional option to
purchase 15,000 shares of common stock on the date of the Company's annual
stockholders' meeting in the year 2000 and an additional option to purchase
15,000 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 will be
granted an option to purchase 30,000 shares of common stock on the date he or
she is first elected to the board of directors and an additional option to
purchase 15,000 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 15,000 shares of
common stock, each non-employee director will be granted an option to purchase
7,500 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.
F-17
<PAGE>
GLOBESPAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
13. STOCK OPTION PLANS AND EMPLOYEE STOCK PURCHASE PLAN (CONTINUED)
A summary of the Company's Stock Option Plans as of December 31, 1999, 1998
and 1997 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
OPTIONS PRICE
---------- --------
<S> <C> <C>
Balance at
December 31, 1997..................................... 4,097,778 $ 0.33
Granted............................................... 1,855,875 3.01
Exercised............................................. (127,962) .49
Forfeited............................................. (146,898) 1.14
----------
Balance at
December 31, 1998..................................... 5,678,793 1.18
Granted............................................... 5,806,191 14.86
Exercised............................................. (3,563,583) 2.00
Forfeited............................................. (71,808) 2.95
----------
Balance at
December 31, 1999..................................... 7,849,593 10.91
==========
</TABLE>
The following table summarizes information about outstanding stock options
as of December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- --------------------------
WEIGHTED-
AVERAGE WEIGHTED WEIGHTED
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
ACTUAL RANGES OF EXERCISE AT DECEMBER 31, CONTRACTUAL EXERCISE AT DECEMBER 31, EXERCISE
PRICES 1999 LIFE PRICE 1999 PRICE
------------------------- --------------- ----------- -------- --------------- --------
<S> <C> <C> <C> <C> <C>
$ 0.33 - 0.33 2,195,601 7.0 $ 0.33 2,195,601 $ 0.33
$ 1.33 - 1.33 205,488 8.0 $ 1.33 205,488 $ 1.33
$ 2.00 - 2.00 380,955 8.2 $ 2.00 380,955 $ 2.00
$ 3.33 - 3.33 1,200,498 9.2 $ 3.33 1,170,150 $ 3.33
$ 5.00 - 5.00 151,998 9.5 $ 5.00 76,998 $ 5.00
$ 14.10 -20.13 1,389,903 9.8 $17.83 312,453 $18.47
$ 21.25 -25.46 2,325,150 9.8 $23.34 1,353,750 $23.33
---------- ---------
$ 0.33 -25.46 7,849,593 8.8 $10.91 5,695,395 $ 7.64
========== =========
</TABLE>
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. 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
F-18
<PAGE>
GLOBESPAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
13. STOCK OPTION PLANS AND EMPLOYEE STOCK PURCHASE PLAN (CONTINUED)
forma basis would have been ($14,368), ($9,236) and $823 for the years ended
December 31, 1999, 1998 and 1997, respectively, calculated with the use of the
Black-Scholes option-pricing model. The pro forma basic and diluted net (loss)
income per share were ($0.31), ($0.25) and $0.02 for the years ended
December 31, 1999, 1998 and 1997, respectively. The following assumptions were
used for the years ended December 31, 1999, 1998 and 1997: (1) risk-free
interest rate of 5.9%, 4.6% and 6.6% respectively; (2) dividend yield of 0.00%;
(3) expected life of four years for December 31, 1999 and five years for
December 31, 1998 and 1997; and (4) volatility of 100% for December 31, 1999 and
.001% for December 31, 1998 and 1997. Results may vary depending on the
assumptions applied within the model.
During 1999, the Company granted stock options to employees to purchase
shares of common stock at exercise prices less than the estimated fair market
value of the Company's common stock at the time of grant. In connection with
these issuances, the Company recorded $1,218 of deferred compensation, of which
$56 was recognized during 1999 as compensation expense. The deferred
compensation is being amortized over the vesting period, which is generally four
years. The Company determined the amount of deferred compensation as the
difference between the estimated fair market value of the options granted and
the exercise price on the date of grant.
NON-EMPLOYEE OPTIONS
In fiscal 1998 and 1997, the Company granted 16,500 and 669,000 stock
options, respectively, to non-employees. In accordance with the requirements of
FAS 123, the Company recorded $44 and $52, 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. In 1999, there were no stock options granted to
non-employees.
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 was contingent upon the
closing of the Company's initial public offering of its common stock (the "IPO")
on June 22, 1999. The Company reserved 1,200,000 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 1,200,000 shares. The Purchase Plan permits
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 is administered by the Compensation Committee of the board of
directors in accordance with the terms of the Purchase Plan.
14. COMMITMENTS AND CONTINGENCIES
In October 1996, the Company became the sub-tenant of Paradyne under a
non-cancelable 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
F-19
<PAGE>
GLOBESPAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
14. COMMITMENTS AND CONTINGENCIES (CONTINUED)
under agreements that are classified as capital leases, the net book value of
which was $814 and $1,568 at December 31, 1998 and December 31, 1999,
respectively. Minimum required future lease payments under the Company's capital
and operating leases at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEARS ENDED DECEMBER 31, LEASES LEASES
- ------------------------ -------- ---------
<S> <C> <C>
2000...................................................... $1,057 $ 813
2001...................................................... 395 835
2002...................................................... 78 317
2003...................................................... 4 --
------ ------
Total minimum lease payments.......................... 1,534 $1,965
======
Less: amount representing interest........................ (126)
------
Present value of net minimum lease payments............... 1,408
Less: current portion..................................... (965)
------
$ 443
======
</TABLE>
Rent expense for the years ended December 31, 1999, 1998 and 1997
approximated $1,049, $868, $467 respectively, and is included in operating
expenses. In December 1998, the Company subleased additional office space from
Paradyne on a month to month basis. Rent expense relating to these additional
spaces amounted to $44 for the year ended December 31, 1999.
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, 1999, 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.
15. RELATED PARTY TRANSACTIONS
During the years ended December 31, 1999, 1998 and 1997, the Company
recorded product sales of $3,224, $962 and $373, respectively, related to goods
sold to Paradyne Corporation. Receivables
F-20
<PAGE>
GLOBESPAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
15. RELATED PARTY TRANSACTIONS (CONTINUED)
related to such product sales as of December 31, 1999 and 1998 amounted to $146
and $73, respectively. 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. In March 1999, the Company and Paradyne agreed to terminate the
Cooperative Development Agreement. In connection with such termination
agreement, the Company agreed to pay Paradyne an aggregate of $1.5 million, less
the amounts previously paid of approximately $0.3 million (or approximately
$1.2 million) to terminate the July discount pricing arrangement with Paradyne
Corporation. Such payment was made in 1999 and has been charged to cost of
sales.
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. 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.
In 1998 and 1997, 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 $231 and $155 for the years ended December 31, 1998 and 1997, respectively.
In the opinion of management, the method of allocation was reasonable.
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 14). In connection therewith, the
Company reimbursed approximately $392 of
F-21
<PAGE>
GLOBESPAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
15. RELATED PARTY TRANSACTIONS (CONTINUED)
Paradyne's moving expenses, the cost of which is included in operating expenses
for the year ended December 31, 1998.
16. VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS - BALANCE AT
BEGINNING COSTS AND END OF
CLASSIFICATION OF PERIOD EXPENSES DEDUCTIONS PERIOD
- -------------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999:
Allowance for doubtful accounts................ $ 61 $ 306 $(30)(a) $ 337
Inventory reserve.............................. 95 -- -- 95
Reserve for product return..................... 112 -- (112)(b) --
Valuation allowance--deferred tax asset........ 3,050 1,876 -- 4,926
YEAR ENDED DECEMBER 31, 1998:
Allowance for doubtful accounts................ 49 61 (49)(a) 61
Inventory reserve.............................. -- 95 -- 95
Reserve for product return..................... -- 112 -- 112
Valuation allowance--deferred tax asset........ -- 3,050 -- 3,050
YEAR ENDED DECEMBER 31, 1997:
Allowance for doubtful accounts................ -- 49 -- 49
</TABLE>
- ------------------------
(a) Represents accounts written off as uncollectible
(b) Represents write-off of reserve
17. SUBSEQUENT EVENTS--STOCK SPLIT
On January 21, 2000, the Company's board of directors approved a 3-for-1
stock split applicable to all issued and outstanding shares of its common stock,
par value $0.001. The 3-for-1 stock split was effected in the form of a stock
dividend and became effective on February 25, 2000 when stockholders of record
received two additional shares of common stock for each outstanding share of
common stock held on the record date. 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 this stock split.
18. SUBSEQUENT EVENTS--ACQUISITIONS (UNAUDITED)
On January 31, 2000, the Company acquired all of the issued and outstanding
shares of Ficon Technologies, Inc. ("Ficon"), a leading provider of solutions in
the areas of IP, ATM and Voice over Packet, which enable service providers to
build next generation communications infrastructure. The transaction will be
accounted for as a purchase transaction. The Company acquired such Ficon shares
for $5 million in cash and the right for Ficon shareholders to receive up to a
maximum of 1,959,999 shares of the company's common stock (the Shares). The
Shares may be issued in the future based upon the continued employment of
certain Ficon shareholders and the completion of development mile stones
mutually agreed to by the parties.
F-22
<PAGE>
GLOBESPAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
18. SUBSEQUENT EVENTS--ACQUISITIONS (UNAUDITED) (CONTINUED)
On February 24, 2000, the Company acquired certain technology and employees
of the Microelectronics Group of PairGain Technologies, Inc. ("PairGain"),
designers of integrated circuits and software for DSL applications. The
transaction will be accounted for as a purchase transaction. The Company paid
3,243,591 shares of its common stock and issued to PairGain a $90.0 million
subordinated redeemable convertible note (the "Note"). The Note may, within the
first six months after its issue, be redeemed at the option of the Company in
cash, or thereafter, be converted at the option of PairGain, into 2,919,237
shares of the Company's common stock. The Note matures in seven years and bears
interest at an annual rate of 5.0%, accrued and payable at the earlier of
maturity or redemption.
19. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------
MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Net revenues.............................. $7,568 $7,683 $ 7,765 $ 8,448 $ 8,641 $ 9,434 $17,032 $21,113
Gross profit.............................. 5,720 5,371 5,437 5,054 4,621 6,198 10,448 12,955
(Loss) income from operations............. 778 (1,721) (2,688) (4,281) (3,687) (2,246) (811) 46
Net (loss) income attributed to common
shareholders............................ 516 (1,174) (1,728) (5,443) (3,869) (5,830) (258) 926
Net (loss) income per common
share--basic............................ $ 0.01 $(0.03) $ (0.05) $ (0.15) $ (0.11) $ (0.14) $ (0.01) $ 0.02
====== ====== ======= ======= ======= ======= ======= =======
Net (loss) income per common share--fully
diluted................................. $ 0.01 $(0.03) $ (0.05) $ (0.15) $ (0.11) $ (0.14) $ (0.01) $ 0.01
====== ====== ======= ======= ======= ======= ======= =======
</TABLE>
F-23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities
Exchange Act of 1934, the registrant has caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
GLOBESPAN, INC.
By: /s/ ARMANDO GEDAY
-----------------------------------------
Armando Geday
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
March 30, 2000 DIRECTOR
</TABLE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Armando Geday and Robert McMullan, or either of
them, each with the power of substitution, his attorney-in-fact, to sign any
amendments to this Form 10-K (including post-effective amendments), and to file
the same, with exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming all
that each of said attorneys-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C> <C>
/s/ ARMANDO GEDAY President, Chief
By ------------------------------------------- Executive Officer March 30, 2000
Armando Geday and Director
Vice President, Chief
/s/ ROBERT MCMULLAN Financial Officer
By ------------------------------------------- and Corporate March 30, 2000
Robert McMullan Secretary
/s/ THOMAS EPLEY
By ------------------------------------------- Director March 30, 2000
Thomas Epley
/s/ KEITH GEESLIN
By ------------------------------------------- Director March 30, 2000
Keith Geeslin
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C> <C>
/s/ DAVID STANTON
By ------------------------------------------- Director March 30, 2000
David Stanton
/s/ DIPANJAN DEB
By ------------------------------------------- Director March 30, 2000
Dipanjan Deb
/s/ JAMES COULTER
By ------------------------------------------- Director March 30, 2000
James Coulter
/s/ BARBARA CONNOR
By ------------------------------------------- Director March 30, 2000
Barbara Connor
/s/ FEDERICO FAGGIN
By ------------------------------------------- Director March 30, 2000
Federico Faggin
</TABLE>
39
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ---------------------
<C> <S>
2.1 Agreement and Plan of Merger among the Company, FTI
Acquisition Corp. and Ficon Technology, Inc., dated January
12, 2000, (incorporated herein by reference to Exhibit 2.1
to the Company's Current Report on Form 8-K filed on March
10, 2000).
2.2 Asset Purchase Agreement between the Company and PairGain
Technologies, Inc., dated January 24, 2000 (incorporated
herein by reference to Exhibit 2.2 to the Company's Current
Report on Form 8-K filed on March 10, 2000).
3.1 Form of Restated Certificate of Incorporation of the
Registrant (incorporated herein by reference to Exhibit 3.2
to the Company's Registration Statement on Form S-1 (File
No. 333-75173)).
3.2 Amended and Restated Bylaws of the Registrant (incorporated
herein by reference to Exhibit 3.4 to the Company's
Registration Statement on Form S-1 (File No. 333-75173)).
4.1 Specimen Common Stock certificate (incorporated herein by
reference to Exhibit 4.2 to the Company's Registration
Statement on Form S-1 (File No. 333-75173)).
4.2 Investors' Rights Agreement dated May 6, 1999 (incorporated
herein by reference to Exhibit 10.19 to the Company's
Registration Statement on Form S-1 (File No. 333-75173)).
4.4 Warrant for the purchase of Common Stock made by the Company
and held by Cisco Systems, Inc., dated May 6, 1999
(incorporated herein by reference to Exhibit 10.20 to the
Company's Registration Statement on Form S-1 (File No.
333-75173)).
4.5 Warrant for the purchase of Common Stock made by the Company
and held by Cisco Systems, Inc., dated May 6, 1999
(incorporated herein by reference to Exhibit 10.21 to the
Company's Registration Statement on Form S-1 (File No.
333-75173).
10.1* Form of Indemnification Agreement entered into by the
Company with each of its directors and executive officers
(incorporated herein by reference to Exhibit 10.1 to the
Company's Registration Statement on Form S-1 (File No.
333-75173)).
10.2* 1999 Equity Incentive Plan (incorporated herein by reference
to Exhibit 10.2 to the Company's Registration Statement on
Form S-1 (File No. 333-75173)).
10.3* Employee Stock Purchase Plan (incorporated herein by
reference to Exhibit 10.3 to the Company's Registration
Statement on Form S-1 (File No. 333-75173)).
10.4* 1999 Director Stock Plan (incorporated herein by reference
to Exhibit 10.4 to the Company's Registration Statement on
Form S-1 (File No. 333-75173)).
10.5 Business Loan Agreement between BankAmerica Business Credit
and the Company, dated May 14, 1998 (incorporated herein by
reference to Exhibit 10.5 to the Company's Registration
Statement on Form S-1 (File No. 333-75173)).
10.6 Real Property Lease between Paradyne Corporation and Shav
Associates, dated October 8, 1996 (incorporated herein by
reference to Exhibit 10.7 to the Company's Registration
Statement on Form S-1 (File No. 333-75173)).
10.7 Real Property Sublease by and between the Company and
Paradyne Corporation, dated December 10, 1997 (incorporated
herein by reference to Exhibit 10.8 to the Company's
Registration Statement on Form S-1 (File No. 333-75173)).
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ---------------------
<C> <S>
10.8 Amendment to Real Property Sublease by the Company and
Paradyne Corporation, dated January 1, 1999 (incorporated
herein by reference to Exhibit 10.9 to the Company's
Registration Statement on Form S-1 (File No. 333-75173)).
10.9 Termination Agreement between the Company and Paradyne
Corporation, dated December 31, 1998 (incorporated herein by
reference to Exhibit 10.10 to the Company's Registration
Statement on Form S-1 (File No. 333-75173)).
10.10 Subordinated Promissory Note between the Company and
Communication Partners, L.P., dated December 15, 1998
(incorporated herein by reference to Exhibit 10.11 to the
Company's Registration Statement on Form S-1 (File No.
333-75173)).
10.11* Employment Agreement between the Company and Armando Geday,
dated April 1, 1997 (incorporated herein by reference to
Exhibit 10.12 to the Company's Registration Statement on
Form S-1 (File No. 333-75173)).
10.12* Employment Agreement between the Company and Thomas Epley,
dated August 29, 1997 (incorporated herein by reference to
Exhibit 10.13 to the Company's Registration Statement on
Form S-1 (File No. 333-75173)).
10.13 Agreement for the Manufacture and Sale of ASIC Products
between the Company and Lucent Technologies Inc.
Microelectronics, dated March 23, 1999 (incorporated herein
by reference to Exhibit 10.14 to the Company's Registration
Statement on Form S-1 (File No. 333-75173)).
10.14 Intellectual Property Agreement among the Company, Lucent
Technologies Inc. and Paradyne Corporation, dated July 31,
1996 (incorporated herein by reference to Exhibit 10.15 to
the Company's Registration Statement on Form S-1 (File No.
333-75173)).
10.15 Tax Matters Agreement between the Company and Paradyne
Corporation, dated July 31, 1996 (incorporated herein by
reference to Exhibit 10.16 to the Company's Registration
Statement on Form S-1 (File No. 333-75173)).
10.16 Product Supply Agreement between the Company and Paradyne
Corporation dated March 16, 1999 (incorporated herein by
reference to Exhibit 10.17 to the Company's Registration
Statement on Form S-1 (File No. 333-75173)).
10.17 AT&T Trademark and Patent Agreement between the Company,
AT&T Corp. and Paradyne Corporation, dated July 31, 1996
(incorporated herein by reference to Exhibit 10.18 to the
Company's Registration Statement on Form S-1 (File No.
333-75173)).
10.18 Investors' Rights Agreement between the Company, Intel
Corporation, Cisco Systems, Inc. and Communication Partners,
L.P., dated May 6, 1999 (incorporated herein by reference to
Exhibit 10.19 to the Company's Registration Statement on
Form S-1 (File No. 333-75173)).
10.19 Covenant Not to Sue between the Company and Intel
Corporation, dated May 6, 1999 (incorporated herein by
reference to Exhibit 10.22 to the Company's Registration
Statement on Form S-1 (File No. 333-75173).
10.20 Registration Rights Agreement between the Company and
PairGain Technologies, Inc., dated February 24, 2000
(incorporated herein by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K filed on March 10,
2000).
10.21 Subordinated Convertible Promissory Note issued by Company
to PairGain Technologies, Inc., dated February 24, 2000
(incorporated herein by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K filed on March 24,
2000).
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ---------------------
<C> <S>
21.1+ Subsidiaries of the Company.
23.1+ Consent of PricewaterhouseCoopers LLP.
27.1+ Financial Data Schedule.
</TABLE>
Certain portions of this exhibit have been granted confidential treatment by the
Commission. The omitted portions have been separately filed with the Commission.
- ------------------------
* Constitutes a management contract or compensatory plan or arrangement.
+ Filed herewith.
42
<PAGE>
Exhibit 21.1
SUBSIDIARIES OF GLOBESPAN, INC.
NAME STATE OF ORGANIZATION
- ---- ---------------------
GlobeSpan International Corp. Delaware
GlobeSpan International Sales Corp. Delaware
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Registration Nos. 333-81711 and 333-92057) of GlobeSpan,
Inc. of our report dated February 1, 2000, except as to Note 17 which is as of
February 25, 2000 relating to the financial statements, which appears in this
Form 10-K.
PricewaterhouseCoopers LLP
Florham Park, New Jersey
March 30, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001081197
<NAME> GLOBESPAN, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 24,657
<SECURITIES> 12,011
<RECEIVABLES> 9,643
<ALLOWANCES> 337
<INVENTORY> 10,656
<CURRENT-ASSETS> 59,731
<PP&E> 11,612
<DEPRECIATION> 5,759
<TOTAL-ASSETS> 70,991
<CURRENT-LIABILITIES> 15,115
<BONDS> 0
0
0
<COMMON> 58
<OTHER-SE> 55,375
<TOTAL-LIABILITY-AND-EQUITY> 70,991
<SALES> 56,220
<TOTAL-REVENUES> 56,220
<CGS> 20,879
<TOTAL-COSTS> 21,998
<OTHER-EXPENSES> 40,920
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 448
<INCOME-PRETAX> (5,565)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,565)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,031)
<EPS-BASIC> (0.19)
<EPS-DILUTED> (0.19)
</TABLE>
