<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
Commission File Number 000-26401
GLOBESPAN, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 75-2658218
(State of incorporation) (IRS Employer Identification No.)
100 SCHULZ DRIVE, RED BANK, NEW JERSEY 07701
(Address of principal executive offices, including ZIP code)
(732) 345-7500
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) Yes X No ___, and (2) has been
subject to such filing requirements for the past 90 days. Yes ___ No X .
The number of shares outstanding of the Registrant's Common Stock as of
May 1, 2000 was 65,672,407.
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<PAGE>
GLOBESPAN, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Part I. Financial Information..........................................................................................i
Item 1. Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999.................................1
Consolidated Statements of Operations for the Three Months Ended March 31, 2000 and 1999.......................2
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2000 and 1999.......................3
Notes to Consolidated Financial Statements.....................................................................4
Item 2. Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations.....7
Part II Other Information.............................................................................................21
Item 1. Changes in Securities and Use of Proceeds.............................................................21
Item 2. Exhibits and Reports on Form 8-K......................................................................21
Signature..............................................................................................................22
Exhibit Index..........................................................................................................23
</TABLE>
i
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
GLOBESPAN, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------- --------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 27,107 $ 24,657
Short-term investments............................................... 4,359 12,011
Accounts receivable, less allowance for doubtful account of $846 and
$337, respectively................................................. 15,407 9,160
Accounts receivable from affiliates.................................. 1,155 146
Inventories.......................................................... 16,662 10,656
Prepaid expenses and other current assets............................ 1,363 3,101
---------- ----------
Total current assets............................................ 66,053 59,731
Property and equipment, net.......................................... 7,506 5,853
Intangible assets, net............................................... 248,148 --
Other assets......................................................... 5,191 5,407
---------- ----------
Total assets................................................... $326,898 $ 70,991
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under line of credit ..................................... $ 200 $ --
Accounts payable..................................................... 6,242 4,333
Accounts payable to affiliates....................................... 82 80
Accrued expenses and other liabilities............................... 10,318 2,049
Payroll and benefit related liabilities.............................. 10,884 7,688
Current portion of capital lease obligations......................... 1,269 965
----------- ----------
Total current liabilities....................................... 28,995 15,115
Subordinated redeemable convertible note payable..................... 52,023 --
Capital lease obligations, less current portion...................... 674 443
---------- ------------
Total liabilities............................................... 81,692 15,558
---------- ------------
Commitments and contingencies.............................................
Stockholders' equity:
Preferred stock, par value $0.001; 10,000,000 shares authorized; none
issued and outstanding.......................................... -- --
Common stock, par value $0.001; 100,000,000 shares authorized;
63,472,407 and 58,134,678 shares issued and outstanding, respectively 63 58
Stock purchase warrant.............................................. 1 1
Additional paid-in capital.......................................... 366,752 77,378
Notes receivable from stock sales................................... (7,169) (7,412)
Deferred stock compensation......................................... (78,185) (1,218)
Accumulated other comprehensive..................................... (5) (22)
Accumulated deficit.............................................. (36,251) $(13,352)
---------- -----------
Total stockholders' equity....................................... 245,206 55,433
---------- -----------
Total liabilities and stockholders' equity....................... $326,898 $ 70,991
========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
GLOBESPAN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
For three months
ended March 31,
-------------------------------
2000 1999
------------ -----------
<S> <C> <C>
Net revenues ............................ $ 31,060 $ 8,641
Cost of sales ........................ 11,480 2,901
Cost of sales related to termination
charge ............................. -- 1,119
-------- --------
Gross profit ............................ 19,580 4,621
-------- --------
Operating expenses
Research and development (exclusive
of non-cash, compensation
expense of $1,879) .................. 10,880 5,380
Selling, general and
administrative (exclusive of non-cash
compensation expense of $1,569) ..... 6,242 2,928
Amortization of intangible assets .... 11,310 --
Non-cash compensation expense ........ 3,448 --
In process research and
development ........................ 1,343 --
-------- --------
Total operating expenses ................ 33,223 8,308
-------- --------
Loss from operations .................... (13,643) (3,687)
Interest income ...................... 606 --
Interest expense ..................... (498) (182)
Interest expense, non-cash ........... (9,364) --
-------- --------
Net loss ................................ $(22,899) $ (3,869)
======== ========
Basic and diluted net loss per
share attributable to common
shareholders............................ $ (0.39) $ (0.11)
========= ========
Weighted average shares of
common stock outstanding
used in computing basic
and diluted net loss per share........ 58,640,432 36,412,767
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
GLOBESPAN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------
2000 1999
---- ----
<S> <C> <C>
CASH FLOW (USED IN) OPERATING ACTIVITIES:
Net loss ................................................................ $(22,899) $ (3,869)
ADJUSTMENTS TO RECONCILE NET LOSS TO CASH (USED IN) OPERATING ACTIVITIES:
Provision for bad debts ............................................ -- 509
Non-cash interest expense .......................................... 9,364
Non-cash compensation expense ...................................... 3,448
Depreciation and amortization ...................................... 1,034 746
Amortization of intangible assets .................................. 11,310
Interest on convertible note payable ............................... -- 444
In-process research and development ................................ 1,343 --
CHANGES IN ASSETS AND LIABILITIES:
(Increase) decrease in accounts receivables ...................... (7,322) 923
(Increase) in inventories ........................................ (5,914) (1,688)
(Increase) decrease in prepaid expenses and other assets ......... 1,923 (520)
Increase in accounts payable .................................... 1,873 4,886
Increase in accrued expenses and other
current liabilities .............................................. 6,076 1,458
-------- --------
Net cash provided by operating activities .......................... 1,189 1,936
-------- --------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Purchases of property and equipment ..................................... (1,578) (67)
Acquisition of businesses ............................................... (6,638) --
Purchases of marketable securities ...................................... (1,386) --
Proceeds from sale/maturity of marketable securities .................... 9,133 --
-------- --------
Net cash provided by (used in) investing activities ................ (469) (67)
-------- --------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Repayments of borrowings under line of credit ........................... -- (1,689)
Proceeds from issuance of common stock .................................. 1,882 32
Proceeds from repayment of notes receivable ............................. 243 --
Repayments of capital lease obligations ................................. (395) (89)
-------- --------
Net cash provided by (used in) financing activities ................ 1,730 (1,735)
-------- --------
Net increase (decrease) in cash and cash equivalents .................... 2,450 134
Cash and cash equivalents at beginning of period ........................ 24,657 12
-------- --------
Cash and cash equivalents at end of period .............................. $ 27,107 $ 146
======== ========
Supplemental non cash financing activities:
Capital lease borrowings ........................................... 511 --
======== ========
</TABLE>
See Note 3 regarding the purchase price of business acquisitions.
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
GLOBESPAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
GlobeSpan, Inc. ("GlobeSpan" or the "Company") is a leading worldwide
developer of advanced digital subscriber line (DSL) integrated circuits which
enable high-speed data transmission over the existing network of copper
telephone wires known as the local loop. GlobeSpan sells integrated circuits as
chip sets to manufacturers of DSL equipment for incorporation into products
which are sold to telecommunications service providers and end users.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements have been
prepared by GlobeSpan and reflect all adjustments, consisting only of normal
recurring adjustments, which in the opinion of management are necessary to
present fairly the financial position and the results of operations for the
interim periods. The balance sheet at December 31, 1999 has been derived from
audited financial statements at that date. The financial statements have been
prepared in accordance with the regulations of the Securities and Exchange
Commission, but omit certain information and footnote disclosure necessary to
present the statements in accordance with generally accepted accounting
principles. For further information, refer to the financial statements and notes
thereto included in GlobeSpan's Annual Report on Form 10-K, filed with the
Securities and Exchange Commission on March 30, 2000. Results for the interim
periods are not necessarily indicative of results for the entire fiscal year.
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.
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.
As of March 31, 2000 and 1999, the Company had outstanding options and
warrants to purchase an aggregate of 12,530,908 and 10,321,380 shares of common
stock, respectively, which were not included in the calculation of earnings per
share for such periods, due to the anti-dilutive nature of these instruments.
REVENUE CONCENTRATION
Three customers accounted for 29.5%, 14.6% and 6.1% of net revenues in
the three months ended March 31, 2000. For the three months ended March 31,
1999, three customers accounted for 39.5%, 9.7% and 9.0% of net revenues,
respectively.
4
<PAGE>
Revenues by geographic region for the three months ended March 31, 2000
and 1999 were as follows:
<TABLE>
<CAPTION>
For three months
ended March 31,
-----------------------
2000 1999
------- -------
<S> <C> <C>
Net revenues:
North America $16,604 $ 4,983
Europe 1,415 1,073
Mexico/Latin America 4,620 1,508
Asia 8,390 979
Australia 31 98
------- -------
$31,060 $ 8,641
======= =======
</TABLE>
2. ACQUISITIONS
On January 31, 2000, the Company acquired all of the issued and
outstanding shares of Ficon Technology, 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
acquisition was 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
milestones mutually agreed to by the parties.
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 acquisition was 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. The Company has recorded a beneficial conversion
feature relating to the Note of $47.3 million reflecting the intrinsic value of
the beneficial conversion feature. Such amount is being amortized as interest
expense over the period the beneficial conversion feature is first available.
For the three months ended March 31, 2000, $9.4 million was recorded as interest
expense.
The following is a summary of all consideration paid for the
acquisitions of Ficon and PairGain in the three months ended March 31, 2000:
<TABLE>
<CAPTION>
<S> <C>
Fair value of common stock issued $159,756
Subordinated redeemable convertible note issued 90,000
Cash paid 5,000
Transaction costs 4,610
--------
Total purchase price $259,366
========
</TABLE>
The assets and liabilities of the acquired entities were recorded at
their appraised fair market value at the dates of acquisition. The allocations
were as follows:
<TABLE>
<CAPTION>
<S> <C>
Cash $ 346
Account receivable 444
Prepaid and other assets 139
Property and equipment 203
Goodwill and intangibles 259,458
---------
260,590
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
In process research and development 1,343
Liabilities assumed (2,567)
---------
Total purchase price $ 259,366
=========
</TABLE>
The amount allocated to in process research and development ("IPR&D")
of $1.3 million was expensed upon acquisition, as it was determined that the
underlying project had not reached technical feasibility, had no alternative
future use and successful development was uncertain. In the allocation of the
Ficon acquisition purchase price to IPR&D consideration was given to the
following for the project at the time of the acquisition:
- the present value of the forecasted cash flows and income that
were expected to result from the project;
- the status of the project;
- completion costs;
- project risks;
- the value of core technology; and
- the stage of completion of the project
In valuing core technology, the relative allocations to core technology
and IPR&D were consistent with the relative contribution of the project. The
determination of the value of IPR&D was based on efforts completed as of the
date Ficon was acquired.
As of the acquisition date, Ficon had a single development project in
process. In order to develop this project into commercially viable product, the
Company has to complete all designing and testing activities necessary to
establish that product could be produced to meet their design requirements. The
project is still in final development stages as of March 31, 2000, consistent
with the initial estimates used in the valuation of this project.
Certain shares of common stock issued to the principals of Ficon are
subject to forfeiture if their employment ceases with the Company, and is
recorded as deferred stock compensation. The deferred stock compensation
recorded was $28.8 million and is being amortized over the three year vesting
period on a straight line basis.
The Company also granted stock options to the employees, including
those of acquired entities, at various discounts to fair market value as
long-term retention strategy and recorded additional deferred stock compensation
of $50.9 million. This amount is being amortized over a four year vesting period
on a straight line basis.
The following unaudited pro forma information represents a summary of
the results of operations as if the Ficon acquisition occurred on January 1,
1999.
<TABLE>
<CAPTION>
For the three months ended
March 31, 2000 March 31, 1999
<S> <C> <C>
Revenue $ 31,120 $ 9,821
======== ========
Net loss $(23,418) $ (7,427)
======== ========
Net loss per common share $ (.40) $ (.20)
======== ========
</TABLE>
The pro forma results are based on various assumptions and are not
necessarily indicative of what would have occurred had this transaction been
consummated on January 1, 1999.
The Company also granted stock options to the employees, including
those of acquired entities, at various discounts to fair market value as
long-term retention strategy and recorded additional deferred stock compensation
of $50.9 million. This amount is being amortized over a four year vesting period
on a straight line basis.
3. SUPPLEMENTAL CASH FLOW DATA:
In the first quarter of 2000 the Company used cash of approximately
$6.6 million for business acquisitions in connection with the purchase of Ficon
Technology Inc. and for the purchase of certain technology and employees of the
Microelectronics Group of PairGain Technologies, Inc:
6
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Purchase price $ 259,366
Common stock issued (159,756)
Subordinated redeemable
convertible note payable (90,000)
Accrued transaction costs (2,626)
---------
Cash paid $ 6,984
Less: cash acquired (346)
---------
$ 6,638
=========
</TABLE>
4 RELATED PARTY TRANSACTIONS
In March 1999, the Company and Paradyne Corporation agreed to terminate
the Cooperative Development Agreement. In connection with such termination
agreement, the Company agreed to pay Paradyne an aggregate of $1.5 million, less
the amounts previously paid of approximately $0.3 million (or approximately $1.2
million) to terminate the July discount pricing arrangement with Paradyne
Corporation. Such payment was made in July 1999 and was charged to cost of sales
during the three months ended March 31, 1999. In addition, GlobeSpan and
Paradyne Corporation as part of the Termination Agreement affirmed that the
earlier technology license provisions of the Cooperative Development Agreement
were never implemented. In conjunction with the signing of the Termination
Agreement, GlobeSpan and Paradyne Corporation also entered into a four-year
Supply Agreement which gave Paradyne Corporation preferential pricing and other
terms in connection with the sale by GlobeSpan of products to Paradyne
Corporation. In addition, under the terms of the Supply Agreement, GlobeSpan is
required to honor Paradyne Corporation's orders for GlobeSpan's products in
quantities at least consistent with Paradyne Corporation's past ordering
practices and must afford Paradyne Corporation at least the same priority for
Paradyne Corporation's orders as GlobeSpan affords its other similarly situated
customers. GlobeSpan also granted Paradyne Corporation a standard customer
immunity under GlobeSpan's intellectual property rights with respect to any of
Paradyne Corporation's products which incorporate GlobeSpan's products. Net
revenues for the three months ended March 31, 2000 and 1999 were $1.9 million
and $0.6 million, respectively.
5. SUBSEQUENT EVENTS
On April 27, 2000, the Company acquired all of the issued and
outstanding shares of T.sqware, Inc. ("T.sqware"), a leading developer of
programmable network processor technology and products based in Santa Clara, CA.
The acquisition will be accounted for as a purchase transaction. The Company
issued 2,022,431 shares of its common stock and assumed the outstanding T.sqware
options for the equivalent of 177,569 Company stock options.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE INFORMATION IN THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E
OF THE SECURITIES ACT OF 1934, AS AMENDED. SUCH STATEMENTS ARE BASED UPON
CURRENT EXPECTATIONS THAT INVOLVE RISKS AND UNCERTAINTIES. ANY STATEMENTS
CONTAINED HEREIN THAT ARE NOT STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE
FORWARD-LOOKING STATEMENTS. FOR EXAMPLE, THE WORDS "BELIEVES," "ANTICIPATES,"
"PLANS," "EXPECTS," "INTENDS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. GLOBESPAN'S ACTUAL RESULTS AND THE TIMING OF CERTAIN
EVENTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DISCREPANCY INCLUDE,
BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN BELOW, AS WELL AS RISK FACTORS
INCLUDED IN THIS QUARTERLY REPORT ON FORM 10-Q. ALL FORWARD-LOOKING STATEMENTS
IN THIS DOCUMENT ARE BASED ON INFORMATION AVAILABLE TO GLOBESPAN AS OF THE DATE
HEREOF AND GLOBESPAN ASSUMES NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING
STATEMENTS.
7
<PAGE>
The following table presents our unaudited quarterly results as a
percentage of revenues for the three months ended March 31, 2000 and 1999. Our
results of operations are reported as a single business segment.
<TABLE>
<CAPTION>
For Three Months
Ended March 31,
---------------
2000 1999
---- ----
<S> <C> <C>
Net revenues .............................. 100.0% 100.0%
----- -----
Cost of sales ............................. 37.0 33.6
Cost of sales related to termination charge -- 12.9
----- -----
Gross profit .......................... 63.0 53.5
===== =====
Operating expenses
Research and development .............. 35.0 62.3
Selling, general and administrative ... 20.1 33.9
Amortization of intangible assets ..... 36.4 --
Non-cash compensation expense ......... 11.1 --
In process research and development ... 4.3 --
----- -----
----- -----
Total operating expenses ......... 106.9 96.2
Loss from operations ...................... (43.9) (42.7)
Interest Income ........................... 1.9 --
Interest expense, ......................... (1.6) (2.1)
Interest expense non-cash ................. (30.1) --
===== =====
Net loss .................................. (73.7)% (44.8)%
===== =====
</TABLE>
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
NET REVENUES Our net revenues were $31.1 million and $8.6 million in
the three months ended March 31, 2000 and 1999, respectively. This amount
represents an increase of 259.4%. This increase in net revenues was primarily
due to the increases in unit volume shipments to existing customers, expansion
of our customer base and the introduction of new products. Net revenues from
international customers represented 46.5% and 42.3% of our net revenues in the
three months ended March 31, 2000 and 1999, respectively. Net revenues from
international customers increased as a percentage of net revenues as a result of
the use of outside manufacturers located in the Asian pacific rim and Mexico by
our domestic customers. We expect that net revenues generated from international
customers will continue to account for a significant percentage of our net
revenues.
COST OF SALES AND GROSS PROFIT. Our gross profit was $19.6 million and
$4.6 million in the three months ended March 31, 2000 and 1999, respectively.
This amount represents an increase of 323.7%. Our gross margin was 63.0% and
53.5% in the three months ended March 31, 2000 and 1999, respectively. The
increase in gross margin was due to a one-time termination charge related to the
termination of a royalty agreement with Paradyne Corporation in the three months
ended March 31, 1999. Without this termination charge, our gross margins would
have decreased from 66.4% to 63.0%. This decrease was related to lower average
selling prices due to increased unit volumes shipped. The increase in gross
profit dollars was the result of higher net revenues. We expect that gross
margin may decrease in the future due to a number of factors, including
pressures on average selling prices, product mix, and customer mix.
RESEARCH AND DEVELOPMENT. Our research and development expenses were
$10.9 million and $5.4 million in the three months ended March 31, 2000 and
1999, respectively. This amount represents an increase of 102.2%. Research and
development expense represented 35.0% and 62.3% of net revenues for the three
months ended March 31, 2000 and 1999, respectively. The increase in dollars is
the result of the inclusion of our two acquisitions completed during the three
months ended March 31, 2000, and from an increase in development efforts in
advance of anticipated revenues from such efforts. In addition, we added new
personnel and related support from the acquisitions and new hiring and incurred
higher amounts of non-recurring engineering expenses related to new products.
The decrease in research and development expense as a percentage of revenue
was due to higher net revenues. Our research and development expense may
increase due to planned increases in personnel, prototyping costs and
depreciation resulting from increased capital investment.
SELLING, GENERAL AND ADMINISTRATIVE. Our selling, general and
administrative expense was $6.2 million and $2.9 million in the three months
ended March 31, 2000 and 1999, respectively. This amount represents an increase
of 113.2%. Selling, general and administrative expense represented 20.1% and
33.9% of net revenues for the three months ended March 31, 2000 and 1999,
respectively. The increase in dollars resulted from the increase in sales,
marketing and administrative personnel and related expenses, increased
commissions and administrative costs. The decrease in the
8
<PAGE>
percentage of selling, general and administrative expense was due to higher net
revenues. Our selling, general and administrative expense may increase due to
higher commissions and administrative costs.
AMORTIZATION OF INTANGIBLE ASSETS. During the three months ended March
31, 2000, we completed two acquisitions which we accounted for as purchases. The
increase in the dollar amount and percentage is the result of our amortizing the
intangible assets acquired.
NON-CASH COMPENSATION. During the three months ended March 31, 2000, we
exchanged our common stock with employee principals of Ficon which was
considered compensation and granted certain employees stock options at less than
fair market value. The deferred stock compensation recorded is being amortized
over the respective vesting periods of 3 and 4 years. The increase in the dollar
amount and percentage is the result of our amortizing the deferred compensation.
IN PROCESS RESEARCH AND DEVELOPMENT. During the three months ended
March 31, 2000, we completed the acquisition of Ficon which had a development
project not yet complete. The increase in dollars and percentage is the result
of expensing the IPR&D acquired.
INTEREST (EXPENSE) INCOME, NET. Interest income for the three months
ended March 31, 2000 was $0.1 million. Interest expense for the three months
ended March 31, 1999 was $0.2 million. The increased interest income resulted
from investment of excess of cash balances.
INTEREST (EXPENSE) NON-CASH. We issued a subordinated, convertible
redeemable note with a beneficial conversion feature measured by the price of
our common stock at closing and the conversion price as defined. We are
amortizing the beneficial conversion feature of approximately $48.0 million,
over our call period through August 2000. The increase in dollar amount and
percentage is the result of the amortization.
RECENT ACCOUNTING PRONOUCEMENTS
In December 1999 the Securities and Exchange Commission 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. We will adopt SAB 101 in the second
quarter of 2000 and believe that adoption will not have a significant effect on
our consolidated results of operations or financial position.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations from initial capital, borrowings on our
lines of credit and the sale of Series A preferred stock and common stock
through our initial public offering on June 23, 1999. As of March 31, 2000, we
had working capital of approximately $37.6 million and $27.1 million in cash and
cash equivalents.
Net cash provided by operating activities was $1.2 million in the three
months ended March 31, 2000. Net cash provided by operating activities was $1.9
million in the three months ended March 31, 1999. The decrease in 2000 from 1999
was primarily due to timing of accrued expenses and other current liabilities.
Net cash used in investing activities was $0.5 million in the three
months ended March 31, 2000, related to costs associated with the acquisitions
of Ficon and PairGain, and the acquisition of capital equipment, partially
offset by the sale/maturity of short term investments. Net cash used in
investing activities for the three months ended March 31, 1999 was $0.1 million
and related primarily to capital expenditures.
Cash provided by financing activities was $1.7 million in the three
months ended March 31, 2000, and was provided by the net proceeds of issuance of
common stock and repayment of employee notes receivable. Cash used in financing
activities was $1.7 million in the three months ended March 31, 1999, and was
primarily related to the repayment of borrowings under a line of credit.
We currently anticipate that the net proceeds from our initial public
offering, together with our current cash, cash equivalents, and the Subordinated
Line, will be sufficient to meet our anticipated cash needs for working capital
and capital expenditures for at least the next 12 months. Thereafter, cash
generated from operations, if any, may not be sufficient to satisfy our
liquidity requirements. We may therefore need to sell additional equity or raise
funds by other means. Any
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additional financings, if needed, might not be available on reasonable terms or
at all. Failure to raise capital when needed could seriously harm our business
and operating results. If additional funds are raised through the issuance of
equity securities, the percentage of ownership of our stockholders would be
reduced. Furthermore, these equity securities might have rights, preferences or
privileges senior to our common stock.
ALTHOUGH WE EXPERIENCED NO SIGNIFICANT YEAR 2000 DISRUPTIONS WE WILL CONTINUE TO
MONITOR DEVELOPMENTS
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,
we completed our Year 2000 compliance project. As a result of our efforts, we
experienced no significant disruptions related to Year 2000. We are not aware of
any material problems resulting from Year 2000 issues, either with our products,
our internal systems, or the products and services of supplies. The incremental
costs related to the Year 2000 project were not material to the our results of
operations, financial position or cash flows. We have not experienced any
significant issues and will continue to monitor throughout Year 2000 our
critical computer applications, and those of our suppliers, to ensure that any
latest Year 2000 matters that may arise are addressed promptly.
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 be caused by
factors related to the operation of our business, including:
o Variations in the timing and size of chip set orders from, and
shipments to, our existing and new customers;
o Loss of a significant customer, or a significant decrease in
purchases by significant customers, such as Cisco Systems or
Lucent Technologies;
o 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;
o The availability of foundry capacity and the expense of having
our chip sets manufactured by Lucent Technologies or other
foundries in the future;
o The timing and size of expenses, including operating expenses
and expenses of developing new products and product
enhancements; and
o Our ability to attract and retain key personnel.
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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:
o The timing and rate of deployment of DSL services by
telecommunications service providers;
o The timing and rate of deployment of alternative high-speed
data transmission technologies, such as cable modems and
high-speed wireless data transmission;
o Anticipated decreases in per unit prices as competition among
DSL chip set suppliers increases; and
o The level of market penetration of our chips sets relative to
those of our competitors.
These variations will also be caused by other factors affecting our
business, many of which are substantially outside of the control of our
management, including:
o Costs associated with future litigation, including litigation
relating to the use or ownership of intellectual property;
o Acquisition costs or other non-recurring charges in connection
with the acquisition of companies, products or technologies;
o 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
o 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 attributable to common stockholders of
$22.9 million in the three months ended March 31, 2000, $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 ended 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
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our significant customers, particularly Cisco Systems, or suffer a substantial
reduction in orders from such customers. In the three months ended March 31,
2000 and the years ended December 31, 1999, 1998 and 1997, our customers who
individually represented at least five percent of our net revenues accounted for
67.6%, 60.6%, 70.1% and 72.6%, respectively, of our net revenues. In the three
months ended March 31, 2000, our top three customers were Cisco Systems, Lucent
Technologies and Xavi Technologies, which accounted for 29.5%, 14.6% and 6.1% of
our net revenues, respectively. 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 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:
o Intense competition;
o Rapid technological change;
o Frequent new product introductions by our competitors;
o Changes in customer demands; and
o Evolving industry standards.
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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 provision 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 continuing
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
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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.
THE NATURE OF OUR RELATIONSHIP WITH, AND SUBSTANTIAL DEPENDENCE ON, LUCENT
TECHNOLOGIES MAY PROVIDE LUCENT TECHNOLOGIES WITH AN ADVANTAGE AS A COMPETITOR
OF OURS
Lucent Technologies is a competitor of ours. Additionally, Lucent
Technologies is a source of our intellectual property, the principal
manufacturer of our chip sets and our customer. 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 these intellectual
property rights may bring infringement claims against us. Any such litigation,
whether or not determined in our favor or settled by us,
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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 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:
o Time to market;
o Functionality;
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o Conformity to industry standards;
o Performance;
o Price;
o Breadth of product lines;
o Product migration plans; and
o 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, train and
retain qualified technical personnel. However, there are many employers
competing to hire qualified technical personnel and we have had difficulty
attracting and retaining such personnel. We expect to continue to have
difficulty hiring and retaining qualified personnel. Further, our competitors
have recruited our employees and may do so in the future.
IF LEADING DSL EQUIPMENT MANUFACTURERS DO NOT INCORPORATE OUR CHIP SETS IN
SUCCESSFUL PRODUCTS, SALES OF OUR PRODUCTS WILL SIGNIFICANTLY DECLINE
We rely upon DSL equipment manufacturers, such as Cisco Systems and
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
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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:
o A prolonged approval process, including laboratory tests,
technical trials, marketing trials, initial commercial
deployment and full commercial deployment;
o The development of a viable business model for DSL services,
including the capability to market, sell, install and maintain
DSL services;
o Cost constraints, such as installation costs and space and
power requirements at the telecommunications service
provider's central office;
o 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; o Challenges of interoperability
among DSL equipment manufacturers' products;
o Evolving industry standards for DSL technologies; and
o 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.
OUR ACQUISITIONS OF FICON TECHNOLOGY, INC. AND THE MICROELECTRONICS GROUP OF
PAIRGAIN TECHNOLOGIES, INC. AND ANY FUTURE ACQUISITIONS MAY BE DIFFICULT TO
INTEGRATE, DISRUPT OUR BUSINESS, DILUTE STOCKHOLDER VALUE OR DIVERT MANAGEMENT
ATTENTION
We acquired Ficon on January 31, 2000 and PairGain on February 24,
2000. We are in the initial stages of integrating the products, software,
services, technologies and personnel from each company into GlobeSpan. We may
encounter problems associated with the assimilation of Ficon and the
Microelectronics Group of PairGain including:
o difficulties in assimilation of acquired personnel,
operations, technologies or products;
o unanticipated costs associated with the acquisitions;
o diversion of management's attention from other business
concerns;
o adverse effects on our existing business relationships with
our or the acquired company's customers; and
o inability to retain employees of the acquired companies.
If we are unable to successfully integrate Ficon and the
Microelectronics Group of PairGain or to create new or
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enhanced products, we may not achieve the anticipated benefits from our
acquisitions. If we fail to achieve the anticipated benefits from the
acquisitions, we may incur increased expenses, experience a shortfall in our
anticipated revenues and we may not obtain a satisfactory return on our
investment. In addition, if any significant number of Ficon or the
Microelectronics Group of PairGain employees fail to remain employed with us, we
may experience difficulties in achieving the expected benefits of the
acquisitions.
Beginning in the three months ended March 31, 2000, we will begin to
incur charges associated with these and future acquisitions including
amortization of intangible assets and goodwill, in process research and
development and non-cash compensation charges associate with stock issued and
stock options granted from these and future acquisitions. We expect these
charges to be significant.
THE RECENT RAPID EXPANSION IN OUR OPERATIONS AND OUR RECENT ACQUISITIONS HAVE
PLACED A STRAIN ON OUR MANAGEMENT AND PERSONNEL AND OTHER RESOURCES
The recent rapid expansion in our operations and our recent
acquisitions have placed a strain on our management and personnel and other
resources. If we do not successfully manage our business, our financial
condition and results of operations will be seriously harmed. Further, from
December 31, 1997 to March 31, 2000, we grew from 93 to 339 total employees.
This growth has placed and will continue to place a significant strain upon our
management, operating and financial systems and other resources. To accommodate
this expansion of operations, we must continue to implement and improve
information systems, procedures and controls and expand, train, motivate and
manage our work force.
WE MAY MAKE FUTURE ACQUISITIONS WHERE ADVISABLE AND ACQUISITIONS INVOLVE
NUMEROUS RISKS
Our business is highly competitive, and as such, our growth is
dependent upon market growth, our ability to enhance our existing products and
our ability to introduce new products on a timely basis. One of the ways we have
addressed and may continue to address the need to develop new products is
through acquisitions of other companies. Acquisitions involve numerous risks,
including the following:
- difficulties in integration of the operations, technologies,
and products of the acquired companies;
- the risk of diverting management's attention from normal daily
operations of the business;
- potential difficulties in completing projects associated
with purchased in-process research and development;
- risks of entering markets in which we have no or limited
direct prior experience and where competitors in such markets
have stronger market positions; and
- the potential loss of key employees of the acquired company.
Mergers and acquisitions of high-technology companies are inherently
risky, and no assurance can be given that our previous or future acquisitions
will be successful and will not materially adversely affect our business,
operating results or financial condition.
We must also maintain our ability to manage such growth effectively.
Failure to manage growth effectively and successfully integrate acquisitions
we made could harm our business and operating results.
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
times periods indicated:
Time Period Percentage of Net Revenues
----------- --------------------------
Three months ended March 31, 2000 46.5%
Year ended December 31, 1999 47.0%
Year ended December 31, 1998 32.6%
Year ended December 31, 1997 49.2%
We expect that sales to 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:
o Unexpected changes in regulatory requirements;
o Tariffs and other trade barriers, including current and future
import and export restrictions;
o Difficulties in collecting accounts receivables;
o Difficulties in staffing and managing international
operations;
o Potentially adverse tax consequences, including restrictions
on the repatriation of earnings;
o The burdens of complying with a wide variety of foreign laws
(particularly with respect to intellectual property) and
license requirements;
o The risks related to international political instability and
to the recent global economic turbulence and adverse economic
circumstances in Asia;
o Risks that changes in foreign currency exchange rates will
make our products comparatively more expensive;
o 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;
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o Difficulties in protecting intellectual property rights in
certain foreign countries; and
o Limited ability to enforce agreements and other rights in
certain foreign countries.
In the three months ended March 31, 2000 and the years ended December
31, 1999, 1998 and 1997, 27.0%, 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 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 48.0% of our outstanding common stock.
Entities affiliated with Texas Pacific Group own approximately 39.7% 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.
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
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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, COULD BE ON TERMS ADVERSE TO OUR COMMON STOCKHOLDERS
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 CONTINUE TO BE VOLATILE
The market price of our common stock has been extremely volatile and
will likely continue to fluctuate significantly in response to the following
factors, some of which are beyond our control:
o Variations in our quarterly operating results;
o Changes in financial estimates of our revenues and operating
results by securities analysts;
o Changes in market valuations of integrated circuit companies;
o Announcements by us of significant contracts, acquisitions,
strategic partnerships, joint ventures or capital commitments;
o Loss or decrease in sales to a major customer or failure to
complete significant transactions;
o Loss or reduction in manufacturing capacity from Lucent
Technologies;
o Additions or departures of key personnel;
o Future sales of our common stock;
o Stock market price and volume fluctuations attributable to
inconsistent trading volume levels of our stock;
o Commencement of or involvement in litigation; and
o Announcements by us or our competitors of key design wins and
product introductions.
WE COULD BE SUBJECT TO CLASS ACTION LITIGATION DUE TO STOCK PRICE VOLATILITY,
WHICH, IF IT OCCURS, WILL DISTRACT MANAGEMENT AND RESULT IN SUBSTANTIAL COSTS,
AND COULD RESULT IN JUDGMENTS AGAINST US
In the past, securities class action litigation has often been brought
against companies following periods of volatility in the market price of their
securities. We may be the target of similar litigation in the future. Securities
litigation could result in substantial costs and divert management's attention
and resources, which could cause serious harm to our business, financial
condition and results of operations.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
A three-for-one stock split of the Company's Common Stock was effected
in the form of a stock dividend for stockholders of record at the close of
business of February 15, 2000. The shares were distributed by the Company's
transfer agent on February 25, 2000 and the stock began trading on a
split-adjusted basis on February 28, 2000.
During the quarter, the Company issued 960,000 shares of its Common
Stock (along with $5.0 million in cash) in exchange for all of the issued and
outstanding shares of Ficon. An additional 999,999 shares are in escrow and may
be issued to shareholders of Ficon based upon the continued employment of
certain Ficon shareholders and the completion of development milestones agreed
to by the parties. These issuances were affected in reliance on the exemptions
from registration provided by Section 4(2) of the Securities Act.
During the quarter, the Company also issued 3,243,591 shares of its
Common Stock and a $90.0 million subordinated redeemable convertible note in
exchange for certain assets of PairGain. 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
Company Common Stock. These issuances were effected in reliance on the
exemptions from registration provided by Section 4(2) of the Securities Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
EXHIBIT
NO. DESCRIPTION
---- -----------
10.1 GlobeSpan, Inc. 1999 Stock Option Plan
27.1* Financial Data Schedule
--------
* Previously Filed.
(b) Reports on Form 8-K.
The Company filed two reports on Form 8-K during the quarter ended
March 31, 2000. Information regarding the items reported is as follows:
Date Item Reported On
------------------- -------------------------------------------
January 26, 2000 The Company announced its agreement to
acquire the outstanding stock of Ficon
Technology, Inc. and certain assets of
PairGain Technologies, Inc.
March 10, 2000 The Company announced the completion of the
acquisition of the outstanding stock of
Ficon Technology, Inc. and certain assets of
PairGain Technologies, Inc.
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GLOBESPAN, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GLOBESPAN, INC.
Date: May 11, 2000 By: /s/ Robert McMullan
------------------------------------
Robert McMullan
Chief Financial Officer
(Principal Financial and Accounting Officer)
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EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
--- -----------
10.1 GlobeSpan, Inc. 1999 Stock Option Plan
27.1* Financial Data Schedule
--------
* Previously Filed.
+
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Exhibit 10.1
GLOBESPAN, INC.
1999 SUPPLEMENTAL STOCK OPTION PLAN
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE 1. INTRODUCTION......................................................1
ARTICLE 2. ADMINISTRATION....................................................1
2.1 Committee Composition...........................................1
2.2 Committee Responsibilities......................................1
ARTICLE 3. SHARES AVAILABLE FOR GRANTS.......................................1
3.1 Basic Limitation................................................1
3.2 Additional Shares...............................................2
ARTICLE 4. ELIGIBILITY.......................................................2
4.1 Other Grants....................................................2
ARTICLE 5. OPTIONS .........................................................2
5.1 Stock Option Agreement..........................................2
5.2 Number of Shares................................................2
5.3 Exercise Price..................................................2
5.4 Exercisability and Term.........................................2
5.5 Modification or Assumption of Options...........................3
5.6 Buyout Provisions...............................................3
ARTICLE 6. PAYMENT FOR OPTION SHARES.........................................3
6.1 General Rule....................................................3
6.2 Surrender of Common Stock.......................................3
6.3 Exercise/Sale...................................................3
6.4 Exercise/Pledge................................................3
6.5 Promissory Note.................................................4
6.6 Other Forms of Payment..........................................4
ARTICLE 7. CHANGE IN CONTROL.................................................4
7.1 Effect of Change in Control.....................................4
7.2 Involuntary Termination.........................................4
ARTICLE 8. PROTECTION AGAINST DILUTION.......................................4
8.1 Adjustments.....................................................4
8.2 Dissolution or Liquidation......................................5
8.3 Reorganizations.................................................5
ARTICLE 9. DEFERRAL OF AWARDS................................................5
ARTICLE 10. LIMITATION ON RIGHTS.............................................6
10.1 Retention Rights...............................................6
10.2 Stockholders' Rights...........................................6
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10.3 Regulatory Requirements........................................6
ARTICLE 11. WITHHOLDING TAXES................................................6
11.1 General........................................................6
11.2 Share Withholding..............................................6
ARTICLE 12. FUTURE OF THE PLAN...............................................7
12.1 Term of the Plan...............................................7
12.2 Amendment or Termination.......................................7
ARTICLE 13. DEFINITIONS......................................................7
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GLOBESPAN, INC.
1999 SUPPLEMENTAL STOCK OPTION PLAN
ARTICLE 1. INTRODUCTION
The Plan was adopted by the Board to be effective as of the date of
adoption. The purpose of the Plan is to promote the long-term success of the
Corporation and the creation of stockholder value by (a) encouraging Employees
and Consultants to focus on critical long-range objectives, (b) encouraging the
attraction and retention of Employees, and Consultants with exceptional
qualifications and (c) linking Employees and Consultants directly to stockholder
interests through increased stock ownership. The Plan seeks to achieve this
purpose by providing for Options (which shall be nonstatutory stock options).
The Plan shall be governed by, and construed in accordance with, the
laws of the State of Delaware (except their choice-of-law provisions).
ARTICLE 2. ADMINISTRATION.
2.1 COMMITTEE COMPOSITION. The Plan shall be administered by the
Committee. The Committee shall consist exclusively of one or more directors of
the Corporation, who shall be appointed by the Board.
2.2 COMMITTEE RESPONSIBILITIES. The Committee shall (a) select the
Employees, and Consultants who are to receive option grants under the Plan, (b)
determine the number, vesting requirements and other features and conditions of
such option grants, (c) interpret the Plan and (d) make all other decisions
relating to the operation of the Plan. The Committee may adopt such rules or
guidelines as it deems appropriate to implement the Plan. The Committee's
determinations under the Plan shall be final and binding on all persons.
ARTICLE 3. SHARES AVAILABLE FOR GRANTS.
3.1 BASIC LIMITATION. Shares of Common Stock issued pursuant to the
Plan may be authorized but unissued shares or treasury shares. The aggregate
number of Options granted under the Plan shall not exceed (a) 2,000,000, plus
(b) the additional shares of Common Stock described in Section 3.2. The
limitation of this Section 3.1 shall be subject to adjustment pursuant to
Article 8.
3.2 ADDITIONAL SHARES. If shares of Common Stock issued upon the
exercise of Options are forfeited, then such shares of Common Stock shall again
become available for option grants under the Plan. If Options are forfeited or
terminate for any other reason before being exercised, then the corresponding
shares of Common Stock shall again become available for option grants under the
Plan.
<PAGE>
ARTICLE 4. ELIGIBILITY.
4.1 GRANTS. Only Employees and Consultants shall be eligible for the
grant of Options. Officers are NOT eligible for the grant of Options. ---
ARTICLE 5. OPTIONS.
5.1 STOCK OPTION AGREEMENT. Each grant of an Option under the Plan
shall be evidenced by a Stock Option Agreement between the Optionee and the
Corporation. Such Option shall be subject to all applicable terms of the Plan
and may be subject to any other terms that are not inconsistent with the Plan.
The provisions of the various Stock Option Agreements entered into under the
Plan need not be identical. Options may be granted in consideration of a
reduction in the Optionee's other compensation. A Stock Option Agreement may
provide that a new Option will be granted automatically to the Optionee when he
or she exercises a prior Option and pays the Exercise Price in the form
described in Section 6.2.
5.2 NUMBER OF SHARES. Each Stock Option Agreement shall specify the
number of shares of Common Stock subject to the Option and shall provide for the
adjustment of such number in accordance with Article 8.
5.3 EXERCISE PRICE. Each Stock Option Agreement shall specify the
Exercise Price; provided that the Exercise Price under an NSO shall in no event
be less than 25% of the Fair Market Value of a share of Common Stock on the date
of grant. In the case of an NSO, a Stock Option Agreement may specify an
Exercise Price that varies in accordance with a predetermined formula while the
NSO is outstanding.
5.4 EXERCISABILITY AND TERM. Each Stock Option Agreement shall specify
the date or event when all or any installment of the Option is to become
exercisable. The Stock Option Agreement shall also specify the term of the
Option. A Stock Option Agreement may provide for accelerated exercisability in
the event of the Optionee's death, disability or retirement or other events and
may provide for expiration prior to the end of its term in the event of the
termination of the Optionee's service.
5.5 MODIFICATION OR ASSUMPTION OF OPTIONS. Within the limitations of
the Plan, the Committee may modify, extend or assume outstanding options or may
accept the cancellation of outstanding options (whether granted by the
Corporation or by another issuer) in return for the grant of new options for the
same or a different number of shares and at the same or a different exercise
price. The foregoing notwithstanding, no modification of an Option shall,
without the consent of the Optionee, alter or impair his or her rights or
obligations under such Option.
5.6 BUYOUT PROVISIONS. The Committee may at any time (a) offer to buy
out for a payment in cash or cash equivalents an Option previously granted or
(b) authorize an Optionee to elect to cash out an Option previously granted, in
either case at such time and based upon such terms and conditions as the
Committee shall establish.
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ARTICLE 6. PAYMENT FOR OPTION SHARES.
6.1 GENERAL RULE. The entire Exercise Price of shares of Common Stock
issued upon exercise of Options shall be payable in cash or cash equivalents at
the time when such shares of Common Stock are purchased. The Committee may at
any time accept payment in any form(s) described in this Article 6.
6.2 SURRENDER OF COMMON STOCK. To the extent that this Section 6.2 is
applicable, all or any part of the Exercise Price may be paid by surrendering,
or attesting to the ownership of, shares of Common Stock that are already owned
by the Optionee. Such shares of Common Stock shall be valued at their Fair
Market Value on the date when the new shares of Common Stock are purchased under
the Plan. The Optionee shall not surrender, or attest to the ownership of,
shares of Common Stock in payment of the Exercise Price if such action would
cause the Corporation to recognize compensation expense (or additional
compensation expense) with respect to the Option for financial reporting
purposes.
6.3 EXERCISE/SALE. To the extent that this Section 6.3 is applicable,
all or any part of the Exercise Price and any withholding taxes may be paid by
delivering (on a form prescribed by the Corporation) an irrevocable direction to
a securities broker approved by the Corporation to sell all or part of the
shares of Common Stock being purchased under the Plan and to deliver all or part
of the sales proceeds to the Corporation.
6.4 EXERCISE/PLEDGE. To the extent that this Section 6.4 is applicable,
all or any part of the Exercise Price and any withholding taxes may be paid by
delivering (on a form prescribed by the Corporation) an irrevocable direction to
pledge all or part of the shares of Common Stock being purchased under the Plan
to a securities broker or lender approved by the Corporation, as security for a
loan, and to deliver all or part of the loan proceeds to the Corporation.
6.5 PROMISSORY NOTE. To the extent that this Section 6.5 is applicable,
all or any part of the Exercise Price and any withholding taxes may be paid by
delivering (on a form prescribed by the Corporation) a full-recourse promissory
note. However, the par value of the shares of Common Stock being purchased under
the Plan, if newly issued, shall be paid in cash or cash equivalents.
6.6 OTHER FORMS OF PAYMENT. To the extent that this Section 6.6 is
applicable, all or any part of the Exercise Price and any withholding taxes may
be paid in any other form that is consistent with applicable laws, regulations
and rules.
ARTICLE 7. CHANGE IN CONTROL.
7.1 EFFECT OF CHANGE IN CONTROL. In the event of any Change in Control,
each outstanding Option shall automatically accelerate so that each such Option
shall, immediately prior to the effective date of the Change in Control, become
fully exercisable for all of the shares of Common Stock at the time subject to
such Option and may be exercised for any or all of those shares as fully-vested
shares of Common Stock. However, an outstanding Option shall NOT so accelerate
if and to the extent such Option is, in connection with the Change in Control,
either to be assumed by the successor corporation (or parent thereof) or to be
replaced with a comparable
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Option for shares of the capital stock of the successor corporation (or parent
thereof). The determination of Option comparability shall be made by the Plan
Administrator, and its determination shall be final, binding and conclusive.
7.2 INVOLUNTARY TERMINATION. In addition, in the event that the Option
is assumed by the successor corporation (or parent thereof) and the Participant
experiences an Involuntary Termination within twelve months following a Change
in Control, each outstanding Option shall automatically accelerate so that each
such Option shall, immediately prior to the effective date of the Involuntary
Termination, become fully exercisable for all of the shares of Common Stock at
the time subject to such Option and may be exercised for any or all of those
shares as fully-vested shares of Common Stock.
ARTICLE 8. PROTECTION AGAINST DILUTION.
8.1 ADJUSTMENTS. In the event of a subdivision of the outstanding
shares of Common Stock, a declaration of a dividend payable in shares of Common
Stock, a declaration of a dividend payable in a form other than shares of Common
Stock in an amount that has a material effect on the price of shares of Common
Stock, a combination or consolidation of the outstanding shares of Common Stock
(by reclassification or otherwise) into a lesser number of shares of Common
Stock, a recapitalization, a spin off or a similar occurrence, the Committee
shall make such adjustments as it, in its sole discretion, deems appropriate in
one or more of:
(a) The number of shares available for future grant under Article 3;
(b) The number of shares of Common Stock covered by each outstanding
Option; or
(c) The Exercise Price under each outstanding Option.
Except as provided in this Article 8, an Optionee shall have no rights by reason
of any issue by the Corporation of stock of any class or securities convertible
into stock of any class, any subdivision or consolidation of shares of stock of
any class, the payment of any stock dividend or any other increase or decrease
in the number of shares of stock of any class.
8.2 DISSOLUTION OR LIQUIDATION. To the extent not previously exercised
or settled, Options shall terminate immediately prior to the dissolution or
liquidation of the Corporation.
8.3 REORGANIZATIONS. In the event that the Corporation is a party to a
merger or other reorganization, outstanding Options shall be subject to the
agreement of merger or reorganization. Such agreement shall provide for (a) the
continuation of the outstanding Options by the Corporation, if the Corporation
is a surviving corporation, (b) the assumption of the outstanding Options by the
surviving corporation or its parent or subsidiary, (c) the substitution by the
surviving corporation or its parent or subsidiary of its own awards for the
outstanding Options, (d) full exercisability or vesting and accelerated
expiration of the outstanding Options or (e) settlement of the full value of the
outstanding Options in cash or cash equivalents followed by cancellation of such
Awards.
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ARTICLE 9. DEFERRAL OF AWARDS.
The Committee (in its sole discretion) may permit or require an
Optionee to have shares of Common Stock that otherwise would be delivered to
such Optionee as a result of the exercise of an Option converted into amounts
credited to a deferred compensation account established for such Optionee by the
Committee as an entry on the Corporation's books. Such amounts shall be
determined by reference to the Fair Market Value of such shares of Common Stock
as of the date when they otherwise would have been delivered to such Optionee.
A deferred compensation account established under this Article 9 may be
credited with interest or other forms of investment return, as determined by the
Committee. An Optionee for whom such an account is established shall have no
rights other than those of a general creditor of the Corporation. Such an
account shall represent an unfunded and unsecured obligation of the Corporation
and shall be subject to the terms and conditions of the applicable agreement
between such Participant and the Corporation. If the deferral or conversion of
Option is permitted or required, the Committee (in its sole discretion) may
establish rules, procedures and forms pertaining to such Option, including
(without limitation) the settlement of deferred compensation accounts
established under this Article 9.
ARTICLE 10. LIMITATION ON RIGHTS.
10.1 RETENTION RIGHTS. Neither the Plan nor any Option granted under
the Plan shall be deemed to give any individual a right to remain an Employee,
Outside Director or Consultant. The Corporation and its Parents, Subsidiaries
and Affiliates reserve the right to terminate the service of any Employee,
Outside Director or Consultant at any time, with or without cause, subject to
applicable laws, the Corporation's certificate of incorporation and by-laws and
a written employment agreement (if any).
10.2 STOCKHOLDERS' RIGHTS. A Participant shall have no dividend rights,
voting rights or other rights as a stockholder with respect to any shares of
Common Stock covered by his or her Option prior to the time when a stock
certificate for such shares of Common Stock is issued or, if applicable, the
time when he or she becomes entitled to receive such shares of Common Stock by
filing any required notice of exercise and paying any required Exercise Price.
No adjustment shall be made for cash dividends or other rights for which the
record date is prior to such time, except as expressly provided in the Plan.
10.3 REGULATORY REQUIREMENTS. Any other provision of the Plan
notwithstanding, the obligation of the Corporation to issue shares of Common
Stock under the Plan shall be subject to all applicable laws, rules and
regulations and such approval by any regulatory body as may be required. The
Corporation reserves the right to restrict, in whole or in part, the delivery of
shares of Common Stock pursuant to any Option prior to the satisfaction of all
legal requirements relating to the issuance of such shares of Common Stock, to
their registration, qualification or listing or to an exemption from
registration, qualification or listing.
5
<PAGE>
ARTICLE 11. WITHHOLDING TAXES.
11.1 GENERAL. To the extent required by applicable federal, state,
local or foreign law, a Participant or his or her successor shall make
arrangements satisfactory to the Corporation for the satisfaction of any
withholding tax obligations that arise in connection with the Plan. The
Corporation shall not be required to issue any shares of Common Stock or make
any cash payment under the Plan until such obligations are satisfied.
11.2 SHARE WITHHOLDING. The Committee may permit a Participant to
satisfy all or part of his or her withholding or income tax obligations by
having the Corporation withhold all or a portion of any shares of Common Stock
that otherwise would be issued to him or her or by surrendering all or a portion
of any shares of Common Stock that he or she previously acquired. Such shares of
Common Stock shall be valued at their Fair Market Value on the date when taxes
otherwise would be withheld in cash.
ARTICLE 12. FUTURE OF THE PLAN.
12.1 TERM OF THE PLAN. The Plan, as set forth herein, shall become
effective as of the date of its adoption. The Plan shall remain in effect until
it is terminated under Section 12.2.
12.2 AMENDMENT OR TERMINATION. The Board may, at any time and for any
reason, amend or terminate the Plan. An amendment of the Plan shall be subject
to the approval of the Corporation's stockholders only to the extent required by
applicable laws, regulations or rules. No Options shall be granted under the
Plan after the termination thereof. The termination of the Plan, or any
amendment thereof, shall not affect any Option previously granted under the
Plan.
ARTICLE 13. DEFINITIONS.
13.1 "AFFILIATE" means any entity other than a Subsidiary, if the
Corporation and/or one or more Subsidiaries own not less than 50% of such
entity.
13.2 "BOARD" means the Corporation's Board of Directors, as constituted
from time to time.
13.3 "CHANGE IN CONTROL" shall mean:
(a) The consummation of a merger or consolidation of the Corporation
with or into another entity or any other corporate reorganization, if more than
50% of the combined voting power of the continuing or surviving entity's
securities outstanding immediately after such merger, consolidation or other
reorganization is owned by persons who were not stockholders of the Corporation
immediately prior to such merger, consolidation or other reorganization;
(b) The sale, transfer or other disposition of all or substantially all
of the Corporation's assets;
6
<PAGE>
(c) A change in the composition of the Board, as a result of which
fewer than two-thirds of the incumbent directors are directors who either (i)
had been directors of the Corporation on the date 24 months prior to the date of
the event that may constitute a Change in Control (the "original directors") or
(ii) were elected, or nominated for election, to the Board with the affirmative
votes of at least a majority of the aggregate of the original directors who were
still in office at the time of the election or nomination and the directors
whose election or nomination was previously so approved; or
(d) Any transaction as a result of which any person is the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Corporation representing at least 50% of the
total voting power represented by the Corporation's then outstanding voting
securities. For purposes of this Paragraph (d), the term "person" shall have the
same meaning as when used in Sections 13(d) and 14(d) of the Exchange Act but
shall exclude (i) a trustee or other fiduciary holding securities under an
employee benefit plan of the Corporation or of a Parent or Subsidiary and (ii) a
corporation owned directly or indirectly by the stockholders of the Corporation
in substantially the same proportions as their ownership of the common stock of
the Corporation.
A transaction shall not constitute a Change in Control if its sole purpose is to
change the state of the Corporation's incorporation or to create a holding
company that will be owned in substantially the same proportions by the persons
who held the Corporation's securities immediately before such transaction.
13.4 "CODE" means the Internal Revenue Code of 1986, as amended.
13.5 "COMMITTEE" means a committee of the Board, as described in
Article 2.
13.6 "COMMON STOCK" means the common stock of the Corporation.
13.7 "CONSULTANT" means a consultant or adviser who provides bona fide
services to the Corporation, a Parent, a Subsidiary or an Affiliate as an
independent contractor. Service as a Consultant shall be considered employment
for all purposes of the Plan, except as provided in Section 4.1.
13.8 "CORPORATION" means GlobeSpan, Inc., a Delaware corporation.
13.9 "EMPLOYEE" means a common-law employee of the Corporation, a
Parent, a Subsidiary or an Affiliate.
13.10 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
13.11 "EXERCISE PRICE," in the case of an Option, means the amount for
which one share of Common Stock may be purchased upon exercise of such Option,
as specified in the applicable Stock Option Agreement.
7
<PAGE>
13.12 "FAiR MARKET VALUE" means the market price of shares of Common
Stock, determined by the Committee in good faith on such basis as it deems
appropriate. Whenever possible, the determination of Fair Market Value by the
Committee shall be based on the prices reported in THE WALL STREET JOURNAL. Such
determination shall be conclusive and binding on all persons.
13.13 "INVOLUNTARY TERMINATION" means the termination of the Service of
any individual which occurs by reason of:
(a) such individual's involuntary dismissal or discharge by
the Corporation for reasons other than Misconduct, or
(b) such individual's voluntary resignation following (A) a
change in his or her position with the Corporation which materially
reduces his or her level of responsibility, (B) a reduction in his or
her level of compensation (including base salary and target bonus in
bonus or incentive programs) or (C) a relocation of such individual's
place of employment by more than fifty (50) miles, provided and only if
such change, reduction or relocation is effected by the Corporation
without the individual's consent.
13.14 "MISCONDUCT" means the commission of any act of fraud,
embezzlement or dishonesty by the Optionee or Participant, any unauthorized use
or disclosure by such person of confidential information or trade secrets of the
Corporation (or any Parent or Subsidiary), or any other intentional misconduct
by such person adversely affecting the business or affairs of the Corporation
(or any Parent or Subsidiary) in a material manner. The foregoing definition
shall not be deemed to be inclusive of all the acts or omissions which the
Corporation (or any Parent or Subsidiary) may consider as grounds for the
dismissal or discharge of any Optionee or Participant or other person in the
Service of the Corporation (or any Parent or Subsidiary).
13.15 "NSO" means a stock option not described in Sections 422 or 423
of the Code.
13.16 "OPTION" means a NSO granted under the Plan and entitling the
holder to purchase shares of Common Stock.
13.17 "OPTIONEE" means an individual or estate who holds an Option.
13.18 "OUTSIDE DIRECTOR" shall mean a member of the Board who is not an
Employee. Service as an Outside Director shall be considered employment for all
purposes of the Plan, except as provided in Section 4.1.
13.19 "PARENT" means any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, if each of the
corporations other than the Corporation owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain. A corporation that attains the status of a Parent on
a date after the adoption of the Plan shall be considered a Parent commencing as
of such date.
8
<PAGE>
13.20 "PLAN" means this GlobeSpan, Inc. 1999 Supplemental Stock Option
Plan, as amended from time to time.
13.21 "STOCK OPTION AGREEMENT" means the agreement between the
Corporation and an Optionee that contains the terms, conditions and restrictions
pertaining to his or her Option.
13.22 "SUBSIDIARY" means any corporation (other than the Corporation)
in an unbroken chain of corporations beginning with the Corporation, if each of
the corporations other than the last corporation in the unbroken chain owns
stock possessing 50% or more of the total combined voting power of all classes
of stock in one of the other corporations in such chain. A corporation that
attains the status of a Subsidiary on a date after the adoption of the Plan
shall be considered a Subsidiary commencing as of such date.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
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TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
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<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
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<SECURITIES> 4,359
<RECEIVABLES> 17,408
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<INVENTORY> 16,662
<CURRENT-ASSETS> 66,053
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<INTEREST-EXPENSE> (9,256)
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