<PAGE>
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-40782
[LOGO]
7,500,000 SHARES
COMMON STOCK
GlobeSpan, Inc. is offering 1,406,250 shares of its common stock and the
selling stockholders are selling an additional 6,093,750 shares. GlobeSpan's
common stock is traded on the Nasdaq National Market under the symbol "GSPN."
The last reported sale price of the common stock on the Nasdaq National Market
on August 1, 2000 was $103.81 per share.
------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- ------------
<S> <C> <C>
Public Offering Price....................................... $100.00 $750,000,000
Underwriting Discounts and Commissions...................... $ 4.00 $ 30,000,000
Proceeds to GlobeSpan....................................... $ 96.00 $135,000,000
Proceeds to the Selling Stockholders........................ $ 96.00 $585,000,000
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Selling Stockholders have granted the underwriters a 30-day option to
purchase up to an additional 1,125,000 shares of common stock to cover
over-allotments.
JOINT BOOK-RUNNING MANAGERS
ROBERTSON STEPHENS MORGAN STANLEY DEAN WITTER
----------------
THOMAS WEISEL PARTNERS LLC
SG COWEN
PRUDENTIAL VOLPE TECHNOLOGY
A UNIT OF PRUDENTIAL
SECURITIES
UBS WARBURG LLC
JEFFERIES & COMPANY, INC.
THE DATE OF THIS PROSPECTUS IS AUGUST 1, 2000
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF THE COMMON STOCK. IN THIS PROSPECTUS, REFERENCES TO
"GLOBESPAN," "WE," "OUR" AND "US" REFER TO GLOBESPAN, INC.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Summary..................................................... 2
Risk Factors................................................ 7
Special Note Regarding Forward-Looking Statements........... 20
Use of Proceeds............................................. 21
Dividend Policy............................................. 21
Price Range of Common Stock................................. 21
Capitalization.............................................. 22
Selected Historical Financial Data.......................... 23
Unaudited Pro Forma Condensed Combined Financial
Information............................................... 25
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 33
Business.................................................... 41
Management.................................................. 56
Certain Transactions........................................ 70
Principal and Selling Stockholders.......................... 72
Description of Capital Stock................................ 75
Shares Eligible for Future Sale............................. 77
Underwriting................................................ 81
Legal Matters............................................... 83
Experts..................................................... 83
Where You Can Find Additional Information................... 84
Index to Financial Statements............................... F-1
</TABLE>
------------------------
Our name and our logo are our trademarks. All other trademarks, trade names
and service marks appearing in this prospectus are the property of their
respective owners.
1
<PAGE>
SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. THIS SUMMARY IS NOT COMPLETE AND DOES NOT CONTAIN ALL OF THE
INFORMATION THAT MAY BE IMPORTANT TO YOU. YOU SHOULD READ THIS ENTIRE PROSPECTUS
CAREFULLY, ESPECIALLY "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES, BEFORE DECIDING TO INVEST IN SHARES OF OUR COMMON STOCK.
OUR BUSINESS
GlobeSpan, Inc. is a leading worldwide developer of advanced digital
subscriber line, or DSL, integrated circuits (chip sets) which enable high-speed
data transmission over the existing network of copper telephone wires known as
the local loop. Our products, when deployed at each end of these copper
telephone wires, enable data transmission at rates over 100 times faster than
today's commonly deployed modem technologies, which transmit data at 56 kilobits
per second, or Kbps. We sell our integrated circuits as chip sets to
manufacturers of DSL equipment for incorporation into products that are sold to
telecommunications service providers and end users. We have shipped our DSL chip
sets to a broad base of leading communications equipment manufacturers,
including Ascom Hasler AG, Cisco Systems, Intel Corporation, Lucent
Technologies, LG Information & Communications, NEC Corporation, Nokia
Corporation, Paradyne Corporation and Westell Technologies.
Our products target the rapidly growing market for high-speed transmission
applications such as Internet access, telecommuting and networking among branch
offices. These transmission applications are expanding to include data, voice
and video transmissions over the same copper wire. In order to enable these
applications, equipment manufacturers are designing DSL systems around
increasingly complex integrated circuits which account for a significant portion
of the value-added, proprietary content of such systems. While equipment
manufacturers have in-depth systems knowledge, they often lack the core
technologies and expertise necessary to develop these integrated circuits
internally and are turning to DSL integrated circuit developers that possess the
core technologies and expertise required to bring high performance,
cost-effective solutions to market.
Our objective is to maximize the number of products that are designed by new
and existing customers to incorporate our chip sets. By maximizing the number of
these "design wins," we create an opportunity to sell our chip sets in volume
quantities, capitalize on the success of any one of our customers' DSL products
and increase the likelihood of additional design wins with our customers. While
achieving such a design win is not a binding commitment to purchase our product
and does not guarantee an order for large volumes of our products, it is a
decision by a customer to use our products in the design process of that
customer's products. We are successful in capturing design wins because:
- We have extensive DSL development experience, including seven years of
field experience in implementing DSL technology;
- We offer a broad suite of DSL chip sets;
- Our DSL chip sets provide high performance processing power, enabling
billions of operations per second;
- Our DSL chip sets create software flexibility, enabling our customers to
enhance or reconfigure their products through multiple software downloads;
- Our DSL chip sets offer a competitive total system cost;
- We apply advanced systems-level expertise;
- We sell comprehensive reference design guides and offer strong technical
support to accelerate customers' time to market; and
- Our DSL chip sets are designed to comply with industry standards.
2
<PAGE>
We believe these advantages and design attributes position us as the
preferred design partner and chip set supplier for DSL equipment manufacturers.
Our strategy is to maintain and grow our leading design win position by:
- Targeting all applications in the DSL market and providing the chip set
technologies necessary to enable these applications;
- Strengthening and broadening our technology competencies to maintain our
leading position in the DSL market;
- Using our advanced systems-level expertise to develop and offer chip sets
that can be cost effectively incorporated into complete DSL systems; and
- Continuing to actively participate in the formulation of critical
standards for the high-speed data transmission market.
We were formed as an independent company in July 1996 as part of the
divestiture by Lucent Technologies of AT&T Paradyne Corporation. Prior to the
divestiture, our business was operated as the Advanced Transmission Technology
Division of AT&T Paradyne Corporation.
RECENT DEVELOPMENTS
SECOND QUARTER RESULTS. Our net revenues were $75.9 million for the three
months ended June 30, 2000, an increase of 704.5% over net revenues of
$9.4 million for the three months ended June 30, 1999, and an increase of 144.4%
over net revenues of $31.1 million for the three months ended March 31, 2000. We
had a net loss for the three months ended June 30, 2000 of $88.7 million or
$1.42 basic loss per share, which includes acquisition related expenses,
including non-cash compensation, amortization of intangible assets, non-cash
interest expense for the beneficial conversion feature for a convertible note
issued as merger consideration (which is measured by the price of our common
stock at the closing of an acquisition and the conversion price) and in process
research and development. The reported net loss attributable to common
stockholders for the three months ended June 30, 1999 was $5.8 million or
$0.15 basic loss per share, which included a preferred stock deemed dividend of
$3.5 million.
For the six months ended June 30, 2000, our net revenues totaled
$107.0 million, an increase of 491.8% over net revenues of $18.1 million for the
six months ended June 30, 1999. Our reported net loss for the six months ended
June 30, 2000 was $111.6 million or $1.84 basic loss per share, which includes
acquisition related expenses, including non-cash compensation, amortization of
intangible assets, non-cash interest expense for the beneficial conversion
feature for a convertible note issued as merger consideration and in process
research and development. The reported net loss attributable to common
stockholders for the six months ended June 30, 1999 was $9.7 million or $0.25
basic loss per share, which included a preferred stock deemed dividend of
$3.5 million.
ACQUISITIONS. On January 31, 2000, we acquired all of the issued and
outstanding shares of Ficon Technology, Inc., or Ficon, a leading provider of
communications software which enable service providers to build next generation
communications infrastructure. The transaction was accounted for as a purchase.
We acquired these shares by paying $5.0 million in cash to Ficon shareholders
and granting them the right to receive up to a maximum of 1,959,999 shares of
our common stock based upon the continued employment of some former Ficon
shareholders and the completion of development milestones mutually agreed to by
the parties.
On February 24, 2000, we acquired technology and the right to hire employees
of the Microelectronics Group of PairGain Technologies, Inc., or PairGain,
designers of integrated circuits and software for DSL applications. The
transaction was accounted for as a purchase. We paid for these assets by issuing
PairGain 3,243,591 shares of our common stock and a $90.0 million subordinated
redeemable convertible note. PairGain is selling 521,563 of the shares we issued
to them in this offering and we are using $91.5 million of the proceeds of this
offering to redeem the note, including accrued interest.
3
<PAGE>
On April 27, 2000, we acquired all the issued and outstanding shares of
T.sqware, Inc., or T.sqware, a provider of fully programmable scalable network
processors supporting high speed data communications. The transaction will be
accounted for as a purchase. We paid for these shares by issuing 2,022,182
shares of our common stock and assuming the outstanding T.sqware options for the
equivalent of 177,569 options to purchase our common stock.
On June 30, 2000, we acquired all the issued and outstanding shares of
iCompression, Inc., or iCompression, a supplier of advanced signal processing
technology for delivering voice, video and data for the broadband infrastructure
in applications such as broadband video conferencing. The transaction will be
accounted for as a purchase. We paid for these shares by issuing approximately
3,470,152 shares of our common stock and assuming the outstanding iCompression
options for the equivalent of approximately 529,727 options to purchase our
common stock.
STOCK SPLIT. On January 21, 2000, our board of directors approved a 3-for-1
stock split applicable to all issued and outstanding shares of our common stock.
This stock split was effected on February 28, 2000 in the form of a stock
dividend. Stockholders of record at the close of business on February 15, 2000
received two additional shares of our common stock for each outstanding share of
our common stock held by them on that date. We have restated all share, stock
option and stock warrant information included in this prospectus to account for
this stock split for all periods presented.
Our principal executive offices are located at 100 Schulz Drive, Red Bank,
New Jersey 07701, and our telephone number is (732) 345-7500. Our corporate
website is www.globespan.net. The information on our website does not constitute
part of this prospectus.
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by GlobeSpan............... 1,406,250 shares
Common stock offered by selling stockholders.... 6,093,750 shares
Common stock to be outstanding after this
offering...................................... 70,553,156 shares
Use of proceeds................................. We intend to use the proceeds from this offering
to repay the subordinated redeemable convertible
note issued by us in connection with our
acquisition of PairGain's Microelectronics Group
and the balance for general corporate purposes,
including working capital, sales and marketing
expenditures, development of new products and
services, and possible acquisitions. See "Use of
Proceeds." We will not receive any proceeds from
the sale of common stock by the selling
stockholders.
Nasdaq National Market symbol................... GSPN
</TABLE>
The foregoing information is based upon shares outstanding as of June 30,
2000. Common stock to be outstanding after this offering does not include:
- up to an aggregate of 900,000 shares of common stock issuable upon the
exercise of outstanding warrants; and
- 14,732,293 shares of common stock issuable upon the exercise of options
outstanding as of June 30, 2000.
UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES THAT
THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED.
4
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY OUR COMPANY
-------------------------- ----------------------------------------------------
SEVEN FIVE
MONTHS MONTHS YEAR ENDED
YEAR ENDED ENDED ENDED DECEMBER 31,
DECEMBER 31, JULY 31, DECEMBER 31, -------------------------------------
1995 1996 1996 1997 1998 1999
------------ ----------- ------------ ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Net revenues......... $ 6,685 $ 1,597 $ 2,360 $ 22,546 $ 31,464 $ 56,220
Gross profit......... 6,685 1,597 1,864 14,981 21,582 34,222
(Loss) income from
operations......... 765 (2,419) (800) 1,051 (7,912) (6,698)
Interest (expense)
income, net........ -- -- -- 91 (134) 1,133
Net (loss) income.... $ 765 $ (2,419) $ (800) $ 842 $ (7,829) $ (5,565)
=========== =========== ========== ========== ========== ==========
(Loss) earnings per
share:
Basic.............. $ (0.02) $ 0.02 $ (0.22) $ (0.19)
========== ========== ========== ==========
Diluted............ $ (0.02) $ 0.02 $ (0.22) $ (0.19)
========== ========== ========== ==========
Shares used in
computing (loss)
earnings per share:
Basic.............. 34,312,500 34,546,614 36,254,133 46,612,752
Diluted............ 34,312,500 38,119,296 36,254,133 46,612,752
<CAPTION>
OUR COMPANY
-----------------------------
THREE MONTHS ENDED MARCH 31,
-----------------------------
1999 2000
------------- -------------
<S> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Net revenues......... $ 8,641 $ 31,060
Gross profit......... 4,621 19,580
(Loss) income from
operations......... (3,687) (13,643)
Interest (expense)
income, net........ (182) (9,256)
Net (loss) income.... $ (3,869) $ (22,899)
========== ==========
(Loss) earnings per
share:
Basic.............. $ (0.11) $ (0.39)
========== ==========
Diluted............ $ (0.11) $ (0.39)
========== ==========
Shares used in
computing (loss)
earnings per share:
Basic.............. 36,412,767 58,640,432
Diluted............ 36,412,767 58,640,432
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
2000
---------
<S> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 31,466
Working capital............................................. 37,058
Total assets................................................ 326,898
Long-term liabilities, less current portion................. 52,697
Accumulated deficit......................................... (36,251)
Total stockholders' equity.................................. 245,206
</TABLE>
The financial data for the year ended December 31, 1995 of our predecessor
company represent the financial position of the Advanced Transmission Technology
Division of AT&T Paradyne prior to the divestiture in July 1996 and was derived
from the unaudited financial statements of our predecessor company.
See note 11 of notes to the financial statements for an explanation of the
method used to compute basic and diluted net (loss) earnings per share data.
Earnings per share data is not presented for our predecessor company, since our
predecessor company did not have its own capital structure. As a result, this
information would not be meaningful.
5
<PAGE>
SUMMARY PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The "Pro Forma" columns under Statement of Operations Data for the year
ended December 31, 1999 and for the three months ended March 31, 2000 give
effect to the Ficon, T.sqware and iCompression acquisitions as if they had
occurred on January 1, 1999 and January 1, 2000, respectively, accounted for as
purchase business combinations.
The "Pro Forma" column under Balance Sheet Data as of March 31, 2000 gives
effect to the acquisitions of T.sqware and iCompression as if the acquisitions
had occurred on March 31, 2000. The Ficon acquisition was consummated on
January 31, 2000 and has been consolidated with GlobeSpan as of March 31, 2000.
The "Pro Forma As Adjusted" column under Balance Sheet Data as of March 31, 2000
gives effect to (a) the receipt by us of the net proceeds from the sale of
common stock sold by us in this offering at an offering price of $100.00 per
share, after deducting the underwriting discounts and commissions and estimated
offering expenses payable by us, (b) our acquisition of T.sqware on April 27,
2000, (c) our acquisition of iCompression on June 30, 2000 and (d) the repayment
of the $90.0 million note issued to PairGain from a portion of the proceeds from
this offering. Also included is the effect of the redemption of the original
beneficial conversion feature of this note (resulting in a reduction in total
stockholders' equity) recorded for $47.3 million and the gain on the associated
redemption of $9.4 million.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1999 MARCH 31, 2000
---------------------------- ----------------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues............................................ $ 56,220 $ 61,908 $ 31,060 $ 31,920
Gross profit............................................ 34,222 39,792 19,580 20,337
(Loss) from operations.................................. (6,698) (210,383) (13,643) (59,876)
Interest (expense) income, net.......................... 1,133 1,273 (9,256) (9,111)
Net (loss).............................................. $ (5,565) $ (209,145) $ (22,899) $ (68,987)
=========== =========== =========== ===========
Loss per share basic and diluted........................ $ (0.19) $ (4.05) $ (0.39) $ (1.07)
=========== =========== =========== ===========
Shares used in computing loss per share--basic
and diluted........................................... 46,612,752 52,549,246 58,640,432 64,280,819
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 2000
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- ---------- -------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 31,466 $ 74,739 $117,439
Working capital............................................. 37,058 75,298 117,998
Total assets................................................ 326,898 806,740 849,440
Long-term liabilities, less current portion................. 52,697 56,625 4,602
Accumulated deficit......................................... (36,251) (86,790) (77,426)
Total stockholders' equity.................................. 245,206 714,539 809,262
</TABLE>
6
<PAGE>
RISK FACTORS
BEFORE YOU INVEST IN OUR COMMON STOCK, YOU SHOULD BE AWARE OF VARIOUS RISKS,
INCLUDING THOSE DESCRIBED BELOW. THE RISKS DESCRIBED BELOW ARE INTENDED TO
HIGHLIGHT RISKS THAT ARE SPECIFIC TO US, BUT ARE NOT THE ONLY RISKS THAT WE
FACE. ADDITIONAL RISKS AND UNCERTAINTIES, INCLUDING THOSE GENERALLY AFFECTING
THE INDUSTRY IN WHICH WE OPERATE OR RISKS THAT WE CURRENTLY DEEM IMMATERIAL MAY
ALSO IMPAIR OUR BUSINESS OR THE VALUE OF YOUR INVESTMENT. YOU SHOULD CAREFULLY
CONSIDER THESE RISK FACTORS, TOGETHER WITH ALL OF THE OTHER INFORMATION INCLUDED
IN THIS PROSPECTUS, BEFORE YOU DECIDE WHETHER TO PURCHASE SHARES OF OUR COMMON
STOCK.
WE HAVE ONLY BEEN OPERATING AS AN INDEPENDENT COMPANY SINCE AUGUST 1996, AND
THIS LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE OUR PROSPECTS
We have only been operating as an independent company since August 1996, and
we only began shipping chip sets in volume in January 1997. We have not had a
long history of generating significant net revenues. 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 MAY FLUCTUATE BECAUSE OF MANY FACTORS, WHICH
WOULD CAUSE OUR STOCK PRICE TO FLUCTUATE
Our net revenues and operating results have varied in the past and may 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. Due to
our recent acquisitions accounted for as purchases, we will incur substantial
non-cash compensation and amortization expenses associated with those and,
potentially, future transactions. In such event, the market price of our common
stock may decline significantly.
These variations in our operating results may be caused by factors related
to the operation of our business, including:
- variations in the timing and size of chip set orders from, and shipments
to, our existing and new customers;
- loss of a significant customer, or a significant decrease in purchases by
significant customers, such as Cisco Systems or Lucent Technologies;
- the mix of chip sets shipped with different gross margins, including the
impact of volume purchases from our large customers at discounted average
selling prices;
- the availability of foundry capacity and the expense of having our chip
sets manufactured by Lucent Microelectronics, a division of Lucent
Technologies, or other foundries in the future;
- the timing and size of expenses, including operating expenses and expenses
of developing new products and product enhancements; and
- our ability to attract and retain key personnel.
7
<PAGE>
These variations will also be caused by factors related to the development
of the DSL market and the competition we face from other DSL chip set suppliers,
including:
- the timing and rate of deployment of DSL services by telecommunications
service providers;
- the timing and rate of deployment of alternative high-speed data
transmission technologies, such as cable modems and high-speed wireless
data transmission;
- anticipated decreases in per unit prices as competition among DSL chip set
suppliers increases; and
- the level of market penetration of our chips sets relative to those of our
competitors.
These variations will also be caused by other factors affecting our
business, many of which are substantially outside of the control of our
management, including:
- costs associated with future litigation, including litigation relating to
the use or ownership of intellectual property;
- acquisition costs or other non-recurring charges in connection with the
acquisition of companies, products or technologies;
- foreign currency and exchange rate fluctuations which may make our
dollar-denominated products more expensive in foreign markets or could
expose us to currency rate fluctuation risks if our sales become
denominated in foreign currencies; and
- general global economic conditions which could adversely affect sales to
our customers.
WE EXPECT THAT PRICE COMPETITION AMONG DSL CHIP SET SUPPLIERS AND VOLUME
PURCHASES BY LARGE CUSTOMERS WILL REDUCE OUR GROSS MARGINS IN THE FUTURE
We expect that price competition among DSL chip set suppliers and volume
purchases of our chip sets at discounted prices will reduce our gross margins in
the future. We anticipate that average per unit selling prices of DSL chip sets
will continue to decline as product technologies mature. Since we do not
manufacture our own products, we may be unable to reduce our manufactured 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 WILL INCUR SUBSTANTIAL LOSSES IN THE FUTURE
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 December 31, 1997. We will incur substantial net losses
for the foreseeable future. Because of substantial operating expenses, we will
need to generate significant quarterly revenues to achieve profitability. Our
failure to significantly increase our net revenues would result in continuing
losses. Even if we do achieve profitability, we may not be able to sustain or
increase profitability or cash flow on a quarterly or annual basis.
8
<PAGE>
THE LOSS OF ONE OR MORE OF OUR KEY CUSTOMERS WOULD RESULT IN A LOSS OF A
SIGNIFICANT AMOUNT OF OUR NET REVENUES
A relatively small number of customers account for a large percentage of our
net revenues. Our business will be seriously harmed if we do not generate as
much revenue as we expect from these customers, or experience a loss of any of
our significant customers, particularly Cisco Systems and Lucent Technologies,
or suffer a substantial reduction in orders from such customers. In the three
months ended March 31, 2000 and the three 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 two
customers were Cisco Systems and Lucent Technologies, which accounted for 29.5%
and 14.6% 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 Ascom Hasler AG, which
accounted for 48.3%, 12.6% and 9.2% of our net revenues, respectively. In 1997,
our top three customers were LG Information & Communications, Ascom Hasler AG
and Westell Technologies, which accounted for 21.4%, 12.5% and 9.6% of our net
revenues, respectively. We do not have purchase contracts with any of our
customers that obligate them to continue to purchase our products and these
customers could cease purchasing our products at any time. 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 net 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
net revenues from that customer if that customer's products are not commercially
successful.
9
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OUR ACQUISITIONS MAY BE DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS, DILUTE
STOCKHOLDER VALUE OR DIVERT MANAGEMENT ATTENTION
We may seek to acquire or invest in additional businesses, products,
technologies or engineers. Our acquisition strategy does not require that our
acquisitions immediately increase our net revenues; rather, our objective is to
seek acquisitions that we believe could complement or expand our business,
augment our market coverage, enhance our technical capabilities or that may
otherwise offer growth opportunities. Since January 2000, we have acquired
Ficon, the Microelectronics Group of PairGain, T.sqware and iCompression. We
plan to pursue further acquisition opportunities in the future.
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. Our past and future acquisitions may involve
many risks, including:
- difficulties in managing our growth following acquisitions;
- difficulties in the integration of the acquired personnel, operations,
technologies, products and systems of the acquired companies;
- uncertainties concerning the intellectual property rights we purport to
acquire;
- unanticipated costs associated with the acquisitions;
- diversion of management's attention from other business concerns;
- adverse effects on our existing business relationships with our or our
acquired companies' customers;
- 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
- inability to retain employees of acquired companies.
Additionally, future acquisitions may require us to use substantial portions
of our available cash as all or a portion of the purchase price. Acquisitions
may also materially and adversely affect our results of operations because they
may require large one-time write-offs, increased debt or contingent liabilities,
substantial depreciation or deferred compensation charges or the amortization of
expenses related to tangible and intangible assets. For example, in the first
quarter of 2000, we incurred a one-time charge of $1.3 million related to in
process research and development in connection with prior acquisitions and began
to amortize charges from tangible and intangible assets acquired.
Furthermore, if we issue equity or convertible debt securities in connection
with an acquisition, as in the case of our recent acquisitions, the issuance may
be dilutive to our existing shareholders. The equity or debt securities that we
may issue could have rights, preference or privileges senior to those of holders
of our common stock.
Any of the events described in the foregoing paragraphs could cause the
price of our common stock to decline.
We are currently engaged in various stages of discussions with several
parties with respect to acquisitions.
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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 rely on these
products to be successful, and if they are not, we will not sell our chip sets
in volume quantities. Accordingly, we must correctly anticipate the price,
performance and functionality requirements of these DSL equipment manufacturers.
We must also successfully develop products that meet these requirements and make
such products available on a timely basis and in sufficient quantities. Further,
if there is consolidation in the DSL equipment manufacturing industry, or if a
small number of DSL equipment manufacturers otherwise dominate the market for
DSL equipment, then our success will depend upon our ability to establish and
maintain relationships with these market leaders. If we do not anticipate trends
in the DSL market and meet the requirements of DSL equipment manufacturers, or
if we do not successfully establish and maintain relationships with leading DSL
equipment manufacturers, then our business, financial condition and results of
operations will be seriously harmed.
IF OUR CUSTOMERS EXPERIENCE COMPONENT SUPPLY SHORTAGES, OUR NET REVENUES AND
OPERATING RESULTS MAY DECLINE
The semiconductor industry from time to time is affected by limited supplies
of certain key components and materials. We rely on our customers, DSL equipment
manufacturers, to produce reliable, successful DSL systems by incorporating our
chip sets and additional components into their products. In the past there have
been industry wide shortages of electronic components, such as capacitors. In
some cases, supply shortages of particular components or materials will
substantially curtail production of products using these components. We cannot
guarantee that we would not lose potential sales from our customers if key
components or materials are unavailable to them, and as a result, we are unable
to maintain or increase our production levels.
RAPID CHANGES IN THE MARKET FOR DSL CHIP SETS MAY RENDER OUR CHIP SETS OBSOLETE
OR UNMARKETABLE
The market for chip sets for DSL products is characterized by:
- intense competition;
- rapid technological change;
- frequent new product introductions by our competitors;
- changes in customer demands; and
- evolving industry standards.
Any of these factors could make our existing or proposed products obsolete or
unmarketable. 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.
WE DEPEND ON A LIMITED NUMBER OF SUPPLIERS TO MANUFACTURE OUR CHIP SETS, AND ANY
DISRUPTION IN ANY OF THESE RELATIONSHIPS COULD PREVENT US FROM SELLING OUR
PRODUCTS
We do not own or operate a semiconductor fabrication facility. Historically,
Lucent Microelectronics has manufactured substantially all of our chip sets. We
depend on Lucent Microelectronics to timely deliver to us sufficient quantities
of fully-assembled and tested chip sets on a
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turnkey basis. We have had a series of manufacturing arrangements with Lucent
Microelectronics, the latest of which became effective in March 1999. This
agreement, however, does not guarantee that Lucent Microelectronics 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.
We have been engaged in the process of negotiating and/or exploring
prospective supply agreements with other leading chip suppliers. We entered into
an agreement with United Microelectronics Corporation, or UMC, to supply some of
our chip sets. Our agreement with UMC became effective in December 1999 and
provides us with the ability to obtain delivery of specific chip sets in
accordance with the terms of that agreement, upon our providing binding
forecasts to UMC. Although this agreement provides for a term of five years,
with subsequent one year renewals, UMC 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
12 month notice period, the termination of this agreement by UMC could cause a
disruption to our business. In addition, we recently finalized an agreement with
Taiwan Semiconductor Manufacturing Co., or TSMC, which also provides for a
five-year term, is terminable by the supplier upon 12 months' advance notice to
us, and requires TSMC to fill our orders for commercially reasonable quantities
of product during the 12-month notice period. We have recently begun using
ZiLOG, Inc., an affiliate of Texas Pacific Group, our controlling shareholder,
to manufacture chip sets for us on a purchase order basis. We do not have a
supply agreement with ZiLOG. We will continue 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 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 any of our suppliers is terminated for any
reason.
IF WE ARE REQUIRED TO SEEK NEW MANUFACTURERS OF OUR INTEGRATED CIRCUITS, WE WILL
BE REQUIRED TO MODIFY OUR PRODUCTS WHICH WILL BE COSTLY
Our integrated circuits are manufactured by independent providers of
semiconductor manufacturing services, known as foundries. These foundries
manufacture our integrated circuits using their individual manufacturing process
technology. In addition, the foundry may license to us standard circuit modules,
known as intellectual property cores, or IP cores. Our DSL chip designs are
customized by the foundry for their specific manufacturing processes and IP
cores. In order to second source or switch foundry providers, our chip sets
would need to be re-designed for the process technology and IP cores of the
respective foundry. The re-design of the integrated circuits is costly and time
consuming and the requalification of the manufacturing process can take up to
six months. Establishing additional sources for manufacturing our products would
be expensive and disruptive to our business.
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,
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or 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 patents. We are currently evaluating Amati's 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 may be
required to offer us a license to use these patents on commercially reasonable,
non-discriminatory 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 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 claim by third parties in the future.
THIRD-PARTY CLAIMS REGARDING INTELLECTUAL PROPERTY MATTERS COULD CAUSE US OR OUR
CUSTOMERS TO STOP SELLING PRODUCTS OR PAY MONETARY DAMAGES
There is a significant risk that third parties, including current and
potential competitors, will claim that our products, or our customers' products,
infringe on their intellectual property rights. The owners of such intellectual
property rights may bring infringement claims against us. Any such litigation,
whether or not determined in our favor or settled by us, would be costly and
divert the attention of our management and technical personnel.
Any inquiries with respect to 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. From time to time we or our customers receive letters from third parties
claiming that our or our customers' products infringe those third parties'
intellectual property rights.
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, on April 25, 2000 we received a letter from counsel to
Cisco Systems informing us that Alcatel Alsthom S.A. had recently asserted that
certain products made and sold by Cisco Systems, which incorporate digital
signal processors made by us, infringed patents held by Alcatel. We evaluate all
letters of this nature to determine whether we have an indemnity obligation and
take appropriate steps. If any claims from third-parties required us to
indemnify customers 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
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 Microelectronics, manufacture our chip
sets. Employees, consultants and customers have access to our proprietary and
confidential information. Any misuse or misappropriation of this intellectual
property could have an adverse impact on our business. We take steps to control
access to, and the distribution of, our proprietary information. We cannot
guarantee,
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however, that such safeguards will protect our intellectual property and other
valuable competitive information.
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 had recently commenced employment with one of our
competitors. The court issued a final judgment in our favor and against the
defendants. In addition, the court ordered injunctive and other relief against
the defendants. The defendants appealed the judgment and their appeal was
dismissed as moot in June 2000.
In connection with our private placement of Series A preferred stock, which
was subsequently converted into common stock, 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 or Intel's ownership in us is less than 1% of our outstanding capital
stock. 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
the same extent as do the laws of the United States, and many U.S. companies
have encountered substantial infringement problems in these countries, some of
which are countries in which we have sold and continue to sell products. There
is a risk that our efforts to protect 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 or if the laws of a foreign jurisdiction do not effectively permit such
protection, 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 further as current competitors expand their product offerings and new
competitors enter the market. We believe that we must compete on the basis of a
variety of factors, including:
- time to market;
- functionality;
- conformity to industry standards;
- performance;
- price;
- breadth of product lines;
- product migration plans; and
- technical support.
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We believe our principal competitors include Alcatel; Analog Devices;
Centillium Technology Corporation; Conexant Systems; Infineon Technologies;
Intel Corporation; 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.
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.
CHANGES IN CURRENT OR FUTURE LAWS OR REGULATIONS OR THE IMPOSITION OF NEW LAWS
OR REGULATIONS BY THE FCC, OTHER FEDERAL OR STATE AGENCIES OR FOREIGN
GOVERNMENTS COULD IMPEDE THE SALE OF OUR PRODUCTS OR OTHERWISE HARM OUR
BUSINESS.
The Federal Communications Commission has broad jurisdiction over our target
market. Although current FCC regulations and the laws and regulations of other
federal or state agencies are not directly applicable to our products, they do
apply to much of the equipment into which our products are incorporated. As a
result, the effects of regulation on our customers or the industries in which
they operate may, in turn, materially and adversely impact our business,
financial condition and results of operations. FCC regulatory policies that
affect the ability of cable operators or telephone companies to offer certain
services or other aspects of their business may impede the sale of our products.
We may also be subject to regulation by countries other than the United States.
Foreign governments may impose tariffs, duties and other import restrictions on
components that we obtain from non-domestic supplies and may impose export
restrictions on products that we sell internationally. These tariffs, duties or
restrictions could materially and adversely affect our business, financial
condition and results of operations. Changes in current laws or regulations or
the imposition of new laws and regulations in the United States or elsewhere
could also materially and adversely affect our business.
OUR FUTURE SUCCESS DEPENDS IN PART ON THE CONTINUED SERVICE OF OUR KEY DESIGN,
ENGINEERING, SALES, MARKETING AND EXECUTIVE PERSONNEL AND OUR ABILITY TO
IDENTIFY, HIRE AND RETAIN ADDITIONAL PERSONNEL
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. Armando Geday, our President and Chief Executive
Officer, is our only executive officer subject to an employment agreement;
however, we cannot be sure that we can retain Mr. Geday's services. In addition,
we have
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not obtained key-man life insurance on any of our executive officers or key
employees. Because DSL technology is specialized and complex, we need to recruit
and train qualified technical personnel. However, there are many employers
competing to hire qualified technical personnel and we have had difficulty
attracting and retaining such personnel. We expect to continue to have
difficulty hiring and retaining qualified personnel. Further, our competitors
have recruited our employees and may do so in the future. Loss of the services
of, or failure to recruit, key design engineers or other technical and
management personnel could be significantly detrimental to our product
development programs.
SUBSTANTIAL SALES OF OUR CHIP SETS WILL NOT OCCUR UNLESS TELECOMMUNICATIONS
SERVICE PROVIDERS INITIATE SUBSTANTIAL DEPLOYMENT OF DSL SERVICES
The success of our products is dependent upon the decision by
telecommunications service providers to deploy DSL technologies and the timing
of the deployment. Factors that will impact such deployment include:
- a prolonged approval process, including laboratory tests, technical
trials, marketing trials, initial commercial deployment and full
commercial deployment;
- the development of a viable business model for DSL services, including the
capability to market, sell, install and maintain DSL services;
- cost constraints, such as installation costs and space and power
requirements at the telecommunications service provider's central office;
- varying and uncertain conditions of the local loop, including the size and
length of the copper wire, electrical interference and interference with
existing voice and data telecommunications services;
- challenges of interoperability among DSL equipment manufacturers'
products;
- evolving industry standards for DSL technologies; and
- government regulation.
Although a number of telecommunications service providers have commenced
commercial deployment of DSL services using DSL products that incorporate our
chip sets, if these telecommunications service providers do not expand their
deployment of DSL services, or if additional telecommunications service
providers do not offer DSL services on a timely basis, then our business,
financial condition and results of operations will be seriously harmed.
THE RECENT RAPID EXPANSION OF OUR OPERATIONS HAS PLACED A STRAIN ON OUR
MANAGEMENT AND PERSONNEL AND OTHER RESOURCES
From December 31, 1997 to June 30, 2000, we increased from 93 to 571 total
employees. This growth and rapid expansion in our operations 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.
If we do not successfully manage our growth, our business, financial condition
and results of operations will be seriously harmed.
SALES TO CUSTOMERS BASED OUTSIDE OF THE UNITED STATES HAVE ACCOUNTED FOR A
SIGNIFICANT PORTION OF OUR NET REVENUES, WHICH EXPOSES US TO INHERENT RISKS OF
INTERNATIONAL BUSINESS
We expect that sales to such international customers will continue to
account for a significant portion of our net revenues for the foreseeable
future. Accordingly, we are subject to risks inherent in our international
business activities, including:
- unexpected changes in regulatory requirements;
- tariffs and other trade barriers, including current and future import and
export restrictions;
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- difficulties in collecting accounts receivables;
- difficulties in staffing and managing international operations;
- potentially adverse tax consequences, including restrictions on the
repatriation of earnings;
- the burdens of complying with a wide variety of foreign laws (particularly
with respect to intellectual property) and license requirements;
- the risks related to international political instability and to the recent
global economic turbulence and adverse economic circumstances in Asia;
- difficulties in protecting intellectual property rights in some foreign
countries; and
- limited ability to enforce agreements and other rights in some foreign
countries.
We are subject to the risks associated with the imposition of legislation
and regulations relating to the import or export of high technology products. We
cannot predict whether quotas, duties, taxes or other changes or restrictions
upon the importation or exportation of our products will be implemented by the
United States or other countries. Because sales of our products have been
denominated to date primarily in United States dollars, increases in the value
of the United States dollar could increase the price of our products so that
they become relatively more expensive to customers in the local currency of a
particular country, leading to a reduction in sales and profitability in that
country. Future international activity may result in increased foreign currency
denominated sales. Gains and losses on the conversion to United States dollars
of accounts receivable, accounts payable and other monetary assets and
liabilities arising from international operations may contribute to fluctuations
in our results of operations. Some of our customer purchase orders and
agreements are governed by foreign laws, which may differ significantly from
United States laws. Therefore, we may be limited in our ability to enforce our
rights under such agreements and to collect damages, if awarded.
IF WE DELIVER PRODUCTS WITH DEFECTS, OUR REPUTATION 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 or as new versions are released. If we deliver products with errors,
defects or bugs or that have reliability, quality or compatibility problems, our
reputation and the market acceptance and sales of our products could be harmed,
which could adversely affect our ability to retain existing customers or attract
new customers. Further, if our products contain errors, defects and bugs, then
we may be required to expend significant capital and resources to alleviate
these problems. Further, these defects or problems could interrupt or delay
sales to our customers. If any of these problems are not found until we have
commenced commercial production, we may be required to incur additional
development costs and product repair or replacement costs. Defects could also
lead to 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. In addition, these problems may divert our technical
and other resources from other development efforts.
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 will own, in the
aggregate, approximately 31.6% of our outstanding common stock after giving
effect to the sale of shares in this offering.
Entities affiliated with Texas Pacific Group will own approximately 26.1% of
GlobeSpan after giving effect to their sale of shares in this offering and will
be able to exercise control over us 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
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stockholders. Texas Pacific Group, through its representatives on our 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, Marren and Stanton. Our board of directors
has also created an Executive Committee consisting of Messrs. Coulter, Epley and
Geday. Of the current members of the board of directors and the Executive
Committee, Messrs. Epley, Geeslin and Stanton are also currently directors of,
and have direct or indirect equity interests in, Paradyne Corporation, which is
a customer of ours. 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 2/3% 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 ANTITAKEOVER DEFENSES THAT COULD DELAY OR PREVENT AN ACQUISITION OF OUR
COMPANY
Some of the provisions of our certificate of incorporation and bylaws and
the provisions of Delaware law could have the effect of delaying, deferring or
preventing our acquisition. For example, we have authorized but unissued shares
of preferred stock which could be used to fend off a takeover attempt, our
stockholders may not take actions by written consent, our stockholders are
limited in their ability to make proposals at stockholder meetings and our
directors may be removed only for cause and upon the affirmative vote of at
least 80% of our outstanding voting shares.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL WHICH MIGHT NOT BE AVAILABLE OR WHICH,
IF AVAILABLE, WOULD BE ON TERMS ADVERSE TO OUR STOCKHOLDERS
We expect the net proceeds from this offering and our current cash and cash
equivalents will meet our working capital and capital expenditure needs for at
least one year. After that, we may need to raise additional funds, and we cannot
be certain that we will be able to obtain additional financing on favorable
terms, if at all. We may also require additional capital for the acquisition of
businesses, products and technologies that are complementary to ours. Further,
if we issue equity securities, the ownership percentage of our stockholders
would be reduced, and the new equity securities may have rights, preferences or
privileges senior to those of existing holders of our common stock. If we cannot
raise needed funds on acceptable terms, we may not be able to develop or enhance
our products, take advantage of future opportunities or respond to competitive
pressures or unanticipated requirements, which could seriously harm our
business, operating results and financial condition.
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OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE, WHICH MIGHT MAKE IT
DIFFICULT FOR OUR STOCKHOLDERS TO SELL THEIR SHARES
The market price of our common stock has fluctuated significantly in
response to some of the following factors and will likely continue to fluctuate
significantly in response to the following factors, some of which are beyond our
control:
- variations in our quarterly operating results;
- changes in financial estimates of our net revenues and operating results
by securities analysts;
- changes in market valuations of integrated circuit companies;
- announcements by us of significant contracts, acquisitions, strategic
partnerships, joint ventures or capital commitments;
- loss or decrease in sales to a major customer or failure to complete
significant transactions;
- loss or reduction in manufacturing capacity from Lucent Microelectronics
or our other suppliers;
- additions or departures of key personnel;
- future sales of our common stock;
- stock market price and volume fluctuations attributable to inconsistent
trading volume levels of our stock;
- commencement of or involvement in litigation; and
- announcements by us or our competitors of key design wins and product
introductions.
WE COULD BE SUBJECT TO CLASS ACTION LITIGATION DUE TO STOCK PRICE VOLATILITY,
WHICH, IF IT OCCURS, WILL DISTRACT MANAGEMENT AND RESULT IN SUBSTANTIAL COSTS,
AND COULD RESULT IN JUDGMENTS AGAINST US
In the past, securities class action litigation has often been brought
against companies following periods of volatility in the market price of their
securities. We may be the target of similar litigation in the future. Securities
litigation could result in substantial costs and divert management's attention
and resources, which could cause serious harm to our business, financial
condition and results of operations.
EXISTING STOCKHOLDERS MAY SELL THEIR COMMON STOCK WHICH MAY REDUCE OUR STOCK
PRICE
The market price of our common stock could drop as a result of sales of a
large number of shares of common stock in the market after the offering, or the
price could remain lower because of the belief that such sales could occur.
These factors also could make it more difficult for us to raise funds through
future offerings of common stock.
Upon the closing of this offering, we will have 70,553,156 shares of common
stock outstanding. All of these shares are freely tradeable without restriction,
with the following exceptions:
- 21,684,448 shares which are owned by certain of our officers, directors
and affiliates and may be resold publicly at any time subject to the
volume and other restrictions under Rule 144 of the Securities Act of
1933, and
- 6,409,469 shares which were issued in our acquisitions may be resold under
Rule 144 beginning on January 28, 2001.
In connection with this offering our executive officers and directors and
some of our other stockholders have agreed with respect to 29,880,736 of our
shares not to sell or otherwise dispose of their shares of common stock. Most of
the shares that will be available for sale after the 90th day after the date of
this prospectus or afterwards will be subject to volume limitations because they
are held by our affiliates. We cannot assure you that these lock-up restrictions
will not be removed prior to 90 days after the offering without prior notice by
the underwriters.
In addition, as of June 30, 2000, there were outstanding options to purchase
14,732,293 shares of our common stock and warrants to purchase 900,000 shares of
our common stock. All shares of common stock underlying our option plans are
registered and, upon exercise, are freely tradeable subject to volume trading
limitations under Rule 144. These options entitle the holders to purchase
19
<PAGE>
shares of common stock at prices per share that are less than the current market
price per share of our common stock. The holders of these options will usually
exercise them at a time when the market price of our common stock is greater
than the exercise price of the options. The exercise of options and subsequent
sale of common stock could reduce the market price for our common stock and
result in dilution to our then stockholders.
Upon completion of this offering, the holders of an aggregate of 28,334,958
shares of our common stock, assuming the exercise of our outstanding warrants,
will have registration rights, including the right to require us to register
their shares and the right to include their shares in public offerings we
undertake in the future.
WE HAVE BROAD DISCRETION TO USE THE OFFERING PROCEEDS, AND HOW WE INVEST THESE
PROCEEDS MAY NOT YIELD A FAVORABLE RETURN
We are effecting the primary portion of this offering at this time because
we believe that favorable market conditions currently exist for the offering of
stock of companies within our industry. As of the date of this prospectus, we
have no specific plans to use our net proceeds from the sale of shares by us in
this offering other than for repayment of the subordinated redeemable
convertible note issued by us in connection with our acquisition of PairGain's
Microelectronics Group, working capital, sales and marketing expenditures,
development of new products and possible acquisitions and plan to invest the net
proceeds in short-term, investment-grade, interest-bearing securities.
Accordingly, our management will retain broad discretion to allocate a
substantial portion of the net proceeds from the primary portion of this
offering to uses that the stockholders may not deem desirable, and there can be
no assurance that these proceeds can or will yield a significant return.
WE DO NOT ANTICIPATE PAYING ANY DIVIDENDS
We currently intend to retain all future earnings to fund the development
and growth of our business and, therefore, we do not anticipate paying any
dividends.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
All statements, trend analyses and other information contained in this
prospectus regarding markets for our products and trends in net revenues, gross
margin and anticipated expense levels, and any statement that contains the words
"anticipate," "believe," "plan," "estimate," "expect," "intend" and other
similar expressions, constitute forward-looking statements. These
forward-looking statements are subject to business and economic risks, including
those risks identified in "Risk Factors" and elsewhere in this prospectus and
our actual results of operations may differ significantly from those contained
in the forward-looking statements because of such risks. The cautionary
statements made in this prospectus apply to all forward-looking statements
wherever they appear in this prospectus.
20
<PAGE>
USE OF PROCEEDS
We estimate that our net proceeds from the sale by us of 1,406,250 shares of
common stock in this offering at an offering price of $100.00 per share, will be
approximately $132.7 million after deducting the underwriting discounts and
commissions and estimated offering expenses payable by us. We will not receive
any of the proceeds from the sale of common stock by the selling stockholders.
We intend to repay a $90.0 million principal amount subordinated redeemable
convertible note issued to PairGain in connection with our acquisition of
PairGain's Microelectronics Group in February 2000, plus accrued but unpaid
interest estimated to be $1.5 million. This note bears interest at a rate of
5.0% per year and matures on February 24, 2007.
After the payment of this outstanding indebtedness, our remaining net
proceeds from this offering will be approximately $41.2 million. We intend to
use these remaining proceeds primarily for general corporate purposes, including
working capital, sales and marketing expenditures, development of new products
and services and possible acquisitions. Although we may use a portion of the net
proceeds to acquire technology or businesses that are complementary to our
business, we have no current plans in this regard. Pending such uses, we plan to
invest the net proceeds in short-term, investment grade, interest-bearing
securities.
DIVIDEND POLICY
We have never paid any dividends on our common stock. We currently intend to
retain all future earnings, if any, for use in our business and do not
anticipate paying any cash dividends on our common stock in the foreseeable
future.
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the Nasdaq National Market System under the
symbol "GSPN". The following table sets forth, for the periods indicated, the
high and low bid prices per share for our common stock as reported by the Nasdaq
National Market, as adjusted for our 3-for-1 stock split on February 28, 2000.
<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
-------------------
1999 Fiscal Year (ended December 31, 1999) HIGH LOW
------------------------------------------ -------- --------
<S> <C> <C>
Second Quarter (from June 26, 1999)........................ $ 14.38 $ 8.79
Third Quarter.............................................. 39.42 14.33
Fourth Quarter............................................. 30.96 16.33
</TABLE>
<TABLE>
<CAPTION>
2000 Fiscal year (ended December 31, 2000) HIGH LOW
------------------------------------------ -------- --------
<S> <C> <C>
First Quarter.............................................. $167.00 $23.58
Second Quarter............................................. 128.00 42.00
Third Quarter (through August 1, 2000)..................... 148.50 100.00
</TABLE>
As of August 1, 2000, there were approximately 2,000 holders of record of
our common stock. The last reported sales price of our common stock on
August 1, 2000 was $103.81 per share.
21
<PAGE>
CAPITALIZATION
The following table sets forth our cash, cash equivalents and short-term
investments and our capitalization as of March 31, 2000:
- on an actual basis;
- on a pro forma basis to give effect to our acquisition of T.sqware on
April 27, 2000 and our acquisition of iCompression on June 30, 2000; and
- on a pro forma as adjusted basis to reflect the sale of the shares of
common stock offered by us at an offering price of $100.00 and the
application of the net proceeds we will receive from the sale of shares by
us in this offering, and the repayment of the $90,000,000 note issued to
PairGain from a portion of the proceeds from this offering. Also included
is the effect of the redemption of the original beneficial conversion
feature of this note (resulting in a reduction in total stockholders'
equity) recorded for $47,341,000 and the gain on the associated redemption
of $9,364,000.
<TABLE>
<CAPTION>
MARCH 31, 2000
-------------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ---------- ------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C>
Cash, cash equivalents and short-term
investments..................................... $ 31,466 $ 74,739 $ 117,439
======== ======== ==========
Subordinated redeemable convertible note
payable......................................... $ 52,023 $ 52,023 $ --
Long-term portion of capital lease obligations,
less current portion............................ 674 1,705 1,705
Other long-term debt.............................. -- 2,897 2,897
Stockholders' equity
Preferred stock, $0.001 par value, 10,000,000
shares authorized; no shares issued or
outstanding, actual, pro forma and pro forma as
adjusted........................................ -- -- --
Common stock, $0.001 par value, 400,000,000 shares
authorized; 63,472,407 shares issued and
outstanding, actual; 68,964,741 shares issued
and outstanding, pro forma; 70,370,991 issued
and outstanding, pro forma as adjusted.......... 63 69 70
Stock purchase warrant............................ 1 1 1
Additional paid-in capital........................ 366,752 886,618 971,976
Notes receivable from stock sales................. (7,169) (7,169) (7,169)
Deferred stock compensation....................... (78,185) (78,185) (78,185)
Accumulated other comprehensive loss.............. (5) (5) (5)
Accumulated deficit............................... (36,251) (86,790) (77,426)
-------- -------- ----------
Total stockholders' equity...................... 245,206 714,539 809,262
-------- -------- ----------
Total capitalization............................ $297,903 $771,164 $ 813,864
======== ======== ==========
</TABLE>
------------------------
The outstanding share information excludes the following:
- 11,630,908 shares of common stock issuable on exercise of outstanding
options as of March 31, 2000 with a weighted average exercise price of
$26.00 per share;
- 1,445,765 shares of common stock reserved for grant and issuance under our
equity and incentive plans as of March 31, 2000; and
- 900,000 shares of common stock issuable upon the exercise of outstanding
warrants with a weighted avergage exercise price of $6.88 per share.
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and the notes thereto included elsewhere in this prospectus.
22
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following selected historical financial data as of December 31, 1998 and
1999, and for the seven months ended July 31, 1996, the five months ended
December 31, 1996 and the years ended December 31, 1997, 1998 and 1999, were
derived from financial statements audited by PricewaterhouseCoopers LLP,
independent accountants. The selected historical financial data for each of the
three month periods ended March 31, 1999 and 2000 were derived from our
unaudited financial statements. The selected historical financial data for the
years ended December 31, 1995 of our predecessor company represent the financial
position of the Advanced Transmission Technology Division of AT&T Paradyne prior
to the divestiture in July 1996 and was derived from the unaudited financial
statements of our predecessor company. This information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements, including the notes
thereto, included elsewhere in this prospectus.
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY OUR COMPANY
-------------------------- ------------------------------------------------------
SEVEN FIVE
YEAR MONTHS MONTHS YEAR ENDED
ENDED ENDED ENDED DECEMBER 31,
DECEMBER 31, JULY 31, DECEMBER 31, --------------------------------------
1995 1996 1996 1997 1998 1999
------------ ---------- ------------ ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues............................ $ 6,685 $ 1,597 $ 2,360 $ 22,546 $ 31,464 $ 56,220
Cost of sales........................... -- -- 496 7,565 9,882 20,879
Cost of sales related to termination
charge................................ -- -- -- -- -- 1,119
---------- ---------- ---------- ---------- ---------- ----------
Gross profit............................ 6,685 1,597 1,864 14,981 21,582 34,222
Operating expenses
Research and development, (exclusive
of non-cash compensation expense of
$1,879 for the three months ended
March 31, 2000)..................... 3,725 2,524 1,616 8,358 18,694 26,531
Selling, general and administrative
(exclusive of non-cash compensation
expense of $1,569 for the three
months ended March 31, 2000)........ 2,195 1,492 644 4,572 10,217 14,389
Amortization of intangible assets..... -- -- 404 1,000 583 --
Non-cash compensation................. -- -- -- -- -- --
In process research and development... -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Total operating expenses.............. 5,920 4,016 2,664 13,930 29,494 40,920
---------- ---------- ---------- ---------- ---------- ----------
(Loss) income from operations........... 765 (2,419) (800) 1,051 (7,912) (6,698)
Interest income......................... -- -- -- 91 55 1,581
Interest expense........................ -- -- -- -- (189) (448)
Interest expense, non-cash.............. -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
(Loss) income before income taxes....... 765 (2,419) (800) 1,142 (8,046) (5,565)
Provision (benefit) for income taxes.... -- -- -- 300 (217) --
---------- ---------- ---------- ---------- ---------- ----------
<CAPTION>
OUR COMPANY
----------------------
THREE MONTHS ENDED
MARCH 31,
----------------------
1999 2000
---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues............................ $ 8,641 $ 31,060
Cost of sales........................... 2,901 11,480
Cost of sales related to termination
charge................................ 1,119 --
---------- ----------
Gross profit............................ 4,621 19,580
Operating expenses
Research and development, (exclusive
of non-cash compensation expense of
$1,879 for the three months ended
March 31, 2000)..................... 5,380 10,880
Selling, general and administrative
(exclusive of non-cash compensation
expense of $1,569 for the three
months ended March 31, 2000)........ 2,928 6,242
Amortization of intangible assets..... -- 11,310
Non-cash compensation................. -- 3,448
In process research and development... -- 1,343
---------- ----------
Total operating expenses.............. 8,308 33,223
---------- ----------
(Loss) income from operations........... (3,687) (13,643)
Interest income......................... -- 606
Interest expense........................ (182) (498)
Interest expense, non-cash.............. -- (9,364)
---------- ----------
(Loss) income before income taxes....... (3,869) (22,899)
Provision (benefit) for income taxes.... -- --
---------- ----------
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY OUR COMPANY
--------------------------- ---------------------------------------------------------
SEVEN FIVE
YEAR MONTHS MONTHS YEAR ENDED
ENDED ENDED ENDED DECEMBER 31,
DECEMBER 31, JULY 31, DECEMBER 31, -----------------------------------------
1995 1996 1996 1997 1998 1999
------------ ----------- ------------ ----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net (loss) income.................. 765 (2,419) (800) 842 (7,829) (5,565)
Preferred stock deemed dividend and
accretion........................ -- -- -- -- -- (3,466)
---------- ----------- ----------- ----------- ----------- -----------
Net (loss) income attributable to
common stockholders.............. $ 765 $ (2,419) $ (800) $ 842 $ (7,829) $ (9,031)
========== =========== =========== =========== =========== ===========
Other comprehensive loss:
Unrealized loss on marketable
securities....................... -- -- -- -- -- (22)
---------- ----------- ----------- ----------- ----------- -----------
Comprehensive (loss) income
applicable to common
stockholders..................... $ 765 $ (2,419) $ (800) $ 842 $ (7,829) $ (9,053)
========== =========== =========== =========== =========== ===========
(Loss) earnings per share:
Basic............................ $ (0.02) $ 0.02 $ (0.22) $ (0.19)
=========== =========== =========== ===========
Diluted.......................... $ (0.02) $ 0.02 $ (0.22) $ (0.19)
=========== =========== =========== ===========
Shares used in computing (loss)
earnings per share:
Basic............................ 34,312,500 34,546,614 36,254,133 46,612,752
Diluted.......................... 34,312,500 38,119,296 36,254,133 46,612,752
<CAPTION>
OUR COMPANY
------------------------
THREE MONTHS ENDED
MARCH 31,
------------------------
1999 2000
----------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C>
Net (loss) income.................. (3,869) (22,899)
Preferred stock deemed dividend and
accretion........................ -- --
----------- -----------
Net (loss) income attributable to
common stockholders.............. $ (3,869) $ (22,899)
=========== ===========
Other comprehensive loss:
Unrealized loss on marketable
securities....................... -- 17
----------- -----------
Comprehensive (loss) income
applicable to common
stockholders..................... $ (3,869) $ (22,882)
=========== ===========
(Loss) earnings per share:
Basic............................ $ (0.11) $ (0.39)
=========== ===========
Diluted.......................... $ (0.11) $ (0.39)
=========== ===========
Shares used in computing (loss)
earnings per share:
Basic............................ 36,412,767 58,640,432
Diluted.......................... 36,412,767 58,640,432
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------ MARCH 31,
1997 1998 1999 2000
-------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 875 $ 12 $ 36,668 $ 31,466
Working capital (deficit)................................... 2,423 (2,655) 44,616 37,058
Total assets................................................ 10,215 13,430 70,991 326,898
Long-term liabilities, less current portion................. -- 5,506 443 52,697
Retained earnings (accumulated deficit)..................... 42 (7,787) (13,352) (36,251)
Total stockholders' equity (deficit)........................ 6,448 (1,293) 55,433 245,206
</TABLE>
See note 11 of notes to the financial statements for an explanation of the
method used to calculate earnings per share. Earnings per share data is not
presented for our predecessor company, since our predecessor company did not
have its own capital structure. As a result, this information would not be
meaningful.
24
<PAGE>
GLOBESPAN, INC.
UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION
The accompanying unaudited pro forma condensed combined Statement of
Operations (the "Pro Forma Statement of Operations") for the year ended
December 31, 1999 and the three months ended March 31, 2000 gives effect to the
Ficon Technology, Inc. (Ficon), T.sqware, Inc. (T.sqware) and iCompression, Inc.
(iCompression) acquisitions as if they had occurred on January 1, 1999 and
January 1, 2000, respectively, accounted for as a purchase business combination.
The Pro Forma Statement of Operations is based on historical results of
operations of GlobeSpan, Inc. (GlobeSpan), Ficon, T.sqware and iCompression for
the year ended December 31, 1999 and for the three months ended March 31, 2000.
The Unaudited Pro Forma Condensed Combined Balance Sheet (the "Pro Forma
Balance Sheet") gives effect to the acquisition of T.sqware and iCompression as
if the acquisition had occurred on March 31, 2000. The Ficon acquisition was
consummated on January 31, 2000 and has been consolidated with GlobeSpan as of
March 31, 2000. On February 24, 2000, GlobeSpan acquired certain technology and
employees of Microelectronics Group of PairGain Technologies, Inc. (PairGain).
As a result, the intangible assets acquired from PairGain are included in the
Pro Forma Balance Sheet of GlobeSpan at March 31, 2000. The T.sqware acquisition
closed on April 27, 2000. The iCompression acquisition closed on June 30, 2000.
The Pro Forma Statement of Operations and Pro Forma Balance Sheet and
accompanying notes (the "Pro Forma Financial Information") should be read in
conjunction with and are qualified by the historical financial statements of
GlobeSpan, Ficon, T.sqware and iCompression and the notes thereto.
The Pro Forma Financial Information is intended for informational purposes
only and is not necessarily indicative of the future financial position or
future results of operations of GlobeSpan after the acquisitions or of the
financial position or results of operations of GlobeSpan that would have
actually occurred had the acquisitions been effected on January 1, 1999 or
January 1, 2000. It is GlobeSpan's current intention to incorporate the acquired
companies' technologies into its on-going product offerings.
25
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31, 2000
----------------------------------------------------------------
GLOBESPAN T.SQWARE ICOMPRESSION ADJUSTMENTS PRO FORMA
--------- -------- ------------ ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Assets
Current assets
Cash and cash equivalents................................. $ 27,107 $16,419 $18,781 $ (3)a $ 62,304
Short-term investments.................................... 4,359 8,076 -- 12,435
Accounts receivable, net.................................. 15,407 186 120 15,713
Account receivable from affiliates........................ 1,155 -- -- 1,155
Inventories............................................... 16,662 -- -- 16,662
Prepaid expenses and other current assets................. 1,363 816 341 2,520
Note receivable from officer,
short-term............................................ -- 85 -- 85
-------- ------- ------- -------- --------
Total current assets.................................. 66,053 25,582 19,242 (3) 110,874
Property and equipment, net................................. 7,506 1,698 1,658 10,862
Note receivable from officer,
long-term............................................... -- 65 -- 65
Restricted cash............................................. -- 220 -- 220
Intangible assets, net...................................... 248,148 -- -- 116,026 a 679,324
313,180 b
860 a
1,110 b
Other assets................................................ 5,191 147 57 5,395
-------- ------- ------- -------- --------
Total assets................................................ $326,898 $27,712 $20,957 $431,173 $806,740
======== ======= ======= ======== ========
Liabilities and Stockholders' Equity
Current liabilities
Borrowings under line of credit........................... $ 200 $ -- $ -- $ 200
Accounts payable.......................................... 6,242 576 568 7,386
Accounts payable to affiliates............................ 82 -- -- 82
Accrued expenses and other liabilities.................... 10,318 1,683 223 860 a 14,194
1,110 b
Payroll and benefit related liabilities................... 10,884 -- -- 10,884
Current portion of long-term debt......................... -- -- 198 198
Current portion of capital lease obligations and equipment
notes payable........................................... 1,269 563 800 2,632
-------- ------- ------- -------- --------
Total current liabilities............................. 28,995 2,822 1,789 1,970 35,576
Subordinated redeemable convertible note payable............ 52,023 52,023
Deferred revenues........................................... -- -- -- --
Long-term debt.............................................. -- 239 2,658 2,897
Capital lease obligations, less current portion and
equipment notes payable................................... 674 1,031 -- 1,705
-------- ------- ------- -------- --------
Total liabilities..................................... 81,692 4,092 4,447 1,970 92,201
-------- ------- ------- -------- --------
Commitments and contingencies
Stockholders' Equity
(23,620)a
(16,510)b
(14,189)a
(36,350)b
153,832 a
366,040 b
-------- ------- ------- -------- --------
Total stockholders' equity............................ 245,206 23,620 16,510 429,203 714,539
-------- ------- ------- -------- --------
Total liabilities and stockholders' equity.................. $326,898 $27,712 $20,957 $431,173 $806,740
======== ======= ======= ======== ========
</TABLE>
26
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1999
----------------------------------------------------------------------------
GLOBESPAN FICON T.SQWARE ICOMPRESSION ADJUSTMENTS PRO FORMA
----------- -------- -------- ------------ ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net revenues....................................... $ 56,220 $4,719 $ 636 $ 333 $ $ 61,908
Cost of sales...................................... 20,879 -- -- 118 20,997
Cost of sales related to termination charge........ 1,119 -- -- -- 1,119
----------- ------ -------- ------- ---------- -----------
Gross profit....................................... 34,222 4,719 636 215 -- 39,792
Operating expenses
Research and development......................... 26,531 4,079 6,803 5,691 674 d 43,778
Selling, general and
administrative................................. 14,389 556 5,926 2,208 126 d 33,038
9,833 e
Non-cash compensation............................ -- -- 241 1,001 1,242
Amortization of intangibles...................... -- -- -- -- 29,007 a 172,117
78,295 b
3,645 c
215 a
278 b
60,677 f
----------- ------ -------- ------- ---------- -----------
Total operating expenses....................... 40,920 4,635 12,970 8,900 182,750 250,175
----------- ------ -------- ------- ---------- -----------
(Loss) from operations............................. (6,698) 84 (12,334) (8,685) (182,750) (210,383)
Interest income.................................... 1,581 -- 280 108 1,969
Interest expense................................... (448) (4) (240) (4) (696)
----------- ------ -------- ------- ---------- -----------
(Loss) income before taxes......................... (5,565) 80 (12,294) (8,581) (182,750) (209,110)
Provision (benefit) for income taxes............... -- 34 -- 1 35
----------- ------ -------- ------- ---------- -----------
Net (loss) income.................................. (5,565) 46 (12,294) (8,582) (182,750) (209,145)
Preferred stock deemed dividend and accretion...... (3,466) -- -- -- (3,466)
----------- ------ -------- ------- ---------- -----------
Net loss attributed to common stockholders......... $ (9,031) $ 46 $(12,294) $(8,582) $ (182,750) $ (212,611)
=========== ====== ======== ======= ========== ===========
Loss per share basic and diluted................... $ (0.19) $ (4.05)
=========== ===========
Shares used in computing net loss per share--basic
and diluted...................................... 46,612,752 444,160 i 52,549,246
2,022,182 g
3,470,152 h
</TABLE>
27
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, 2000
-----------------------------------------------------------------------------
GLOBESPAN FICON T.SQWARE ICOMPRESSION ADJUSTMENTS PRO FORMA
------------ -------- -------- ------------ ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net revenues...................................... $ 31,060 $ 60 $ 505 $ 295 $ $ 31,920
Cost of sales..................................... 11,480 -- -- 103 11,583
------------ ----- ------- ------- ---------- -----------
Gross profit...................................... 19,580 60 505 192 -- 20,337
Operating expenses
Research and development........................ 10,880 532 1,599 2,259 15,270
Selling, general and administrative............. 6,242 68 2,669 691 819 e 10,489
Non-cash compensation expense................... 3,448 -- 168 820 4,436
Amortization of intangible assets............... 11,310 -- -- -- 7,252 a 48,675
19,574 b
54 a
69 b
304 c
10,112 f
In process research and development............. 1,343 -- -- -- 1,343
------------ ----- ------- ------- ---------- -----------
Total operating expenses...................... 33,223 600 4,436 3,770 38,184 80,213
------------ ----- ------- ------- ---------- -----------
(Loss) from operations............................ (13,643) (540) (3,931) (3,578) (38,184) (59,876)
Interest income................................... 606 -- 289 147 1,042
Interest expense, other........................... (498) -- (291) -- (789)
Interest expense, non-cash........................ (9,364) -- -- -- (9,364)
------------ ----- ------- ------- ---------- -----------
(Loss) income before taxes........................ (22,899) (540) (3,933) (3,431) (38,184) (68,987)
Provision (benefit) for income taxes.............. -- -- -- -- --
------------ ----- ------- ------- ---------- -----------
Net (loss)........................................ $ (22,899) $(540) $(3,933) $(3,431) $ (38,184) $ (68,987)
============ ===== ======= ======= ========== ===========
Loss per share basic and diluted.................. $ (0.39) $ (1.07)
============ ===========
Shares used in computing net loss per share--basic
and diluted..................................... 58,640,432 2,022,182 g 64,280,819
3,470,152 h
148,053 i
</TABLE>
28
<PAGE>
1. PRO FORMA ADJUSTMENTS AND ASSUMPTIONS (IN THOUSANDS, EXCEPT SHARE AND PER
SHARE DATA)
(a) The following represents the preliminary allocation of the purchase
price over the historical net book values of the acquired assets and
assumed liabilities of T.sqware at March 31, 2000, and is for
illustrative pro forma purposes only. Actual fair values will be based on
financial information as of the acquisition date. Assuming the
transaction had occurred on March 31, 2000, the preliminary allocation
would have been as follows:
<TABLE>
<S> <C>
Assets acquired
Cash.................................................... $ 16,419
Short-term investments.................................. 8,076
Accounts receivable..................................... 186
Prepaids and other assets............................... 1,333
Property and equipment.................................. 1,698
Goodwill and intangibles................................ 116,026
--------
143,738
In-process technology..................................... 14,189
Liabilities assumed....................................... (4,092)
--------
Purchase price.......................................... $153,835
========
</TABLE>
------------------------
(1) The purchase price consists of 2,022,182 shares of common stock
exchanged and employee stock options valued at $153,832 based upon
GlobeSpan's stock price a few days before and after companies reached
agreement and the proposed transaction was announced and $3 in cash.
The pro forma balance sheet of T.sqware reflects the assumed
conversion of the redeemable convertible preferred stock to common
stock. Included in adjustment (a), in accordance with purchase
business acquisition accounting, the total pro forma stockholders'
equity of T.sqware of $23,620 has been eliminated on consolidation.
This allocation is preliminary and may be subject to change upon the
completion of an independent third party valuation of the fair value of
T.sqware's acquired assets and liabilities as of the acquisition date as
well as the potential identification of certain intangible assets.
- The pro forma adjustments relating to the acquisition of T.sqware
reflect twelve months of amortization expense for the year ended
December 31, 1999 and three months for the period ended March 31,
2000, assuming the transaction had occurred on January 1, 1999 and
January 1, 2000, respectively. The preliminary value of the goodwill
and intangible assets at January 1, 1999 and January 1, 2000 would
have been approximately $116,026. Goodwill and other intangible
assets will be amortized over four years, which is the average of the
expected estimated period of benefit of three to five years. Such
amounts approximate $29,007 and $7,252 for the year ended December
31, 1999 and the three month period ended March 31, 2000,
respectively;
- For purposes of the pro forma financial information, the estimated
amount of the in-process technology is $14,189, which is based upon a
preliminary analysis. Because such in-process technology is not
expected to reach the stage of technological feasibility by the
anticipated acquisition date and is expected to have no alternative
future use, this amount shall be immediately written-off by GlobeSpan
and has been reflected in the pro forma balance sheet as a charge to
stockholders' equity; and
If GlobeSpan is unable to write-off any of the in-process technology
and, accordingly, the dollar amount of the purchase price allocated
to in-process technology was determined to be zero, the effect would
result in (i) a $14,189 increase in both goodwill and other
intangible assets and stockholder's equity presented in the unaudited
pro forma condensed combined balance sheet as of March 31, 2000; and
(ii) $3,547 and $887 of incremental goodwill and other intangible
amortization for the year ended December 31, 1999 and the three
months ended March 31, 2000, respectively. This results in $0.07 and
$0.01 per share increase in the net loss attributable to common
stockholders and net loss
29
<PAGE>
per common share presented in the unaudited pro forma condensed
consolidated combined statement of operations for the year ended
December 31, 1999 and the three months ended March 31, 2000,
respectively. As a result, the annual amortization of goodwill and
other intangible assets would increase from $29,007 per year to
$32,554 per year based upon an amortization period of four years,
which is the average of the expected estimated period of benefit of
three to five years;
- In connection with the acquisition of T.sqware, GlobeSpan has
estimated acquisition expenses of $860, reflected as an adjustment to
goodwill and will be amortized over four years, which is the average
of the estimated period of benefit of three to five years or $215 for
the year ended December 31, 1999 and $54 for the three months ended
March 31, 2000; and
- The pro forma adjustment reconciles the historical balance sheet of
T.sqware at March 31, 2000 to the allocated purchase price of
T.sqware of $153,835, assuming the transaction had occurred on March
31, 2000.
(b) The following represents the preliminary allocation of the purchase
price over the historical net book values of the acquired assets and
assumed liabilities of iCompression at March 31, 2000, and is for
illustrative pro forma purposes only. Actual fair values will be based on
financial information as of the acquisition date. Assuming the
transaction had occurred on March 31, 2000, the preliminary allocation
would have been as follows:
<TABLE>
<S> <C>
Assets acquired
Cash.................................................... $ 18,781
Accounts receivable..................................... 120
Prepaids and other assets............................... 398
Property and equipment.................................. 1,658
Goodwill and intangibles................................ 313,180
--------
334,137
In-process technology..................................... 36,350
Liabilities assumed....................................... (4,447)
--------
Purchase price.......................................... $366,040
========
</TABLE>
------------------------
(1) The purchase price consists of 3,470,152 shares of common stock
exchanged and stock options valued at $366,040 based upon GlobeSpan's
stock price a few days before and after companies reached agreement
and the proposed transaction was announced. Also included in
adjustment (b), in accordance with purchase business acquisition
accounting, the total stockholders equity of iCompression, after the
conversion of the redeemable preferred stock to equity, of $16,510,
has been eliminated for pro forma presentation.
This allocation is preliminary and may be subject to change upon the
completion of an independent third party valuation of the fair value of
iCompression's acquired assets and liabilities as of the acquisition
date as well as the potential identification of certain intangible
assets.
- The pro forma adjustments relating to the acquisition of iCompression
reflect twelve months of amortization expense for the year ended
December 31, 1999 and three months for the period ended March 31,
2000, assuming the transaction had occurred on January 1, 1999 and
January 1, 2000, respectively. The preliminary value of the goodwill
and intangible assets at January 1, 1999 and January 1, 2000 would
have been approximately $313,180. Goodwill and other intangible
assets will be amortized over four years, which is the average of the
expected estimated period of benefit of three to five years. Such
amounts approximate $78,295 and $19,574 for the year ended
December 31, 1999 and the three month period ended March 31, 2000,
respectively;
- For purposes of the pro forma financial information, the estimated
amount of the in-process technology is $36,350, which is based upon a
preliminary analysis. Because such
30
<PAGE>
in-process technology is not expected to reach the stage of
technological feasibility by the anticipated acquisition date and is
expected to have no alternative future use, this amount shall be
immediately written-off by GlobeSpan and has been reflected in the
pro forma balance sheet as a charge to stockholders' equity; and
If GlobeSpan is unable to write-off any of the in-process technology
and, accordingly, the dollar amount of the purchase price allocated
to in-process technology was determined to be zero, the effect would
result in (i) an $36,350 increase in both goodwill and other
intangible assets and stockholder's equity presented in the unaudited
pro forma condensed combined balance sheet as of March 31, 2000; and
(ii) $9,088 and $2,272 of incremental goodwill and other intangible
amortization for the year ended December 31, 1999 and the three
months ended March 31, 2000, respectively. This results in or $0.17
and $0.04 per share increase in the net loss attributable to common
stockholders and net loss per common share presented in the unaudited
pro forma condensed consolidated combined statement of operations for
the year ended December 31, 1999 and the three months ended March 31,
2000, respectively. As a result, the annual amortization of goodwill
and other intangible assets would increase from $78,295 per year to
$87,383 per year based upon an amortization period of four years,
which is the average of the expected estimated period of benefit of
three to five years;
- In connection with the acquisition of iCompression, GlobeSpan has
estimated acquisition expenses of $1,110, reflected as an adjustment
to goodwill and will be amortized over four years, which is the
average of the estimated period of benefit of three to five years or
approximately $278 for the year ended December 31, 1999 and $69 for
the three months ended March 31, 2000; and
- The pro forma adjustment reconciles the historical balance sheet of
iCompression at March 31, 2000 to the allocated purchase price of
iCompression of $366,040 assuming the transaction had occurred on
March 31, 2000.
(c) The following represents the allocation of the purchase price over the
historical net book values of the acquired assets and assumed liabilities
of Ficon at December 31, 1999. Assuming the transaction had occurred on
December 31, 1999, the preliminary allocation would have been as follows:
<TABLE>
<S> <C>
Assets acquired
Cash..................................................... $ 899
Accounts receivable...................................... 787
Prepaids and other current assets........................ 136
Property and equipment................................... 241
Goodwill and intangibles................................. 10,025
-------
12,088
In-process technology...................................... 1,350
Liabilities assumed........................................ (1,388)
-------
Purchase price......................................... $12,050(1)
=======
</TABLE>
------------------------
(1) The purchase price consists of 186,240 shares of common stock valued
at $7,050 based upon GlobeSpan's stock price a few days before and
after companies reached agreement and the proposed transaction was
announced and $5,000 in cash. Also included in this adjustment, in
accordance with purchase business acquisition accounting, the total
stockholders equity of Ficon, of $675, has been eliminated for pro
forma presentation.
The pro forma adjustments reflect twelve months of amortization expense
for the year ended December 31, 1999 relating to the Ficon acquisition
assuming the transaction had occurred on January 1, 1999. The preliminary
value of the goodwill and intangible assets at January 1, 1999 would have
been approximately $10,070. Goodwill and other intangible assets will be
amortized over the expected estimated period of benefit ranging from two
to four years. Such amount would approximate $3,645 per year or $304 per
month.
31
<PAGE>
(d) Included in the Pro Forma Financial Information for the three months
ended March 31, 2000, is the operating results of Ficon for the month of
January 2000. In addition, in connection with the Ficon merger agreement,
Ficon paid its employees a bonus in amounts not to exceed $60 for any
employee or $800 in the aggregate, allocated between research and
development and selling, general and administrative expenses, based on
Ficon's historical allocation of employee salaries.
(e) In connection with the acquisition of Ficon by GlobeSpan, 773,760 shares
of restricted common stock were issued to Ficon employees and its
principal shareholder, contingent upon continued employment with the
merged companies. GlobeSpan will record deferred compensation of
approximately $29,522 to be amortized as compensation expense over the
vesting period in accordance with EITF 95-8, "Accounting for Contingent
Consideration Paid to Shareholders of an Acquired Enterprise in a
Purchase Business Combination," generally three years, or $9,833 per year
or $819 per month. Such compensation expense has been included as a pro
forma adjustment.
In addition, up to an additional 999,999 shares of common stock
("Contingent Shares") may be issuable six months after GlobeSpan has
validated release 3 of the Ficon software (the "Milestone Date"). In the
event that the Milestone Date is achieved more than 12 months after the
closing date, then the number of Contingent Shares to be issued is
reduced, as provided in the merger agreement. The Contingent Shares will
be released to the named Ficon employees and principal shareholder over a
period of 42 months, upon completion of certain development activities as
provided in the merger agreement. No amounts have been included in these
pro forma financial statements related to the Contingent Shares.
(f) In connection with the PairGain assets acquisition, GlobeSpan
(1) exchanged 3,243,591 shares of its common stock valued at $152,706,
based upon GlobeSpan's stock price a few days before and after the
companies reached agreement and the proposed transaction was announced
and (2) issued a $90,000 subordinated redeemable convertible note.
The pro forma adjustments reflect twelve months of amortization expense
for the year ended December 31, 1999 and approximately two months of
amortization for three months ended March 31, 2000, assuming the
transaction had occurred on January 1, 1999 and January 1, 2000,
respectively. The preliminary value of intangible assets acquired from
PairGain at January 1, 1999 and 2000 would have been approximately
$242,706, amortized over four years, which is the average of the expected
estimated period of benefit of three to five years. Such amount
approximates $60,677 per year or $10,112 for two months through
February 24, 2000, the date of acquisition.
(g) The pro forma basic and diluted net loss per common share is computed by
dividing the net loss attributable to common stockholders by the weighted
average number of common shares outstanding, reflecting an additional
2,022,182 shares of GlobeSpan's common stock issued in connection with
its acquisition of T.sqware and is assumed to be outstanding for the
entire period.
(h) The pro forma basic and diluted net loss per common share is computed by
dividing the net loss attributable to common stockholders by the weighted
average number of common shares outstanding, reflecting an additional
3,470,152 shares of GlobeSpan's common stock issued in connection with
its acquisition of iCompression and is assumed to be outstanding for the
entire period.
(i) The pro forma basic and diluted net loss per common share is computed by
dividing the net loss attributable to common stockholders by the weighted
average number of common shares outstanding, reflecting an additional
444,160 and 148,053 shares of GlobeSpan's common stock at December 31,
1999 and March 31, 2000, respectively, consisting of 186,240 shares
issued in connection with its acquisition of Ficon and is assumed to be
outstanding for the entire period ended December 31, 1999 and for one
month in the period end March 31, 2000; and 257,920 (equivalent to one
year's vesting) shares earned in connection with the continued employment
of certain Ficon employees and its principal shareholder, assumed to be
outstanding for the entire period ended December 31, 1999 and for one
month in the period ended March 31, 2000.
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS OF GLOBESPAN AND THE NOTES THERETO INCLUDED ELSEWHERE IN THIS
PROSPECTUS. OUR DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS BASED UPON
CURRENT EXPECTATIONS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS OUR PLANS,
OBJECTIVES AND INTENTIONS. GLOBESPAN'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM
THOSE INDICATED IN SUCH FORWARD-LOOKING STATEMENTS. SEE "SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS."
OVERVIEW
GlobeSpan, Inc. is a leading worldwide developer of advanced digital
subscriber line (DSL) integrated circuits which enable high-speed data
transmission over the existing network of copper telephone wires known as the
local loop. We sell our integrated circuits as chip sets to manufacturers of DSL
equipment for incorporation into products which are sold to telecommunications
service providers and end users. Our products target the rapidly growing market
for high-speed data transmission applications such as Internet access,
telecommuting and networking between branch offices. We currently outsource the
manufacturing of our integrated circuits, which enables us to concentrate our
resources on the design, development and marketing of our chip set solutions. We
have shipped our DSL chip sets to a broad base of leading communications
equipment manufacturers.
We were formed as an independent company in July 1996 as part of the
divestiture of AT&T Paradyne Corporation by Lucent Technologies. Prior to the
divestiture, our business was operated as the Advanced Transmission Technology
Division of AT&T Paradyne Corporation. This division was primarily engaged in
the development of high-speed DSL solutions. We refer to this division as our
predecessor company, although it was not operated as a separate entity.
Substantially all of our net revenues are derived from the sale of DSL chip
sets. We also sell reference design guides, which are technical specifications
relating to the design of systems based on our chip sets that enable our
customers to develop products that incorporate our chip sets. In our last fiscal
year, the sale of reference design guides accounted for 0.4% of our net
revenues. We recognize revenues at the time we ship our DSL products. We
typically sell our products with a 60 day warranty. Product returns to date have
not been significant. Prior to 2000, we generated substantially all of our
revenues from our DSL products that use the CAP line code. In 1998, we
introduced, and currently ship, a number of chip sets incorporating additional
features and other line code technologies, including 2B1Q, DMT and PAM. These
new product introductions have substantially expanded our DSL product offerings,
reducing the contribution to net revenues of our CAP based chip sets. Further,
we introduced asymmetric and symmetric DSL multi-mode chip sets each
interoperable with all line codes, and which makes it difficult to determine the
importance to the actual line code utilized by the service provider. We have
invested extensively in research and development projects and personnel and have
expanded our sales, marketing, general and administrative capabilities. This
investment has led to significant hiring which began in early 1997. Our overall
headcount increased from 93 employees at December 31, 1997 to 571 employees at
June 30, 2000.
To supplement and expand our core competencies, technologies, capabilities
and resources, we have actively pursued strategic acquisitions of complementary
DSL resources and companies. To this result, we acquired Ficon on January 31,
2000, a leading provider of communications software solutions in the areas of
IP, ATM and Voice over Packet, which enable service providers to build next
generation communications infrastructure. On February 24, 2000, we acquired
technology and the right to hire employees of the Microelectronics Group of
PairGain, designers of integrated circuits and software for DSL applications. On
April 27, 2000, we acquired T.sqware, a leading developer of high performance
communications solutions. These solutions consist of network processors which
incorporate T.sqware's
33
<PAGE>
scalable multiprocessor architecture, and multi-protocol high performance
software. To achieve scalability, one or more T.sqware network processor cores
may be embedded in systems on a chip, or SOCs, to address communications
applications ranging from DS3 to OC-12 data rates and scalable to OC-48 data
rates. In addition, we benefit from T.sqware's sophisticated VLSI design
capabilities which consist of experienced chip designers and design tools. On
June 30, 2000, we acquired iCompression, a developer of high performance signal
processor architectures and associated signal processing algorithms for
compression of data, voice and video for the broadband infrastructure in
applications such as broadband video conferencing.
As a result of these acquisitions, we have acquired both technologies and
resources to incorporate added features and functions into our DSL chip sets for
our customers. In order to accomplish this integration, we will continue to make
significant investments in research and development.
Historically, a significant portion of our net revenues in any quarter or
annual period has been derived from sales to relatively few customers, and we
expect this trend to continue. For the three months ended March 31, 2000 and the
three 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. For the three
months ended March 31, 2000, our top two customers were Cisco Systems and Lucent
Technologies, which accounted for 29.5% and 14.6% 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 Ascom Hasler AG, which accounted for 48.3%, 12.6%
and 9.2% of our net revenues, respectively. In 1997, our top three customers
were LG Information & Communications, Ascom Hasler AG and Westell Technologies,
which accounted for 21.4%, 12.5% and 9.6% of our net revenues, respectively. We
do not have purchase contracts with any of our customers that obligate them to
continue to purchase our products, and they could cease purchasing products from
us at any time. Because fluctuations in orders from our major customers could
cause our net revenues to fluctuate significantly in any given quarter or annual
period, we do not believe that period-to-period comparisons of our financial
results are necessarily meaningful and should not be relied upon as an
indication of future performance.
Members of the group comprising our largest customers change frequently due
to our lack of long term contracts with our customers, the timing of our
customers' product implementations, demand cycles in the sales of our customers'
products and our long sales cycle. In particular, the amount of revenues we
derive from our customers depends upon their success in selling DSL equipment to
telecommunications service providers for use in DSL service deployments. Our
largest customers in any particular period have varied with the timing of DSL
deployments and the identity of the telecommunications service provider
initiating the deployment. Further, since we are a worldwide supplier, our net
revenues and customers may be influenced by local economic conditions that
influence our customers' level of business with us. Our long sales cycle is
another factor in the frequent change of our principal customers. In general,
our customers will evaluate our products for three to six months prior to
incorporating our products into their products and beginning volume production.
As a result, our principal customers will vary depending on their stage in the
sales cycle.
Historically, a significant portion of our net revenues has been derived
from customers outside of North America, and we expect this trend to continue.
For the three months ended March 31, 2000, approximately 46.5% of our net
revenues were derived from customers outside of North America, of which 4.6%
were derived from customers based in Europe, 27.0% were derived from customers
based in Asia, and 15.0% were derived from customers based in other
international markets. In 1999, approximately 47.1% of our net revenues were
derived from customers outside of North America, of which 9.1% were derived from
customers based in Europe, 23.2% were derived from customers based in Asia and
14.8% were derived from customers based in other international markets. In 1998,
34
<PAGE>
approximately 32.6% of our net revenues were derived from customers outside of
North America, of which 11.8% were derived from customers based in Europe, 9.4%
were derived from customers based in Asia and 11.4% were derived from customers
based in other international markets. In 1997, approximately 49.2% of our net
revenues were derived from customers outside of North America, of which 17.5%
were derived from customers based in Europe, 30.9% were derived from customers
based in Asia and 0.8% were derived from customers based in other international
markets. All of our net revenues have been denominated in United States dollars.
Competition and technological change in the rapidly evolving DSL market has
and may continue to influence our quarterly and annual net revenues and results
of operations. Average selling prices of our chip sets and associated gross
margins tend to be higher at the time we introduce new products and decline over
time due to competitive pressures. We expect this pattern to continue with
existing and future products. Further, our gross margins are impacted by our
customer concentration and product mix. For example, purchases from our major
customers are generally at lower average selling prices and some of our
products, such as discrete components, are generally lower margin products.
Our product development and marketing strategy is focused on generating
design wins with DSL equipment manufacturers. The sales cycle for design wins
includes detailed testing and evaluation of our products, followed by a product
development cycle. Due to these cycles, which may be up to 12 months or longer,
and because the end-user market for DSL services is an emerging market, we
invest significantly in research and development and marketing in advance of
generating substantial revenues related to these investments. Additionally, the
rate and timing of customer orders may vary significantly from month-to-month.
Our backlog has fluctuated from quarter-to-quarter and has not been predictive
of quarterly results. Accordingly, if sales of our products do not occur when we
expect and we are unable to predict or adjust our estimates on a timely basis,
our expenses and inventory levels may increase as a percentage of net revenues
and total assets, respectively.
Our net losses have resulted from our significant investment in research and
development, in building sales and marketing and general and administrative
infrastructure and from the effects of purchase accounting for our acquisitions.
These expenses have exceeded our gross profits. We expect to continue to invest
significantly in this infrastructure in advance of realizing revenues associated
with such expenses.
Each of the acquisitions we have made in 2000 will be accounted for as a
purchase. Under purchase accounting, we will record the market value of our
shares of common stock issued in connection with the purchases and the amount of
direct transaction costs as the cost of acquiring the companies. That cost will
be allocated to the individual assets acquired and liabilities assumed,
including various identifiable intangible assets such as in process research and
development, acquired technology, acquired trademarks and trade names and
acquired workforce, based on their respective fair values. We will allocate the
excess of the purchase cost over the fair value of the net assets to intangible
assets. We estimate that the purchase of Ficon, T.sqware, iCompression and the
intangible assets of PairGain will result in annual amortization and other
non-cash acquisition related charges of approximately $130.0 million to
$250.0 million using two to five year useful lives. As a result, purchase
accounting treatment of our recent acquisitions will result in a net loss for
the foreseeable future, which could have a material adverse effect on the market
value of our stock. We will continue to seek out other acquisition
opportunities. Accordingly, we expect to incur substantial operating losses for
the foreseeable future.
35
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, statement of
operations data as a percentage of net revenues. Our results of operations are
reported as a single business segment.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------- ----------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........................................ 33.6 31.4 37.1 33.6 37.0
Cost of sales related to termination charge.......... -- -- 2.0 12.9 --
----- ----- ----- ------ ------
Gross profit......................................... 66.4 68.6 60.9 53.5 63.0
----- ----- ----- ------ ------
Operating expenses:
Research and development........................... 37.1 59.4 47.2 62.3 35.0
Selling, general and administrative................ 20.3 32.5 25.6 33.9 20.1
Amortization and other............................. 4.4 1.9 -- -- 36.4
Non-cash compensation................................ -- -- -- -- 11.1
In process research and development.................. -- -- -- -- 4.3
Total operating expenses......................... 61.8 93.8 72.8 96.2 107.0
----- ----- ----- ------ ------
(Loss) income from operations........................ 4.7 (25.1) (11.9) (42.7) (43.9)
Interest income...................................... 0.4 0.2 2.8 -- 2.0
Interest expense..................................... -- (0.6) (0.8) (2.1) (1.6)
Interest expense, non-cash........................... -- -- -- -- (30.1)
----- ----- ----- ------ ------
(Loss) income before income taxes.................... 5.1 (25.6) (9.9) (44.8) (73.7)
Provision (benefit) for income taxes................. 1.3 (0.7) -- -- --
----- ----- ----- ------ ------
Net (loss) income.................................... 3.8% (24.9)% (9.9)% (44.8)% (73.7)%
===== ===== ===== ====== ======
</TABLE>
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
NET REVENUES. Our net revenues from product sales are recognized upon
shipment of DSL chip sets and reference design guides. 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. Cost of sales consists of costs of having
our chip sets manufactured by our suppliers. Gross profits represents net
revenues less cost of sales. 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
36
<PAGE>
revenues. We expect that gross margin may decrease in the future due to a number
of factors, including pressures on average selling prices, and product and
customer mix.
RESEARCH AND DEVELOPMENT. Research and development expenditures are
primarily comprised of salaries and related expenses of employees engaged in
research, design and development activities. It also includes related supplies,
license fees for acquired technologies used in research and development,
equipment expenses and depreciation and amortization. Our research and
development 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. Selling, general and administrative
expense is primarily comprised of salaries and related costs for sales, general
and administrative personnel as well as general non-personnel related expenses.
Our selling, general and administrative expense was $6.2 million and
$2.9 million in the three months which 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 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. Amortization expense is related to
intangible assets we acquired from our acquisitions. 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 some employees stock options at less than
fair market value. The deferred stock compensation recorded is being amortized
over the respective vesting periods of three and four 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 $0.6 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. As part of the purchase price for the
Microelectronics Group of PairGain, we issued a subordinated redeemable
convertible note with a beneficial conversion feature measured by the price of
our common stock at closing of the acquisition and the conversion price as
defined. We are amortizing the difference between the price of our common stock
at the closing of the
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acquisition and the conversion price of approximately $47.3 million over our
call period through August 2000. The increase in dollar amount and percentage is
the result of the amortization.
RESULTS OF OPERATIONS IN THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NET REVENUES. Our net revenues were $56.2 million, $31.5 million, and
$22.5 million in the years ended December 31, 1999, 1998 and 1997, respectively.
These amounts represent increases of 78.7% from 1998 to 1999, and 39.6% from
1997 to 1998. The increase in revenues was primarily due to the increases in
unit volume shipments to existing customers, the expansion of our customer base
and the introduction of new products. Net revenues from customers outside of
North America represented 47.1%, 32.6% and 49.2% of our net revenues in the
years ended December 31, 1999, 1998 and 1997, respectively. Net revenues from
customers outside of North America increased as a percentage of net revenues
from 1998 to 1999 primarily due to a shift in manufacture of product by domestic
customers to offshore facilities. Net revenues from customers outside of North
America decreased as a percentage of net revenues from 1997 to 1998 as a result
of reduced shipments to existing customers in Asia due to an economic downturn
in a number of countries in this region. We expect that revenues generated from
customers outside of North America will continue to account for a significant
percentage of our net revenues.
COST OF SALES AND GROSS PROFIT. Our gross profit was $34.2 million,
$21.6 million and $15.0 million in the years ended December 31, 1999, 1998 and
1997, respectively. These amounts represent an increase of 58.6% from 1998 to
1999, and 44.1% from 1997 to 1998. Our gross margin was 60.9%, 68.6% and 66.4%
in the years ended December 31, 1999, 1998 and 1997, respectively. The decrease
in gross margin from 1998 to 1999 was due to a number of factors, including
pressures on average selling prices and customer and product mix. The increase
in gross margin from 1997 to 1998 resulted from an expanded customer base and
lower supplier costs based on greater volumes purchased. The increase in gross
profit dollars was the result of higher unit sales. In consideration for
modifying pricing terms for the sale of our products under cooperative
development agreements with Paradyne Corporation, we agreed to pay a license fee
to Paradyne Corporation on products sold to all customers up to an aggregate
amount of $1.5 million. As of March 1999, we had incurred and paid approximately
$300,000 to Paradyne Corporation under this arrangement. In connection with
terminating the cooperative development agreements and entering into a new
Supply Agreement effective December 1998 with Paradyne Corporation, we agreed to
pay Paradyne Corporation the remaining $1.2 million which was expensed in the
first quarter of 1999 as a cost of sales and paid during 1999.
RESEARCH AND DEVELOPMENT. Our research and development expenditures were
$26.5 million, $18.7 million and $8.4 million, in the years ended December 31,
1999, 1998 and 1997, respectively. These amounts represent increases of 41.9%
from 1998 to 1999 and 124% from 1997 to 1998. Research and development
expenditures represented 47.2%, 59.4% and 37.1% of net revenues in the years
ended December 31, 1999, 1998 and 1997, respectively. The decrease as a
percentage of revenues was due to the increased revenue. The increase in dollars
and as a percentage of net revenues in 1998 resulted from a significant increase
in development efforts in advance of anticipated revenues from such efforts. In
particular, we added a significant number of new personnel and related support.
SELLING, GENERAL AND ADMINISTRATIVE. Our selling, general and
administrative expense was $14.4 million, $10.2 million and $4.6 million in the
years ended December 31, 1999, 1998 and 1997, respectively. These amounts
represent increases of 40.8% from 1998 to 1999, and 123% from 1997 to 1998.
Selling, general and administrative expense represented 25.6%, 32.5% and 20.3%
of net revenues in the years ended December 31, 1999, 1998 and 1997,
respectively. The increase in dollars in 1999 and 1998, and as a percentage of
net revenues in 1998, resulted from the addition of sales, marketing, management
and administrative personnel and related expenses, including increased
commissions, and general business costs.
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AMORTIZATION OF INTANGIBLE ASSETS. Amortization was provided on a
straight-line basis commencing in August 1996 through July 1998. Our expense for
amortization of core technology was $0.0 million, $0.6 million and $1.0 million
in the years ended December 31, 1999, 1998 and 1997, respectively. These amounts
represent a decrease of 41.7% from 1997 to 1998.
INTEREST (EXPENSE) INCOME, NET. Interest (expense) income, net is comprised
of interest expense from bank borrowings and other debt, net of interest earned
on invested cash, and other non-operating expenses. Interest income increased by
$1.5 million for the year ended December 31, 1999 due to higher levels of
invested cash.
INCOME TAXES. We use the liability method of accounting for income taxes
prescribed by Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes (see note 10 of Notes to Financial Statements). Our effective
tax rate for the year ended December 31, 1997 was 26.3%, which differed from the
federal statutory rate primarily due to the utilization of the net operating
loss carryforwards generated in 1996 and a reduction of the valuation allowance
recorded against deferred tax assets. Since we generated a loss in 1998, a
benefit was recorded reflecting a loss carry-back for taxes paid in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations from initial contributions
of capital, borrowings on our lines of credit, the sale of Series A preferred
stock and the sale of common stock through our initial public offering on
June 23, 1999. As of March 31, 2000, we had working capital of approximately
$37.0 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 the Microelectonics Group of 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 expect our capital expenditures to increase from $1.2 million in 1999 to
more than $5.0 million in 2000 to support further expansion of operations. We
expect our expenditures for research and development to increase in 2000 as the
result of the addition of new engineers through direct hiring and our recent
acquisitions. These expenditures will be funded through our anticipated increase
in net revenues and resulting gross profits, our cash balances and the increase
in capital bases balances, as well as the net proceeds received from this
offering.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, or SAB 101, as amended in June 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 fourth
quarter of 2000 and believe that adoption will not have a significant effect on
our consolidated results of operations or financial position.
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In June 1998, FASB issued FAS No. 133, "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. FAS No. 133 is effective for all
fiscal quarters or fiscal years beginning after June 15, 2000, as amended by
FAS No. 137, "Accounting for Derivative and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133," issued in June 1999. We do not expect
the adoption of this statement to have a significant impact on our consolidated
results of operations or financial position.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our investment activities is to preserve principal
while at the same time maximizing the income we receive from our investments
without significantly increasing risk. Some of the securities that we may invest
in may be subject to market risk. This means that a change in prevailing
interest rates may cause the principal amount of the investment to fluctuate.
For example, if we hold a security that was issued with a fixed interest rate at
the then-prevailing rate and the prevailing interest rate later rises, the
principal amount of our investment will probably decline. To minimize this risk
in the future, we intend to maintain our portfolio of cash equivalents and
short-term investments in a variety of securities, including commercial paper,
money market funds, government and non-government debt securities and
certificates of deposit. As of March 31, 2000, all of our investments were in
money market funds, certificates of deposits or high quality commercial paper.
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BUSINESS
GENERAL
We are a leading worldwide developer of advanced DSL chip sets, which enable
high-speed data transmission over the existing network of copper telephone wires
known as the local loop. Our products, when deployed at each end of these copper
telephone wires, enable data transmission at rates over 100 times faster than
today's commonly deployed modem technologies, which transmit data at 56 Kbps.
Our products target the rapidly growing market for high-speed transmission
applications such as Internet access, telecommuting and networking among branch
offices. These transmission applications are expanding to include data, voice
and video transmissions over the same copper wire. In order to enable these
applications, equipment manufacturers are designing DSL systems around
increasingly complex integrated circuits which account for a significant portion
of the value added, proprietary content of such systems. While equipment
manufacturers have in-depth system knowledge, they often lack the core
technology and expertise necessary to develop these integrated circuits
internally and are turning to DSL integrated circuit developers that possess the
core technologies and expertise required to bring high performance, cost
effective solutions to market.
INDUSTRY OVERVIEW
THE LOCAL LOOP HAS BECOME THE BOTTLENECK TO HIGH-SPEED DATA ACCESS
Vast amounts of data are carried over the Internet and private
communications networks. International Data Corporation estimates that the
number of Internet users worldwide was approximately 144 million in 1998 and
will reach approximately 602 million in 2003. As the number of end users
accessing these networks grows and their use of data-intensive applications
increases, the volume of data transmitted over these networks will also continue
to grow.
In order to accommodate increasingly high volumes of data,
telecommunications service providers have invested significant resources to
upgrade central office switching centers and the interconnecting infrastructure,
known as the backbone. While these capacity constraints continue to be addressed
through the use of high-speed digital and fiber-optic equipment, the network of
twisted pair copper telephone wires that connects end users to central office
switching centers, known as the local loop, remains a bottleneck that limits
high-speed data transmission.
[Graphic depicting the local loop bottleneck, including the following text:
The local loop bottleneck. The barrier to high-speed data transmission is the
local loop. Commonly used analog modems connect a customer's PC to the network
service provider but the data transmission rate is limited to 56 Kbps. Once the
data reaches the service provider's "broadband' network, the transmission
capacity ranges from millions of bits per second to over 600 million bits per
second between points within the network using fiber optic and microwave
transmission systems.]
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According to the International Telecommunications Union, more than
700 million copper telephone wires have been installed worldwide primarily by
local telecommunications service providers. This local loop infrastructure was
originally designed for lower-speed voice traffic rather than higher-speed data
transmission. As a result, access to the Internet and private communications
networks using standard dial-up connections over the local loop has typically
been limited to data transmission rates of only 28.8 Kbps to 56 Kbps, often
requiring several minutes to several hours to download large data-intensive
files. This bottleneck has frustrated end users and limited the capability of
service providers to deliver high-speed applications such as efficient Internet
access, telecommuting and networking between branch offices.
NEW COMPETITION TO PROVIDE HIGH-SPEED DATA ACCESS
Until recently, traditional regional telephone companies were the almost
exclusive operators of the local loop. To address the demand for high-speed data
transmission, these service providers primarily offered high-speed data
transmission at transmission rates of up to 128 Kbps and 1.5 Mbps, depending on
the technology used to transmit the data. These services have generally achieved
limited success due to complexity and the high cost of deployment.
The Telecommunications Act of 1996 has enabled new entrants, such as
competitive local exchange carriers, to offer high-speed data transmission
services. These new carriers, as well as the traditional regional telephone
companies, are accelerating deployment of high-speed DSL services over the local
loop. DSL equipment, when deployed at each end of a copper telephone wire,
enables data transmission speeds of 128 Kbps to 52 Mbps, depending on the length
and condition of the copper telephone wire. In addition, other
telecommunications service providers, including cable, wireless and direct
broadcast satellite companies, are providing high-speed data transmission
services outside of the existing telephone network. Cable services are deployed
over the cable television infrastructure at transmission rates of up to 40 Mbps.
Cable is expected to compete effectively with other high-speed data transmission
technologies, particularly in the residential market, because it enables fast
data transmission speeds at comparatively low cost and leverages an existing
infrastructure of coaxial cable. Wireless and direct broadcast satellite systems
transmit digital data without terrestrial lines at speeds of more than 1 Mbps.
Many of these services are at an early stage of development, but they are
expected to provide cost-effective high-speed data transmission. In addition,
some telecommunications service providers are delivering high-speed data
transmission services to large businesses in major metropolitan areas over local
installed fiber networks. Although local fiber networks have not generally been
cost effective to deploy for small business and residential end users, fiber
networks will compete effectively in the market for high-speed data transmission
services, particularly for large business end users. As the volume of data
traffic increases, high-speed data transmission services have become a key
competitive service offering for these providers.
DSL TECHNOLOGY ENABLES HIGH-SPEED DATA TRANSMISSION OVER COPPER TELEPHONE WIRE
DSL technology was developed to address the local loop bottleneck. DSL
implementations have several important advantages over other high speed
technologies, including:
DEDICATED BANDWIDTH. DSL is a point-to-point technology that connects
the end user to the service provider's central office over a copper
telephone wire. Because DSL connections are dedicated, DSL does not suffer
from service degradation as other subscribers are added to the system, and,
in addition, allows a higher level of security. Some alternative high-speed
data transmission solutions, such as cable, are shared systems which may
suffer degradation and increase the risk of security breaches as additional
users are added.
LOW COST. Because DSL uses the existing local loop connection, it can
be significantly less expensive to deploy to businesses and homes than other
high-speed data transmission technologies. In addition, recent advances in
technology development and industry standardization can make widespread
deployment of DSL increasingly economical to both service providers and end
users.
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BROAD COVERAGE. Since virtually all businesses and homes in the United
States have installed copper telephone wire connections, DSL technologies
can be made immediately available to a large percentage of potential end
users.
DSL technology uses sophisticated digital signal processing technologies to
achieve high-speed data transmission over copper telephone wires. DSL technology
addresses different high-speed data transmission service requirements resulting
in several configuration options. Symmetric transmission technologies, such as
high bit rate DSL, or HDSL, symmetric DSL, or SDSL, and multi-rate symmetric
DSL, or MSDSL, provide equal data transmission rates between the central office
and the end user. These configurations are therefore most ideally suited for
applications such as telecommuting and networking between branch offices, which
require equal data transmission rates in both directions. Asymmetric
transmission technologies, such as asymmetric DSL, or ADSL, and rate-adaptive
asymmetric DSL, or RADSL, provide greater downstream transmission rates towards
the end user than upstream from the end user. Applications most efficiently
served by asymmetric technologies include Internet access where data traffic
flows primarily downstream.
To date the traditional telecommunications service providers, such as the
regional telephone companies, have accelerated their investments primarily in
ADSL technologies because ADSL appeared most appropriate for residential
subscribers. The new competitive exchange carriers, in contrast, have focused on
providing competitively priced, high-speed data transmission services to
business customers. These new carriers have focused on providing services based
on symmetric DSL transmission technologies, such as SDSL and MSDSL.
In a typical deployment of DSL services, DSL equipment is connected to a
personal computer in a residence or to a router in a business where multiple
personal computers may be connected. The end user is connected to the
telecommunications service providers' central office over a copper telephone
wire that is terminated at the central office by either a stand-alone DSL
network interface unit or by a digital subscriber line access multiplexer, or
DSLAM, terminating up to hundreds of connections to many users. Accordingly, a
local loop of one copper telephone wire pair which connects the end user to the
service provider's central office will require DSL equipment on both ends of the
wire pair.
Prior to 2000, most large volume DSL service deployments used carrierless
amplitude phase modulation, or CAP, and two bits per quadrant, or 2B1Q, line
codes. DSL products utilize different coding techniques to transmit data
reliably over copper telephone wires. These coding techniques, or line codes,
include 2B1Q, CAP, discrete multitone modulation, or DMT, and pulse amplitude
modulation, or PAM. 2B1Q, CAP and PAM are used for symmetric applications. CAP
and DMT are used for asymmetric applications.
THE DEMANDS OF DSL SERVICE PROVIDERS
DSL services are in the initial phases of worldwide deployment. To present a
compelling alternative to other data transmission services, DSL services must:
- reach a large potential end user base;
- provide low equipment, installation and maintenance costs;
- be tested and proven through field deployment; and
- possess value-added functionality for the high-speed transmission of
voice, data and video.
We believe that telecommunications service providers are electing to
commence DSL service deployment based primarily on these factors. These service
providers may also be commencing deployment of DSL services in response to
competition from other service providers, such as cable companies, that are also
using high-speed data transmission services to compete for traditional voice
communications.
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THE OPPORTUNITY FOR DEVELOPERS OF DSL INTEGRATED CIRCUITS
DSL equipment manufacturers are striving to meet the requirements of
telecommunications service providers by designing high performance DSL products.
In order to minimize time-to-market, development and product costs, DSL
equipment manufacturers use increasingly complex integrated circuits which
account for a large portion of the value-added proprietary content of such
products. However, DSL equipment manufacturers often lack the core technology
expertise in signal processing, signal conversion and communications algorithms
that is required to develop these integrated circuits. In addition, these
solutions must overcome real-world impairments of the local loop, such as line
noise, which could otherwise degrade data transmission performance. As a result
of these factors, DSL equipment manufacturers are turning to a new breed of
integrated circuit developers that possess the core technology and expertise
required to develop DSL chip sets. A DSL chip set is needed in equipment on each
end of the copper telephone wire pair for every end user. Successful solutions
must offer field-proven technology, high performance, high levels of system
integration, low power consumption, flexibility to enhance features and
performance, rapid time-to-market and competitive total system cost.
THE GLOBESPAN SOLUTION
We are a leading worldwide developer of DSL integrated circuits which enable
high-speed data transmission over the local loop. We sell our integrated
circuits to manufacturers of DSL equipment for incorporation into products which
are sold to telecommunications service providers and end users. We believe we
provide our customers with significant value created by our leading DSL
integrated circuit chip sets, our heritage in the DSL market, our understanding
of DSL equipment manufacturers, service provider and end user needs, and our
strong sales and support organizations. Key elements of our solution include:
BROAD BREADTH OF CAPABILITIES. We have significantly increased our
capabilities in terms of overall employees to more than 571, of which 485 are
involved in product development and customer support, as of June 30, 2000, and
their core competencies and capabilities to support a growing customer base and
market deployments.
LONG HISTORY OF DSL EXPERIENCE. We have leveraged seven years of field
experience in implementing DSL technology to successfully bring proven DSL chip
set solutions to market. Our core engineering team includes several individuals
who were early developers of DSL technology at AT&T Bell Labs in 1988.
BROAD SUITE OF DSL CHIP SETS. We offer a broad suite of DSL solutions,
including ADSL, RADSL, HDSL, HDSL2, SDSL and MSDSL chip sets which use the 2B1Q,
CAP, DMT and PAM line codes, including multi-mode asymmetric and symmetric
platforms.
COMPLETE SYSTEM-ON-A-CHIP. Our SOC solutions provide significant density,
power and cost advantages by integrating the functionality of multiple discrete
components, such as memory, microprocessors or framers, onto a single chip. Our
recent acquisitions provide us with additional core competencies and design and
product development resources to add greater functionality to our existing chip
sets and introduce new chip set products targeted to capture more of the
integrated circuit functions used in DSL systems.
HIGH PERFORMANCE. Our chip sets are capable of performing billions of
operations per second. We believe the high performance capability of our chip
sets enables us to deliver one of the industry's longest reach per data
transmission rate which allows telecommunications service providers to offer
services to a larger customer base.
SOFTWARE FLEXIBILITY. Our chip sets are highly programmable. Our customers
are able to enhance or reconfigure their products through downloads of our
software rather than through costly replacement or modification of their
installed DSL system products. This flexibility enables telecommunications
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service providers to optimize performance and keep pace with changing industry
requirements, including features and standards compliance. It also allowed us to
deliver multi-mode chip sets.
COMPETITIVE TOTAL SYSTEM COST. Our high levels of integration lead to low
power consumption and density advantages, thereby maximizing the number of
transceivers that can be incorporated into a DSL central office system. Higher
system density enables telecommunications service providers to connect a larger
number of end users with their central office equipment thereby reducing total
cost per end user.
ADVANCED SYSTEMS-LEVEL EXPERTISE. Our systems-level expertise enables us to
offer chip sets which can be cost effectively incorporated into complete DSL
systems and which contribute to optimizing the performance of these systems in
the local loop environment. As a result we provide comprehensive step-by-step
DSL reference design guides that enable our customers to rapidly bring robust
DSL systems to market.
STRONG TECHNICAL SUPPORT. We provide superior technical support throughout
the design and test process to minimize our customers' cost and time to deploy.
We also provide comprehensive field support to ensure that our customers'
products perform optimally in real world environments.
STANDARDS COMPLIANCE. We actively participate in the formulation of DSL
standards which enables us to monitor industry trends and refine our product
development efforts to bring standards-compliant solutions to market.
We believe these attributes, as well as our growing strength of
capabilities, position us as the preferred design partner and supplier of
integrated circuits for DSL systems.
STRATEGY
Our objective is to be the leading provider of integrated circuits for DSL
systems. To achieve this objective, we are pursuing the following strategies:
EXPAND OUR RESOURCES AND CAPABILITIES. Our strategy is to significantly
grow our position as one of the largest organizations dedicated to DSL and to
build upon and expand our core competencies and capabilities to support our
growing customer base and accelerating pace of DSL deployment.
MAXIMIZE DESIGN WIN MARKET SHARE. Our strategy is to maximize the number of
design wins with both new and existing customers. A design win represents a
customer's initial commitment to develop a product incorporating our chip sets.
We believe design wins are strategically important because once a customer has
designed our chip sets into its product, that customer is more likely to
continue to choose our solutions for additional products. Furthermore, achieving
the broadest number of design wins creates an opportunity to capitalize on the
success of any one of our customers' DSL products. We maximize our ability to
compete for design wins by using our extensive sales representative organization
to access the greatest number of customers and further penetrate our existing
customer base.
TARGET ALL APPLICATIONS WITHIN THE DSL MARKET. Our strategy is to provide
the necessary technologies to enable all applications within the DSL market. We
are currently shipping chip sets based upon ADSL, RADSL, HDSL, HDSL2, SDSL and
MSDSL technologies which use 2B1Q, CAP, DMT and PAM line codes. Our chip sets
are used in both central office and customer locations to enable high speed data
applications such as Internet access, telecommuting and networking among branch
offices. We will continue to monitor industry trends and refine our product
development efforts to target emerging DSL applications and have introduced
multi-mode asymmetric and symmetric chip sets that interoperate with all
applicable line codes.
STRENGTHEN AND BROADEN TECHNOLOGY LEADERSHIP. Our strategy is to continue
to build upon our strong technology core competencies to maintain our position
as a technology leader in the DSL market. We are currently investing substantial
development resources in system-level knowledge, communications algorithms,
signal processing and signal conversion. Specifically, we are devoting resources
to extend reach by enhancing our high performance algorithms and to increase
system
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integration by embedding more system functions on a single integrated circuit.
We invest significant resources in research and development and product support
and will continue to work closely with our customers to develop new and enhanced
solutions that address next-generation DSL market opportunities.
LEVERAGE ADVANCED SYSTEMS-LEVEL EXPERTISE. Our strategy is to leverage our
advanced systems-level expertise to develop and market chip sets that can be
cost effectively and rapidly incorporated into complete DSL systems manufactured
by our customers. This strategy is intended to enable our customers to optimize
time-to-market, performance and system cost. By working closely with our
customers throughout the design and deployment process, we gain valuable
insights and are often able to anticipate their needs and incorporate
value-added functionality onto our chip sets. We gain additional insights by
continually testing our solutions against real-world models of DSL networks to
verify their performance in harsh and unpredictable deployment environments. We
have built a state-of-the-art system test facility which we use to validate the
performance of our chip sets and which we make readily available to our
customers to test their DSL systems. We plan to continue to expand and improve
this capability. Furthermore, we will continue to provide comprehensive
reference design guides that enable our customers to apply our systems-level
expertise to their products.
DRIVE INDUSTRY STANDARDS. We actively participate in the formulation of
critical standards for high-speed data transmission markets. We believe such
participation accelerates and expands the development of markets for our
products and provides valuable insights and relationships which assist us in
directing our product development efforts to target emerging market
opportunities.
TECHNOLOGY CORE COMPETENCY
Our key competitive advantage is founded in our technology expertise
encompassing the entire DSL design process from the development of custom
integrated circuits to their integration into a system solution. To address the
technology challenges of DSL transmission, we have developed and will continue
to build upon our primary technology core competencies, including systems-level
knowledge, communications algorithms, digital signal processing and signal
conversion.
SYSTEMS-LEVEL KNOWLEDGE. Our systems-level knowledge has been developed
through years of field installation experience and working relationships with
over 100 equipment manufacturer customers. As a result, we have an advantage in
understanding the harsh and varying conditions of the local loop. This
environment is characterized by various impairments that impact DSL operations
and make reliable high-speed data transmission difficult to achieve. These
factors include bridge taps, cross-talk from adjacent wires in the same wire
bundle, signal attenuation and impulse noise spikes, among others. To minimize
the effects of these impairments, we will continue to incorporate our
understanding of these factors into our DSL chip set designs. We have also
leveraged our systems-level expertise to create a state-of-the-art system test
facility to validate the performance and operation of new DSL designs. We have
invested significant resources in automating our test facility to maximize the
efficiency and repeatability of our tests. We will continue to make our test
facility readily available to our customers to verify the performance of their
DSL products.
COMMUNICATIONS ALGORITHMS. A key component of our continued success is the
expertise that we have developed in the areas of communications theory and
algorithms. Communications algorithms are the processes and techniques used to
transform a digital data stream into a specially-conditioned analog signal
suitable for transmission across copper telephone wires. At the receiving end of
the copper telephone wire, our algorithms process the analog signal and
transform this data into a digital form without introducing data errors. We
invest significant resources to maintain our technology leadership in the
development of communications system algorithms in the areas of start-up
training, coding for forward error correction, line codes, echo cancellation,
adaptive equalizers, digital filter design and transmission line analysis. Our
broad theoretical knowledge base, coupled with our extensive DSL field
experience, has enabled our technology team to generate comprehensive DSL system
models utilizing
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computer-aided design tools. These models are used to design our complex
algorithms and to determine performance and architectural requirements for our
digital communications processor and analog front end chips. Ultimately, the
knowledge gained from these simulations, combined with the advantages of our
programmable platform, enables us to optimize algorithm designs for specific DSL
applications across a broad range of local loop conditions. In addition, we
develop communications algorithms used specifically for data compression and
coding and decoding critical to the transmission of voice and video over DSL
lines.
DIGITAL SIGNAL PROCESSING. Digital signal processing, as it relates to DSL
applications, is a means of encoding digital data for transmission over
bandwidth limited media, such as copper telephone wires, and recovering the
encoded data at the receiving end. This process requires very high-speed,
high-precision silicon engines to meet the performance specifications of
telecommunications service providers. We are a leader in the design of
high-performance, low-power, silicon-efficient, digital communications
processors which optimize digital signal processing for DSL applications. Our
digital communications processor is based on a proprietary architecture that
incorporates concurrent multi-tasking, multi-processor digital signal processing
engines. Our digital communications processor architecture provides system
design flexibility without the inherent power and costs normally associated with
conventional, general purpose digital signal processors. The performance and
flexibility of our digital communications processor enables our customers to
implement multiple DSL configurations using different line codes through a
simple software download.
ATM AND IP PROTOCOL. ATM and IP protocol are being used to build the next
generation of communication infrastructure, including Voice over Packet. Our
software solutions are used to build a packet-based converged switching and
routing network with guaranteed quality of service for voice, data and
multimedia applications and represent critical components of broadband access
systems and network edge devices.
SIGNAL CONVERSION. Signal conversion is a component of our solution that
transforms digital signals into analog signals that are suitable for
transmission over copper telephone wires. Our analog front end includes a custom
integrated circuit that performs the signal conversion function, as well as a
combination of discrete components such as resistors, capacitors, linear
amplifiers and transformers. Our analog front end provides several programmable
analog functions critical to achieving high-speed and long-reach performance.
Our analog front end is capable of operating over a wide array of signal
amplitudes and frequency ranges associated with different line codes.
PRODUCTS
We offer a broad suite of DSL chip set solutions. A typical product offering
includes a chip set, consisting of a digital communications processor and an
analog front end, a DSL reference design guide and software.
Our DSL chip sets are software programmable, enabling a broad range of data
transmission rates, performance enhancements, feature upgrades and compliance
with industry standards. We have been producing high volumes of our current chip
sets for over two years and have shipped more than four million chip sets. Our
comprehensive step-by-step DSL reference design guides include schematics, bills
of materials, circuit board layouts, application interface programs and debug
guides. Our DSL reference design guides enable equipment manufacturers to bring
robust systems to market quickly and cost-effectively.
Our chip sets and reference design guides are optimized for specific DSL
applications, resulting in a variety of configuration options. Our products
offer alternative packaging and bus interface options, and standards-based line
codes.
HDSL. High bit rate digital subscriber line, or HDSL, is a cost-effective
alternative to traditional repeatered T1 and E1 data services for business
applications. HDSL provides symmetric transmission over two pairs of copper
telephone wires at data transmission rates of T1 (1.544 Mbps)/ E1 (2.048
47
<PAGE>
Mbps). We currently offer HDSL chip sets using CAP or 2B1Q line codes which
incorporate a single or dual channel digital communications processor and an
analog front end. Our HDSL product is the first chip set capable of implementing
both line codes recommended by the ANSI Technical Report TR28 draft 2 and the
International Telecommunications Union standard G.991.
HDSL2. HDSL2 is a next generation HDSL configuration that provides
symmetric transmission over one pair of copper telephone wires rather than two
pairs, resulting in a more network-efficient and cost-effective solution. We
currently offer HDSL2 chip sets using the PAM line code which incorporate a
single channel digital communications processor and an analog front end. Our
HDSL2 chip set is designed to meet the HDSL2 standard T1.418-2000 defined in the
United States by the ANSI.
SDSL. Symmetric digital subscriber line, or SDSL, is a cost-effective
alternative to traditional repeatered T1 and E1 data services for business
applications. SDSL provides symmetric transmission over one pair of copper
telephone wires and provides T1/E1 data rates. We currently offer SDSL chip sets
using the CAP line code which incorporate a single or dual channel digital
communications processor and an analog front end. Our SDSL chip set is designed
to meet the International Telecommunications Union G.991.1 standard.
MSDSL. Multi-rate symmetric digital subscriber line, or MSDSL, is used to
provide cost-effective symmetric transmission over one pair of copper telephone
wires at data transmission rates ranging from 144 Kbps to 2.3 Mbps depending
upon the available data transmission rates of the relevant service provider. We
currently offer MSDSL chip sets using the CAP or 2B1Q line codes which
incorporate a single or dual channel digital communications processor and an
analog front end.
ADSL AND RADSL. Asymmetric digital subscriber line, or ADSL, and rate
adaptive asymmetric digital subscriber line, or RADSL, are used to provide cost
effective, high-speed local loop access for Internet and other applications
where data flows downstream to the end user faster than it does upstream from
the end user. ADSL provides asymmetric transmission over one pair of copper
telephone wires with downstream data transmission rates ranging from 32 Kbps to
8.0 Mbps and upstream data transmission rates ranging from 32 Kbps to 1.1 Mbps.
ADSL allows the telephone line to be used simultaneously for voice and data
transmission. We currently offer ADSL chip sets which incorporate an analog
front-end and a dual channel digital communications processor chip using the CAP
line code or a single channel and quad channel digital communications processor
chip using the DMT line code, or a single channel and quad channel digital
communications processor using both CAP and DMT line codes. Our ADSL chip sets
are designed to meet the ANSI standard specification T1.413 for the 8 Mbps DMT
line code configuration and the International Telecommunications Union standard
G.992.1 for 8Mbps DMT line code configuration (commonly called G.dmt) and
G.992.2 for the 1.5 Mbps DMT line code configuration (commonly called G.lite).
Our DMT line configuration is also standard compliant for ADSL over ISDN, or
Integrated Services Digital Network, for use in Europe and for use in Japan.
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<PAGE>
The following table summarizes our DSL product families, their key
functions, data transmission rates and introduction dates.
<TABLE>
<CAPTION>
PRODUCT DATA INTRO.
FAMILY FUNCTION TRANSMISSION RATES DATE
------- ----------------------------------------- --------------------------------------- --------
<S> <C> <C> <C>
G7263................. High density Quad ADSL G.lite CO chipset. Downstream--64 Kbps to 1.536 Mbps 4Q99
Upstream--32 Kpbs to 512 Kbps
G7266................. High density Quad ADSL DMT CO chipset. Downstream--32 Kbps to 8.192 Mbps 4Q99
Upstream--32 Kbps to 1.024 Mbps
G7271................. High density Quad ADSL Multimode (with DMT Downstream--32 Kbps to 8.192 Mbps 4Q99
CAP) CO chipset. DMT Upstream--32Kbps to 1.024 Mbps CAP
Downstream--256 Kbps to 7.168 Mbps CAP
Upstream--90.6 Kbps to 1.088 Mbps
G7066-RT.............. Low power, high density DMT Quad ADSL 4Q99
optimized for Digital Loop Carrier and
Multiple Dwelling Unit.
G7066-RT.............. Low power, high density G.lite Quad ADSL 4Q99
optimized for Digital Loop Carrier and
Multiple Dwelling Unit.
G2237................. Common Dual channel high density platform T1 (1.544 Mbps and up to 4.6 Mbps) 2Q99
for HDSL2, SDSL 2B1Q and high speed
symmetric 4.6 Mbps.
G70xx................. USB bus powered ADSL Reference Design 3Q99
G2237................. Common Dual channel high density platform T1 (1.544 Mbps and up to 4.6 Mbps) 2Q99
for HDSL2, SDSL 2B1Q and high speed
symmetric 4.6 Mbps.
G2237................. Common Dual channel high density platform 2Q99
for HDSL2, SDSL, 2B1Q, high speed
symmetric 4.6 Mbps, and IDSL.
G2237................. Common single channel high density T1 (1.544 Mbps and up to 2.32 Mbps) 4Q99
platform for HDSL2 and SDSL 2B1Q
symmetric.
G2216................. High density SDSL 2B1Q with integrated Up to 2.32.Mbps 3Q99
ATM and serial interface.
G2237................. Dual channel HDSL2 with HDLC T1 (1.544 Mbps) 2Q99
functionality.
G2237................. Dual channel HDSL2 with integrated ATM T1 (1.544 Mbps) 2Q99
Interface for symmetric transmission over
one wire pair.
GS9070................ ASIC chip used to connect our G2710, Not Applicable 1Q99
G7060 or G7061 chip sets to PCI bus and
V.90 voice band modems for PC
applications.
G7070................. Multi-mode RADSL single channel chip set Downstream--90 Kbps to 8.0 Mbps 4Q98
for asymmetric transmission over one wire Upstream--45 Kbps to 1.1 Mbps
pair using DMT or CAP line code. Includes
integrated framer.
G7060................. RADSL single channel chip set for Downstream--90 Kbps to 8.0 Mbps 4Q98
asymmetric transmission over one wire Upstream--45 Kbps to 1.1 Mbps
pair using DMT line code. Includes
integrated framer.
G7061................. RADSL (G.lite) single channel chip set Downstream--90 Kbps to 1.5 Mbps 4Q98
for asymmetric transmission over one wire Upstream--45 Kbps to 540 Kbps
pair using DMT line code. Includes
integrated framer.
G2237................. HDSL2 single channel chip set for T1 (1.544 Mbps)/E1 (2.048 Mbps) 4Q98
symmetric transmission over one wire pair
using PAM line code. Includes integrated
framer.
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
PRODUCT DATA INTRO.
FAMILY FUNCTION TRANSMISSION RATES DATE
------- ----------------------------------------- --------------------------------------- --------
<S> <C> <C> <C>
G2232................. SDSL single or dual channel chip set for T1 (1.544 Mbps)/E1 (2.048 Mbps) 4Q98
symmetric transmission over one wire pair
using CAP line code. Includes integrated
framer.
G2216................. MSDSL single or dual channel chip set for 144 Kbps to 1.1 Mbps 4Q98
symmetric transmission over one wire pair
using 2B1Q line code. Includes integrated
framer and analog front end.
G2214................. MSDSL single or dual channel chip set for 144 Kbps to 2.3 Mbps 4Q98
symmetric transmission over one wire pair
using CAP line code. Includes integrated
framer.
G2710................. RADSL single or dual channel chip set for Downstream--90 Kbps to 7.2 Mbps 3Q98
asymmetric transmission over one wire Upstream--45 Kbps to 1.1 Mbps
pair using CAP line code. Includes
integrated framer.
G2213................. HDSL dual channel chip set for symmetric T1 (1.544 Mbps)/E1 (2.048 Mbps) 3Q98
transmission over two wire pairs using
CAP line code. Includes integrated
framer.
G2212................. HDSL dual channel chip set for symmetric T1 (1.544 Mbps)/E1 (2.048 Mbps) 3Q98
transmission over two wire pairs using
2B1Q line code. Includes integrated
framer and analog front end.
MDT-x6-01............. MSDSL single channel chip set for 144 Kbps to 1.1 Mbps 3Q98
symmetric transmission over one wire pair
using 2B1Q line code.
HDT-12-0x............. HDSL single channel chip set for T1 (1.544 Mbps)/E1 (2.048 Mbps) 4Q97
symmetric transmission over two wire
pairs using 2B1Q line code.
MDT-x4-01............. MSDSL single channel chip set for 144 Kbps to 2.3 Mbps 2Q97
symmetric transmission over one wire pair
using CAP line code.
SDT-32-03............. SDSL single channel chip set for T1 (1.544 Mbps)/E1 (2.048 Mbps) 1Q97
symmetric transmission over one wire pair
using CAP line code.
HDT-13-0x............. HDSL single channel chip set for T1 (1.544 Mbps)/E1 (2.048 Mbps) 2Q96
symmetric transmission over two wire
pairs using CAP line code.
RDT-x0-01............. RADSL single channel chip set for Downstream--90 Kbps to 7.2 Mbps 2Q96
asymmetric transmission over one wire Upstream--45 Kbps to 1.1 Mbps
pair using CAP line code.
</TABLE>
SALES, MARKETING AND TECHNICAL SUPPORT
Our strategy is to expand the breadth of our customer base by using our
extensive worldwide sales representative organization, comprised of exclusive
relationships with approximately 34 firms with over 150 professionals. In
addition our sales, marketing and technical support professionals total 75
employees. Our strategy has enabled us to spread our sales efforts across a much
larger base of customers than would otherwise be possible using only a direct
sales model. Furthermore, it has been our experience that once we successfully
penetrate a new account, we become better positioned to secure additional design
wins.
Providing comprehensive DSL reference design guides to our customers is
integral to our sales strategy. Our design materials are intended to enable our
customers to effectively incorporate our chip sets into their DSL systems and to
achieve a faster time-to-market. This reduces the necessary level of customer
support and allows for a greater allocation of our sales effort to target future
design wins.
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We provide superior technical support throughout the design and test process
to accelerate our customers' time-to-market. We also provide comprehensive field
support to ensure that our customers' products perform optimally in real world
deployment environments.
CUSTOMERS
We sell our products worldwide to approximately 100 companies that
manufacture data communications products. Customers from which we recognized at
least $2.0 million in net revenues in 1999 include Ascom Hasler AG, Cisco
Systems, Intel Corporation, Lucent Technologies, Inc., NEC Corporation, and
Paradyne Corporation. Our chip sets are incorporated by our customers into the
following products:
- digital subscriber line access multiplexers, or DSLAMs, which are used to
terminate up to hundreds of lines in a central office and aggregate them
onto high-speed lines for transmission to the communications backbone;
- DSL network interface units, which are customer premises products that
enable high-speed data transmission over the local loop;
- DSL-compatible routers, which are used to connect one or more personal
computers to the local loop;
- personal computer DSL network interface cards, which are used to connect a
personal computer directly to the local loop; and
- DSL Universal Serial Bus, or USB, standalone network interface cards,
which are used to connect a PC to the local loop.
Our customers market their products to public and private telecommunications
service providers. These service providers include traditional telephone
companies, competitive local exchange carriers, Internet service providers,
businesses and government entities.
We depend on a relatively small number of customers for a large percentage
of our net revenues. In the three months ended March 31, 2000 and the three
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 two customers were Cisco Systems and Lucent
Technologies, which accounted for 29.5% and 14.6% 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 Ascom Hasler AG, which accounted for 48.3%, 12.6%
and 9.2% of our net revenues, respectively. In 1997, our top three customers
were LG Information & Communications, Ascom Hasler AG and Westell Technologies,
which accounted for 21.4%, 12.5% and 9.6% of our net revenues, respectively. We
do not have purchase contracts with any of our customers that obligate them to
continue to purchase our products and these customers could cease purchasing our
products at any time.
PRODUCT DEVELOPMENT AND SUPPORT
Our core engineering team, including several individuals who were early
developers of DSL technology at AT&T Bell Labs, has substantial expertise in DSL
technology. Since our founding in August 1996, we have invested significant
resources to expand our product development and support group. As of June 30,
2000, approximately 485 employees are engaged in product development and
support. These engineers are involved in advancing our technology core
competencies and our product development activities. Recently, we have been
devoting a significant portion of our research and
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development expenditures to products incorporating new features and line codes,
such as 2B1Q, DMT and PAM.
We believe that we must continually enhance the performance and flexibility
of our current products, and successfully introduce new products to maintain our
leadership position. In 2000, our research and development expenditures will
increase due to planned increases in personnel, material costs and depreciation
resulting from higher capital expenditures. Our research and development
expenditures in the three months ended March 31, 2000 and the three years ended
December 31, 1999, 1998 and 1997 were $10.9 million, $26.5 million,
$18.7 million and $8.4 million, respectively.
MANUFACTURING
Our manufacturing objective is to produce reliable, high quality integrated
circuits at competitive prices and to achieve on-time delivery of our products
to our customers. We outsource the manufacturing of our integrated circuits
which enables us to concentrate our resources on the design, development and
marketing of our products where we believe we have greater competitive
advantages, and to eliminate the high cost of owning and operating a
semiconductor wafer fabrication facility.
Our long-term strategy is to qualify new foundries to provide additional
manufacturing capacity and to access diverse manufacturing technologies. We have
secured and intend to continue to secure multiple sources of wafer fabrication,
assembly and test to reduce our dependence on any single source. There can be no
assurance that we will be able to successfully qualify and implement any
additional arrangements.
We do not own or operate a semiconductor fabrication facility. Presently, we
depend primarily on Lucent Microelectronics 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 Microelectronics, the
latest of which became effective in March 1999. Under this agreement, Lucent
Microelectronics will fill our orders for our current chip sets in accordance
with agreed-upon quantity, price, lead-time and other terms. The agreement also
contains procedures for establishing Lucent Microelectronics as a manufacturer
of future chip sets for us. This agreement, however, does not guarantee that
Lucent Microelectronics will adequately fill our orders for current chip sets
(either in quantity or timing), or that we will be able to negotiate mutually
satisfactory terms for manufacturing our future chip sets. Further, Lucent
Microelectronics has the right to discontinue the supply of any chip set upon
12 months' notice (as long as Lucent Microelectronics fills our orders for
commercially reasonable quantities of that chip set during the notice period).
In addition, Lucent Microelectronics' ability to manufacture our chip sets is
limited by its available capacity, and under some circumstances Lucent
Microelectronics may allocate its available capacity to its other customers. Any
disruption in availability of our products would have a serious adverse impact
on our business. If we are required for any reason to seek a new manufacturer of
the chip sets presently manufactured by Lucent Microelectronics, such a new
manufacturer may not be available and in any event switching to a new
manufacturer would require six months or more and would involve significant
expense and disruption to our business.
In order to enhance our ability to obtain sufficient quantities of chip sets
to meet our growing product needs, we have been engaged in the process of
negotiating and/or exploring prospective supply agreements with other leading
chip suppliers. In this regard, we entered into an agreement with UMC to supply
some of our chip sets. The UMC agreement, which became effective in
December 1999, provides us with the ability to obtain delivery of specified chip
sets, in accordance with the agreement's terms, upon our providing of binding
forecasts to UMC. Although the UMC agreement provides for a term of five years,
with subsequent one year renewals, the supplier may cancel the agreement upon
12 months' advance notice to us. While, in such an event, UMC would still be
required to fill our orders for commercially reasonable quantities of product
during the twelve month notice period, the
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<PAGE>
termination of this agreement by UMC could cause a disruption to our business.
We recently finalized an agreement with TSMC which also provides for a five-year
term and is terminable by the supplier upon 12 months' advance notice to us.
TSMC will still fill our orders for commercially reasonable quantities of
product during the 12-month notice period. Finally, we have recently begun using
ZiLOG as a chip supplier. To further supply us with greater chip supply
capacity, we will continue to seek agreements with other chip manufactures.
COMPETITION
The DSL chip set market is intensely competitive. We expect competition to
intensify further as current competitors expand their product offerings and new
competitors enter the market. We believe that we must compete on the basis of a
variety of factors, including time to market, functionality, conformity to
industry standards, performance, price, breadth of product lines, product
migration plans, and technical support.
We believe our principal competitors include:
- for ADSL products based on the ANSI standard T1.413, Alcatel, Analog
Devices Inc., Infineon Technologies, Intel Corporation, Motorola and Texas
Instruments, among others;
- for G.lite products based on the International Telecommunications Union
standard G.992.2, Alcatel, Analog Devices Inc., Centillium Technology
Corporation, Integrated Telecom Express, Lucent Technologies and Texas
Instruments, among others; and
- for HDSL, SDSL, MSDSL and HDSL2 products, Conexant Systems, Intel
Corporation and MetaLink, among others.
In addition to these competitors, there have been growing numbers of
announcements by other integrated circuit companies that they intend to enter
the DSL chip set market.
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 in addition to the
above-listed factors, they more quickly introduce new technologies, more rapidly
or effectively address customer requirements or devote greater resources to the
promotion and sale of their products than we do. Further, in the event of a
manufacturing capacity shortage, these competitors may be able to manufacture
products when we are unable to do so.
As the DSL market matures, the industry may become subject to increasing
price competition driven by the lowest cost providers of chip sets. We
anticipate that average per unit selling prices of DSL chip sets will continue
to decline as product technologies mature. If we are unable to reduce our costs
sufficiently to offset declines in the average per unit selling prices or are
unable to introduce new higher performance products with higher average per unit
selling prices, our operating results will be seriously harmed. Since we do not
manufacture our own products, we may be unable to negotiate volume discounts
with our foundries in order to reduce the costs of manufacturing our chip sets
in response to declining average per unit selling prices. Many of our
competitors are larger with greater resources and therefore may be able to
achieve greater economies of scale and would be less vulnerable to price
competition. Our inability to achieve manufacturing efficiencies would have an
adverse impact on our operating results.
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INTELLECTUAL PROPERTY
Our success depends significantly upon our ability to protect our
intellectual property. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our products or obtain and
use information that we regard as proprietary. In the past, competitors have
recruited our employees who have had access to our proprietary technologies,
processes and operations. Our competitors' recruiting efforts, which we expect
will continue, expose us to the risk that such employees will misappropriate our
intellectual property. In June 1998, we filed suit against three former
employees who had commenced employment with one of our competitors. Our lawsuit
alleged misappropriation of trade secrets. The court issued a final judgment and
against the defendants. In addition, the court ordered injunctive and other
relief against the defendants. The defendants appealed the judgment and in June
2000, the Appellate Division dismissed this appeal as moot.
We rely in part on patents to protect our intellectual property. As of
December 31, 1999, we had 35 patents in the United States and 15 patents in
other countries. These patents principally cover various aspects of systems and
features relating to telecommunications technologies and telecommunications
products, including aspects specifically pertaining to particular DSL algorithms
and DSL communications systems. These patents have expiration dates ranging from
2009 to 2017. In addition, as of December 31, 1999, we had 65 utility patent
applications and 33 provisional applications pending in the United States Patent
and Trademark Office. We also had 53 patent applications pending in various
countries other than the United States. These patents may never be issued. Even
if these patents are issued, taken together with our existing patents, they may
not provide sufficiently broad protection to protect our proprietary rights, or
they may prove to be unenforceable. To protect our proprietary rights, we also
rely on a combination of copyrights, trademarks, trade secret laws, contractual
provisions, licenses and maskwork protection under the Federal Semiconductor
Chip Protection Act of 1984. We also typically enter into confidentiality
agreements with our employees, consultants and customers and seek to control
access to, and distribution of, our other proprietary information.
The laws of some foreign countries do not protect our proprietary rights to
as great an extent as do the laws of the United States, and many U.S. companies
have encountered substantial infringement problems in such countries, some of
which are countries in which we have sold and continue to sell products. There
is also a risk that our means of protecting our proprietary rights may not be
adequate. For example, our competitors may independently develop similar
technology, duplicate our products or design around our patents or our other
intellectual property rights. If we fail to adequately protect our intellectual
property, it would be easier for our competitors to sell competing products.
Another company, Singapore Telecommunications Limited, or Singapore Telecom,
also has prior rights to the GlobeSpan mark in one or more countries outside the
United States, in connection with services involving the transmission and
broadcast of satellite communications. Singapore Telecom's rights in the
GlobeSpan mark may limit our ability to use or market under the GlobeSpan name
in some territorial regions outside the United States.
EMPLOYEES
As of June 30, 2000, we had 571 full-time employees, including 485 employees
engaged in product development and support, and 86 engaged in general and
administrative activities. Our employees are not represented by any collective
bargaining agreements, and we have never experienced a work stoppage. We believe
our employee relations are good.
PROPERTIES
Our facility in Red Bank, New Jersey, comprises our headquarters,
administration, sales and marketing and research and development departments. We
believe we have adequate space, and any
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additional space required will be available to us on commercially reasonable
terms. We have the leases set forth in the following table:
<TABLE>
<CAPTION>
SIZE LEASE
LOCATION (SQUARE FEET) EXPIRATION DATE
-------- ------------- ---------------
<S> <C> <C>
Red Bank, NJ
Headquarters/office....................................... 50,000 4/30/02
Office.................................................... 50,000 11/30/01
Middletown, NJ
Office.................................................... 78,120 3/31/03
Boston, MA
Office.................................................... 6,400 6/30/03
Paris, France
Office.................................................... 12,000 8/30/02
Santa Clara, CA
Office.................................................... 4,754 7/31/03
Irvine, CA
Office.................................................... 31,720 9/30/05
New Dehli, India
Office.................................................... 7,000 6/30/02
Tustin, CA
Office.................................................... 12,274 8/24/00
</TABLE>
We have executed a fifteen year lease for 200,000 square feet in a newly
constructed building in Old Bridge, New Jersey. This lease will commence upon
completion of the building, which is anticipated in November 2001.
LEGAL PROCEEDINGS
In June 1998, we filed suit against Hanan Herzberg, Selvaraj Seetharaman and
Xiao-Feng Qi in the Superior Court of New Jersey seeking compensatory damages,
costs and attorneys' fees and injunctive relief based on allegations of
misappropriation of trade secrets. In April 1998, the defendants terminated
their employment with our company and subsequently began employment with Level
One Communications, a competitor in the DSL industry. No counterclaim has been
asserted against us. On June 16, 1999, the Superior Court of New Jersey issued a
final judgment in our favor and against the defendants, ordering injunctive and
other relief against the defendants. The defendants appealed the judgment to the
Appellate Division of New Jersey. On June 16, 2000, the Appellate Division
dismissed defendants' appeal as moot.
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MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
Our executive officers, key employees and directors of, and their ages as of
June 30, 2000, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- ----------- -----------------------------------------------------
<S> <C> <C>
Armando Geday(1)....................... 38 President, Chief Executive Officer and Director
Robert McMullan........................ 46 Chief Financial Officer, Vice President and Treasurer
Nicholas Aretakis...................... 38 Vice President, Worldwide Sales
Daniel Amrany.......................... 48 Chief Technology Officer
Vivek Bansal........................... 31 Executive Vice President
Niall Bartlett......................... 39 Vice President, Corporate Development
Michel Desbard......................... 52 Vice President
Cesar Douady........................... 37 Vice President
Alain Fanet............................ 40 Vice President
Clete Gardenhour....................... 61 Vice President, Business Development
Richard Gottuso........................ 40 General Counsel and Secretary
Angelo Stephano........................ 38 Vice President, Worldwide Marketing
Barbara Connor(2)...................... 50 Director
James Coulter(1)(3).................... 40 Director
Dipanjan Deb(1)(2)..................... 30 Director
Thomas Epley(1)(3)..................... 59 Director
Federico Faggin(3)..................... 58 Director
Keith Geeslin(2)....................... 47 Director
John Marren............................ 37 Director
David Stanton(3)....................... 37 Director
</TABLE>
------------------------
(1) Member of Executive Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
ARMANDO GEDAY has served as our President and Chief Executive Officer since
April 1997 and as a director of GlobeSpan since April 1997. From June 1986 to
March 1997, Mr. Geday was Vice President and General Manager of the Multimedia
Communications Division of Rockwell Semiconductor Systems, a developer and
manufacturer of semiconductor systems. Prior to June 1986, Mr. Geday held
several other marketing and general management positions at Rockwell. Prior to
Rockwell, Mr. Geday was product marketing manager at Harris Semiconductor.
Mr. Geday received a B.S. in Electrical Engineering from the Florida Institute
of Technology.
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ROBERT MCMULLAN has served as our Chief Financial Officer, Vice President
and Treasurer since July 1998. Mr. McMullan also served as our Secretary from
February 1999 to February 2000. From November 1990 to March 1998, Mr. McMullan
was employed by The BISYS Group, Inc., an outsourcer to the financial services
industry, where he served as Executive Vice President and Chief Financial
Officer. Mr. McMullan received a B.A. in Business Administration from St.
Michael's College.
NICHOLAS ARETAKIS has served as our Vice President, Worldwide Sales since
May 1998. From July 1994 to April 1998, Mr. Aretakis served as Vice President of
Marketing and Sales at ESS Technology, Inc., a developer of audio, digital video
and modem/fax communication semiconductors and software products for the
personal computing industry. Prior to joining ESS Technology Inc., Mr. Aretakis
held senior sales and marketing positions at SEEQ Technology, Inc., a developer
of LAN and memory semiconductors and software, and Microchip Technology, a
manufacturer of RISC-based microcontrollers and specialized memory products.
Mr. Aretakis received a B.A. in Mathematics from Hobart College and a B.S. in
Electrical Engineering from Columbia University.
DANIEL AMRANY has served as our Chief Technology Officer since
October 1998. From August 1996 to October 1998, Mr. Amrany was director of VLSI
development for GlobeSpan. In January 1985, Mr. Amrany founded Amra-Tech, a VLSI
consulting firm, which developed the VLSI devices for AT&T Bell Labs' voice band
modems and DSL products. Mr. Amrany served as Vice President of Amra-Tech from
January 1985 to August 1996. Prior to 1985, Mr. Amrany worked at Perkin-Elmer, a
developer and manufacturer of life science products, ITT Industries, a designer
and manufacturer of electronics products, and Intel Corporation, a developer and
manufacturer of semiconductor systems. Mr. Amrany holds more than ten patents in
various telecom, digital TV, and semiconductor disciplines and received a B.S.
in Electrical Engineering from Tel Aviv University.
VIVEK BANSAL has served as our Executive Vice President since January 2000.
From March 1996 to December 1999, Mr. Bansal was President and CEO of Ficon
Technology, Inc., a developer of IP and ATM-based software solutions for the
broadband access market. Prior to Ficon, Mr. Bansal was with NEC USA where he
contributed to the development of access switches and systems. Mr. Bansal
received a M.S. in Computer Science from Kansas State University and a B.S. in
Computer Science from M.S. University, India.
NIALL BARTLETT has served as our Vice President, Corporate Development since
October 1999. From November 1995 to September 1999, Mr. Bartlett served as Vice
President of Marketing and Vice President of the Technology Labs at NeoMagic
Corporation, a developer of semiconductors and software products for mobile
applications. Prior to joining NeoMagic, Mr. Bartlett held a number of
engineering and marketing positions during a seven year tenure at International
Business Machines Corporation. Mr. Bartlett received a B.S. in Electronic
Engineering from Southampton University, England.
MICHEL DESBARD has served as our Vice President since April 2000.
Mr. Desbard was a co-founder of T.sqware and served as its Chairman and Chief
Executive Officer from February 1997 to April 2000. From 1991 to 1997,
Mr. Desbard served as the President and Chief Executive Officer of Matra MHS, a
French subsidiary of the Temic Group. Prior to assuming that position,
Mr. Desbard served as the Financial Controller and Chief Financial Officer at
Matra. Prior to Matra, Mr. Desbard was the Director of Finance and a financial
auditor at Thomson Semiconductor. Mr. Desbard received a B.S. in Finance from
Paris University.
CESAR DOUADY has served as our Vice President since April 2000. Mr. Douady
was a co-founder of T.sqware and served as its Chief Technology Officer from
February 1997 to April 2000. From 1995 to 1997, Mr. Douady was a System
Architect Engineer at Gipsy. Mr. Douady is a co-inventor of several patents in
Bus technology and received a Ph.D. in Electrical Engineering from Orsay
University.
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ALAIN FANET has served as our Vice President since April 2000. Dr. Fanet was
a co-founder of T.sqware and served as its President and Chief Operating Officer
from February 1997 to April 2000. From 1991 to 1997, Dr. Fanet served as the
Director of the Network Division at Matra. Prior to Matra, Dr. Fanet served as
the Director of the X Terminal Division at Gipsy, a French start-up, for three
years. Dr. Fanet received a Ph.D. in Computer Science from Ecole National
Superiere des Telecommunications (Paris).
CLETE GARDENHOUR has served as our Vice President, Business Development
since May 1998. From August 1996 to August 1998, Mr. Gardenhour was Executive
Director of Worldwide Sales for GlobeSpan. From January 1992 to August 1996,
Mr. Gardenhour was responsible for technology planning and business development
of DSL technology at AT&T Paradyne Corporation, a developer and manufacturer of
telecommunications products, and served as Senior Vice President and General
Manager of AT&T Paradyne Corporation's Modem and Network Management business.
Mr. Gardenhour received a B.S. in Electrical Engineering from the Georgia
Institute of Technology and a Masters degree in Management of Technology from
the University of Miami.
RICHARD GOTTUSO has served as our General Counsel since December 1999 and as
our Secretary since February 2000. From November 1993 to December 1999,
Mr. Gottuso was General Counsel of Wheelock, Inc., a developer and manufacturer
of electronic life-safety and security devices. Prior to Wheelock, Mr. Gottuso
was employed as in-house counsel by Armco, Inc. and engaged in private practice
with the law firm of Shanley & Fisher. Mr. Gottuso received a B.A. from Syracuse
University and a J.D. from the Emory University School of Law.
ANGELO STEPHANO has served as our Vice President, Marketing since
August 1998. From June 1996 to August 1998, Mr. Stephano was the Director of
Marketing for Rockwell Semiconductor Systems' Multimedia Communications
Division. From June 1994 to June 1996, Mr. Stephano was the Manager of Marketing
for the same division of Rockwell International. Mr. Stephano received a B.S. in
Electrical Engineering from Syracuse University.
BARBARA CONNOR has served as a director of GlobeSpan since May 1999. Since
1973, Ms. Connor has held various positions in Bell Atlantic Corporation, a
telecommunications company, including Treasurer and Controller. Since 1995,
Ms. Connor has served as President of Bell Atlantic Federal Systems, where she
oversees Bell Atlantic's sales and servicing activities to the Federal
Government in the continental United States, Puerto Rico and Europe. Ms. Connor
received a B.A. in economics from Immaculata College, an M.A. in economics and
statistics from the University of Notre Dame and an M.B.A. in finance from Rider
University.
JAMES COULTER has served as a director of GlobeSpan since May 1998.
Mr. Coulter has served as a managing partner of Texas Pacific Group, an
investment firm, since 1992. Mr. Coulter currently serves as a director of
America West Holdings Corp., Beringer Wine Estates Holdings, Inc., Oxford Health
Plans Inc., and several privately held companies. Mr. Coulter received a B.A. in
Business from Dartmouth College and an M.B.A. from the Stanford Graduate School
of Business.
DIPANJAN DEB has served as a director of GlobeSpan since March 1999.
Mr. Deb has been a partner of Francisco Partners, an investment firm, since
August 1999. From November 1998 until August 1999, Mr. Deb was employed by Texas
Pacific Group, an investment firm, where he was responsible for
technology-related investments. From August 1991 to June 1994, Mr. Deb was
employed at Robertson Stephens, an investment bank. Mr. Deb rejoined Robertson
Stephens in June 1996 and served as their Director of Semiconductor Banking
until October 1998. Prior to rejoining Robertson Stephens in 1996, Mr. Deb
worked as a management consultant at McKinsey & Company, a consulting firm.
Mr. Deb received a B.S. in Electrical Engineering from the University of
California at Berkeley and an M.B.A. from the Stanford Graduate School of
Business.
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THOMAS EPLEY has served as a director of GlobeSpan since August 1996 and as
Chairman of the Board from August 1996 to March 1999. Mr. Epley has also served
as President of Paradyne Credit Corporation, a related party of GlobeSpan, since
August 1996. Mr. Epley was the CEO and President of GlobeSpan from August 1996
to April 1997 and the President and CEO of Paradyne Corporation, a developer and
manufacturer of telecommunications products and a related party of GlobeSpan,
from August 1996 to April 1997. From May 1991 to April 1996, Mr. Epley was the
CEO of Technicolor, an entertainment media company. Mr. Epley currently serves
as Chairman of Paradyne Corporation and as Chairman of MEM Solutions, a
microelectrical and mechanical systems company. Mr. Epley received a B.S. in
Mechanical Engineering from the University of Cincinnati and an M.B.A. from
Northwestern University.
FEDERICO FAGGIN has served as a director of GlobeSpan since May 1999.
Mr. Faggin is the Chairman of the board of directors and a director of
Synaptics, Inc., a computer peripheral and software company he founded in 1986.
Mr. Faggin currently serves as a director of Integrated Device
Technologies, Inc., a semiconductor company, and several privately held
companies. Mr. Faggin received a "Dottore in Fisica" degree from the University
of Padua, Italy, and holds an honorary doctor degree in Computer Science from
the University of Milan, Italy.
KEITH GEESLIN has served as a director of GlobeSpan since August 1996.
Mr. Geeslin is a General Partner of The Sprout Group, a venture capital firm,
where he has been employed since July 1984. In addition, he is a general or
limited partner of a series of investment funds associated with The Sprout
Group, a division of DLJ Capital Corporation, which is a subsidiary of
Donaldson, Lufkin & Jenrette. Mr. Geeslin is a director of SDL, Inc., Rhythms
NetConnections Inc., and several privately held companies, including Paradyne
Corporation, a related party to GlobeSpan. Mr. Geeslin received a B.S.E.E.
degree from Stanford University, an M.A. degree in Philosophy, Politics and
Economics from Oxford and an M.S. degree in Engineering and Economic Systems
from Stanford University.
JOHN MARREN has served as a director of GlobeSpan since June 2000. Since
April 2000, Mr. Marren has served as a partner of Texas Pacific Group, an
investment firm. From 1996 until 2000, Mr. Marren served as a managing director
and the co-head of Technology Investment Banking for Morgan Stanley Dean Witter.
From 1992 until 1996, Mr. Marren was a managing director and semiconductor
research analyst for Alex. Brown & Sons. Mr. Marren received a B.S. in
Electrical Engineering from the University of California at Santa Barbara.
DAVID STANTON has served as a director of GlobeSpan since June 1996.
Mr. Stanton has been a partner of Francisco Partners, an investment firm, since
August 1999. From 1994 until August 1999, Mr. Stanton was a partner of Texas
Pacific Group, an investment firm. Prior to joining Texas Pacific Group,
Mr. Stanton was a venture capitalist with Trinity Ventures, where he specialized
in information technology, software and telecommunications investing.
Mr. Stanton currently serves as a director of Denbury Resources, Inc., Paradyne
Corporation, a related party of GlobeSpan, SCG Holding Corporation, which does
business as ON Semiconductor, and several private companies. Mr. Stanton
received a B.S. in Chemical Engineering from Stanford University and an M.B.A.
from the Stanford Graduate School of Business.
BOARD OF DIRECTORS AND COMMITTEES
Our board of directors consists of nine directors, each holding office until
the next annual meeting of stockholders.
The only standing committees of our board of directors are the Executive
Committee, the Audit Committee and the Compensation Committee.
EXECUTIVE COMMITTEE. Our board of directors has created an Executive
Committee consisting of Messrs. Coulter, Deb, Epley and Geday. The Executive
Committee is authorized to act with respect to
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all matters arising before the board, except for matters which require
stockholder approval or where prohibited by Delaware law, including a merger or
sale of GlobeSpan.
COMPENSATION COMMITTEE. The Compensation Committee of our board of
directors reviews and makes recommendations to the board regarding all forms of
compensation provided to our executive officers and directors and the executive
officers and directors of our subsidiaries, including stock compensation and
loans. In addition, the Compensation Committee reviews and makes recommendations
on stock compensation arrangements for all of our employees. As part of the
foregoing, the Compensation Committee also administers the 1999 Equity Incentive
Plan and Employee Stock Purchase Plan. The current members of the Compensation
Committee are Messrs. Coulter, Epley, Faggin and Stanton.
AUDIT COMMITTEE. The Audit Committee of our board of directors reviews and
monitors our corporate financial reporting and our internal and external audits,
including, among other things, our internal audit and control functions, the
results and scope of the annual audit and other services provided by our
independent auditors and our compliance with legal matters that have a
significant impact on our financial reports. The Audit Committee also consults
with our management and independent auditors prior to the presentation of
financial statements to stockholders and, as appropriate, initiates inquiries
into aspects of our financial affairs. In addition, the Audit Committee has the
responsibility to consider and recommend the appointment of, and to review fee
arrangements with our independent auditors. The current members of the Audit
Committee are Ms. Connor and Messrs. Deb and Geeslin.
COMPENSATION OF DIRECTORS
Our directors who are not employees receive $1,500 for participation in
meetings of our board of directors. Our non-employee directors who also serve on
either the Compensation or the Audit Committees receive $750 for participation
in the committee meetings. We also reimburse our directors for out-of-pocket
expenses incurred by them in their capacity as a director.
In addition, our 1999 Director Stock Plan grants to each non-employee
director an option to purchase 30,000 shares of common stock on the date on
which he or she is initially elected or appointed to our board; and another
option to purchase 15,000 shares of common stock at each of the first two annual
stockholders' meetings in the calendar years following the year in which he or
she initially became a board member. However, a new director will not receive an
option to purchase 5,000 shares of common stock if he or she resigns at that
annual stockholders' meeting. At each annual stockholders' meeting following the
annual meeting during which each non-employee director received the second
option to purchase 15,000 shares of common stock, our 1999 Director Stock Plan
grants to each continuing director an option to purchase 7,500 shares of common
stock. Stock options granted pursuant to the 1999 Director Stock Plan become
vested and exercisable upon the director's completion of 12 months of service
during which he or she attended at least 75% of our board meetings. Each
subsequent option will be fully vested at grant. Ms. Connor and
Messrs. Coulter, Deb, Fagin, Geeslin, Marren and Stanton are non-employee
directors.
On January 20, 2000, the directors Deb and Stanton were each granted an
option to purchase 15,000 shares of common stock under the 1999 Director Stock
Plan. These grants which were approved by the Compensation Committee upon the
recommendation of our board of directors, were given in recognition of the fact
that the original grants under the Directors Stock Plan in the names of
directors Deb and Stanton were assigned to their then-employer Texas-Pacific
Group and, therefore, such grants were appropriate to encourage these
individuals to remain as directors of the Corporation.
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Epley is a current director of our company, was Chairman of our board of
directors from August 1996 to March 1999 and was our CEO and President from
August 1996 to April 1997. Mr. Epley is also a director of Paradyne Corporation,
is Chairman of its board of directors, is a member of its compensation committee
and was its CEO and President from August 1996 to April 1997.
EXECUTIVE COMPENSATION
The following table sets forth compensation information for the fiscal years
ended December 31, 1998 and 1999 earned by our Chief Executive Officer and our
three other executive officers, collectively referred to below as the Named
Executive Officers:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL -------------------------
COMPENSATION SECURITIES
------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS(A) COMPENSATION
--------------------------- -------- -------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Armando Geday............................ 1999 $225,173 $475,000 480,048 $ 405
President and Chief Executive Officer 1998 215,004 330,000 -- --
Robert McMullan(b)....................... 1999 153,436 225,000 240,000 5,198
Chief Financial Officer, Vice President 1998 80,780 100,000 233,325 --
and Treasurer
Nicholas Aretakis(c)..................... 1999 153,436 130,000 219,999 3,094
Vice President, Worldwide Sales 1998 87,704 110,000 233,325 79,227(d)
Thomas Sennhauser(e)..................... 1999 153,436 110,000 69,999 253
Chief Operating Officer 1998 80,780 110,000 233,325 37,996(d)
</TABLE>
------------------------
(a) Each of the options listed in the table is immediately exercisable. Any
shares acquired upon exercise of the options may be repurchased by us at the
original exercise price paid per share if the optionee ceases service before
vesting in such shares. The repurchase right lapses for Mr. McMullan's
option and Mr. Sennhauser's option, and each officer vests as to 25% of the
option shares upon completion of 12 months of service from the vesting start
date; and each officer vests as to 6.25% of the option shares upon the
completion of every three-month period of service over the next three years
thereafter. At the time Mr. Sennhauser left the company in June 2000, 25% of
the option granted to him in 1999 and 50% of the option granted to him in
1998 had vested; no additional portions of these options will vest and 75%
and 50% respectively, of the shares acquired upon exercise of these options
are subject to a right of repurchase by us. The repurchase right lapses for
Mr. Aretakis' option and he vests as to 33 1/3% of the option shares upon
completion of 12 months of service from the vesting start date; he vests as
to 8.33% of the option shares upon the completion of every three-month
period of service over the next two years thereafter. Each of the options
has a ten-year term, but the term may end earlier if the optionee ceases
service with us.
(b) Mr. McMullan started employment with us in July 1998.
(c) Mr. Aretakis started employment with us in May 1998.
(d) Represents reimbursed relocation expenses.
(e) Mr. Sennhauser's employment with us terminated in June 2000.
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OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options during the fiscal
year ended December 31, 1999 to each of the Named Executive Officers. No stock
appreciation rights were granted to these individuals during such year.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
------------------------------------------------- AT ASSUMED ANNUAL RATES
NUMBER OF % OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO TERM(D)
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION ---------------------------
NAME GRANTED(A) 1999(B) PRICE(C) DATE 5% 10%
---- ---------- ------------ -------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Armando Geday....................... 48 -- $3.33 11/03/09 $ 101 $ 255
180,000 3.1% 3.33 06/06/09 376,956 955,289
300,000 5.2 17.69 10/13/09 3,337,560 8,457,990
Robert McMullan..................... 90,000 1.6 3.33 05/17/09 188,478 477,644
150,000 2.6 17.69 10/13/09 1,668,780 4,228,995
Nicholas Aretakis................... 69,999 1.2 3.33 05/17/09 146,592 371,496
150,000 2.6 17.69 10/13/09 1,668,780 4,228,995
Thomas Sennhauser................... 69,999 1.2 3.33 05/17/09 146,592 371,496
</TABLE>
------------------------
(a) Each of the options listed in the table is immediately exercisable. Any
shares acquired upon exercise of the options may be repurchased by us at the
original exercise price paid per share if the optionee ceases service before
vesting in such shares. The repurchase right lapses for Mr. McMullan's
option and Mr. Sennhauser's option, and each officer vests as to 25% of the
option shares upon completion of 12 months of service from the vesting start
date; and each officer vests as to 6.25% of the option shares upon the
completion of every three-month period of service over the next three years
thereafter. At the time Mr. Sennhauser left the company in June 2000, 25% of
the option granted to him in 1999 had vested; no additional portion of this
option will vest and 75% of the shares acquired upon exercise of this option
are subject to a right of repurchase by us. The repurchase right lapses for
Mr. Aretakis' option and he vests as to 33 1/3% of the option shares upon
completion of 12 months of service from the vesting start date; he vests as
to 8.33% of the option shares upon the completion of every three-month
period of service over the next two years thereafter. Each of the options
has a ten-year term, but the term may end earlier if the optionee ceases
service with us.
(b) Based on a total of 5,806,191 option shares granted to our employees during
1999 under the 1996 Equity Incentive Plan, 1999 Equity Incentive Plan, 1999
Supplemental Stock Option Plan and 1999 Director Stock Option Plan.
(c) The exercise price was equal to the fair market value of our common stock as
valued by our board of directors on the date of grant. The exercise price
may be paid in cash or through a cashless exercise procedure involving a
same-day sale of the purchased shares. The exercise price may also be paid
with a full recourse promissory note.
(d) The potential realizable value is calculated based on the ten-year term of
the option at the time of grant. Stock price appreciation of 5% and 10% is
assumed pursuant to rules promulgated by the Securities and Exchange
Commission and does not represent our prediction of our stock price
performance. The potential realizable value at 5% and 10% appreciation is
calculated by assuming that the exercise price on the date of grant
appreciates at the indicated rate for the entire term of the option and that
the option is exercised at the exercise price and sold on the last day of
its term at the appreciated price.
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AGGREGATED OPTION EXERCISES IN
LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning the number of shares
acquired and the value realized upon the exercise of stock options during the
year ended December 31, 1999 and the number and value of unexercised options for
each of the Named Executive Officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
NUMBER OF UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS HELD AT OPTIONS HELD AT
ACQUIRED VALUE DECEMBER 31, 1999 DECEMBER 31, 1999
NAME ON EXERCISE REALIZED VESTED(B)/UNVESTED(A) VESTED/UNVESTED(B)
---- ----------- ---------- ---------------------- ---------------------
<S> <C> <C> <C> <C>
Armando Geday................. 1,467,180 $4,187,700 0/408,720 $0/3,205,024
Robert McMullan............... 323,325 -- 0/150,000 0/603,000
Nicholas Aretakis............. 303,324 -- 0/150,000 0/603,000
Thomas Sennhauser(c).......... 303,324 -- 0/0 0/0
</TABLE>
------------------------
(a) The options are immediately exercisable for all of the option shares, but
any shares purchased under those options may be repurchased by us at the
original exercise price paid per share, if the optionee ceases service with
us before vesting in such shares. The heading "Vested" refers to shares that
are no longer subject to repurchase; the heading "Unvested" refers to shares
subject to repurchase as of December 31, 1999.
(b) Based on the fair market value of our common stock on the Nasdaq National
Market on December 31, 1999 ($21.71), less the exercise price payable for
these shares.
(c) Because Mr. Sennhauser left our company in June 2000, 75% of these shares
are subject to repurchase by us at the original exercise price.
EMPLOYEE BENEFIT PLANS
1999 EQUITY INCENTIVE PLAN. Our board of directors adopted our 1999 Equity
Incentive Plan in March 1999, and our stockholders approved the adoption of the
plan in May 1999. On May 1 in 2001 and 2002, the number of shares reserved for
issuance under the 1999 Equity Incentive Plan will be increased automatically by
5.0% of the total number of shares of common stock then outstanding or, if less,
by 3,000,000 shares. Under the 1999 Equity Incentive Plan, the eligible
individuals are: employees, non-employee members of the board of directors and
consultants. The types of awards that may be made under the 1999 Equity
Incentive Plan are options to purchase shares of common stock, stock
appreciation rights, restricted shares and stock units. Options may be incentive
stock options that qualify for favorable tax treatment for the optionee under
Section 422 of the Internal Revenue Code of 1986 or nonstatutory stock options
not designed to qualify for such favorable tax treatment. With limited
restrictions, if shares awarded under the 1999 Equity Incentive Plan or the 1996
Equity Incentive Plan are forfeited, then those shares will again become
available for new awards under the 1999 Equity Incentive Plan.
The Compensation Committee of our board of directors administers the 1999
Equity Incentive Plan. Our Compensation Committee has complete discretion to
make all decisions relating to the interpretation and operation of the 1999
Equity Incentive Plan, including the discretion to determine which eligible
individuals are to receive any award, and to determine the type, number, vesting
requirements and other features and conditions of each award.
The exercise price for incentive stock options granted under the 1999 Equity
Incentive Plan may not be less than 100% of the fair market value of our common
stock on the option grant date. The exercise price for non-qualified options
granted under the 1999 Equity Incentive Plan may not be less
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than 85% of the fair market value of the common stock on the option grant date.
The exercise price may be paid in cash or in outstanding shares of common stock.
The exercise price may also be paid by using a cashless exercise method, a
pledge of shares to a broker or promissory note. The purchase price for newly
issued restricted shares awarded under the 1999 Equity Incentive Plan may be
paid in cash, by promissory note or by the rendering of past or future services.
Our Compensation Committee may reprice options and may modify, extend or
assume outstanding options and stock appreciation rights. Our Compensation
Committee may accept the cancellation of outstanding options or stock
appreciation rights in return for the grant of new options or stock appreciation
rights. The new option or right may have the same or a different number of
shares and the same or a different exercise price.
Upon specified defined events causing a change in control of GlobeSpan, an
option or other award under the 1999 Equity Incentive Plan will become fully
exercisable and fully vested if the option or award is not assumed by the
surviving corporation or its parent or if the surviving corporation or its
parent does not substitute another option or award on substantially the same
terms. If an optionee or other participant under this plan is involuntarily
terminated within 12 months after a change in control in which the option or
award was assumed or substituted, then the option or award becomes fully
exercisable and vested. A change in control includes:
- our merger or consolidation after which our then-current stockholders own
less than 50.0% of the surviving corporation;
- sale, transfer or other disposition of all or substantially all of our the
assets;
- a proxy contest that results in replacement of more than one-third of our
directors over a 24-month period; or
- an acquisition of 50.0% or more of our outstanding stock by a person other
than by a person related to us, such as a corporation owned by our
stockholders.
If a merger or other reorganization occurs, the agreement of merger or
reorganization may provide that outstanding options and other awards under the
1999 Equity Incentive Plan shall be assumed by the surviving corporation or its
parent, shall be continued by us if we were a surviving corporation, shall have
accelerated vesting and then expire early, or shall be cancelled for a cash
payment.
Our board of directors may amend or terminate our 1999 Equity Incentive Plan
at any time. If our board amends the plan, stockholder approval of the amendment
will be sought only if required by an applicable law. The 1999 Equity Incentive
Plan will continue in effect indefinitely unless our board decides to terminate
the plan earlier.
1999 SUPPLEMENTAL STOCK OPTION PLAN. Our board of directors adopted our
1999 Supplemental Stock Option Plan in December 1999. Under the 1999
Supplemental Stock Option Plan, the individuals eligible for grants are
employees and consultants only. Our officers are not eligible for grants. Only
non-qualified stock options can be granted under the 1999 Supplemental Stock
Option Plan. If shares awarded under the 1999 Supplemental Stock Option Plan are
forfeited, those shares will again become available for new awards under the
1999 Supplemental Stock Option Plan.
Our Compensation Committee of our board of directors administers the 1999
Supplemental Stock Option Plan. Our Compensation Committee has complete
discretion to make all decisions relating to the interpretation and operation of
the 1999 Supplemental Stock Option Plan, including the discretion to determine
which eligible individuals are to receive any award, and to determine the type,
number, vesting requirements and other features and conditions of each award.
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The exercise price for options granted under the 1999 Supplemental Stock
Option Plan may not be less than 25% of the fair market value of the common
stock on the option grant date. The exercise price may be paid in cash or in
outstanding shares of common stock. The exercise price may also be paid by using
a cashless exercise method, a pledge of shares to a broker or promissory note.
Our Compensation Committee may reprice options and may modify, extend or
assume outstanding options and stock appreciation rights. Our Compensation
Committee may accept the cancellation of outstanding options or stock
appreciation rights in return for the grant of new options or stock appreciation
rights. The new option or right may have the same or a different number of
shares and the same or a different exercise price.
Upon specified defined events causing a change in control of GlobeSpan, an
option or other award under the 1999 Supplemental Stock Option Plan will become
fully exercisable and fully vested if the option or award is not assumed by the
surviving corporation or its parent or if the surviving corporation or its
parent does not substitute another option or award on substantially the same
terms. If an optionee or other participant under this plan is involuntarily
terminated within 12 months after a change in control in which the option or
award was assumed or substituted, then the option or award becomes fully
exercisable and vested. A change in control includes:
- our merger or consolidation after which our then-current stockholders own
less than 50.0% of the surviving corporation;
- sale, transfer or other disposition of all or substantially all of our the
assets;
- a proxy contest that results in replacement of more than one-third of our
directors over a 24-month period; or
- an acquisition of 50.0% or more of our outstanding stock by a person other
than by a person related to us, such as a corporation owned by our
stockholders.
If a merger or other reorganization occurs, the agreement of merger or
reorganization may provide that outstanding options and other awards under the
1999 Supplemental Stock Option Plan shall be assumed by the surviving
corporation or its parent, shall be continued by us if we were a surviving
corporation, shall have accelerated vesting and then expire early, or shall be
cancelled for a cash payment.
Our board of directors may amend or terminate our 1999 Supplemental Stock
Option Plan at any time and for any reason. If our board amends the plan,
stockholder approval of the amendment will be sought only if required by an
applicable law. The 1999 Supplemental Stock Option Plan will continue in effect
indefinitely unless our board decides to terminate the plan earlier.
EMPLOYEE STOCK PURCHASE PLAN. Our board of directors adopted the Company's
Employee Stock Purchase Plan in March 1999, and our stockholders approved the
adoption of the plan in May 1999. As of February 1, 2001 and 2002, the number of
shares reserved for issuance under the Employee Stock Purchase Plan will be
increased automatically by 2.0% of the total number of shares of common stock
outstanding or, if less, 1,200,000 shares. The Employee Stock Purchase Plan is
intended to qualify under Section 423 of the Internal Revenue Code. Two
overlapping offering periods each with a duration of 24 months will commence on
February 1 and August 1 each calendar year. However, the first offering period
commenced on the effective date of our initial public offering and will end on
July 31, 2001. Purchases of common stock will occur on January 31 and July 31
each calendar year during an offering period. The Compensation Committee of our
board of directors administers the Company's Employee Stock Purchase Plan. Each
of our employees is eligible to participate if he or she is employed by us for
more than 20 hours per week and for more than five months per year.
The Employee Stock Purchase Plan permits each eligible employee to purchase
common stock through payroll deductions. Each employee's payroll deductions may
not exceed 15.0% of the
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employee's cash compensation. The price of each share of common stock purchased
under the Employee Stock Purchase Plan will be 85.0% of the lower of (A) the
fair market value per share of common stock on the date immediately before the
first date of the applicable offering period or (B) the fair market value per
share of common stock on the purchase date. Employees may end their
participation in the Employee Stock Purchase Plan at any time. Participation
ends automatically upon termination of employment with us.
If a change in control of GlobeSpan occurs, the Employee Stock Purchase Plan
will end and shares will be purchased with the payroll deductions accumulated to
date by participating employees, unless this plan is assumed by the surviving
corporation or its parent. Our board of directors may amend or terminate the
Employee Stock Purchase Plan at any time. If our board of directors increases
the number of shares of common stock reserved for issuance under the Employee
Stock Purchase Plan, it must seek the approval of our stockholders.
1999 DIRECTOR STOCK PLAN. Our board of directors adopted our 1999 Director
Stock Plan in March 1999, and our stockholders approved the adoption of the plan
in May 1999. Under the 1999 Director Stock Plan, non-employee members of our
board of directors will be eligible for option grants and other awards.
A maximum of 750,000 shares of common stock has been authorized for issuance
under the 1999 Director Stock Plan. We may grant options to purchase shares of
common stock under the 1999 Director Stock Plan. Options may only be
nonstatutory stock options not designed to qualify for favorable tax treatment.
With limited restrictions, if shares awarded under the 1999 Director Stock Plan
are forfeited, then those shares will again become available for new awards
under the 1999 Director Stock Plan.
The exercise price for options granted under the 1999 Director Stock Plan
may not be less than 100% of the fair market value of the common stock on the
option grant date. Optionees may pay the exercise price in cash or in
outstanding shares of common stock. Optionees may also pay the exercise price by
using a cashless exercise method or a pledge of shares to a broker. Each option
will have a maximum term of ten years, but will terminate earlier if the
optionee ceases to be a member of our board of directors.
Our Compensation Committee may reprice options and may modify, extend or
assume outstanding options. The Compensation Committee may accept the
cancellation of outstanding options in return for the grant of new options. The
new option may have the same or a different number of shares and the same or a
different exercise price.
Upon specified defined events causing a change in control of GlobeSpan, an
option or other award granted under the 1999 Director Stock Plan will become
fully exercisable and fully vested and will terminate unless the option or award
is not assumed by the surviving corporation or its parent. Change in control has
the same definition as under the 1999 Equity Incentive Plan.
The 1999 Director Stock Plan grants options to non-employee directors
pursuant to an automatic grant provision at defined intervals beginning on the
effective date of this plan. The 1999 Director Stock Plan grants to each person
who becomes a non-employee director following the effective date of this plan an
option to purchase 30,000 shares of common stock on the date on which he or she
is initially elected or appointed to the board; and each such new director will
be granted another option to purchase 15,000 shares of common stock at each of
the first two annual stockholders' meeting in the calendar years following the
year in which he or she initially became a board member. However, a new director
will not receive an option to purchase 15,000 shares of common stock if he or
she resigns at that annual stockholders' meeting. At each annual stockholders'
meeting following the annual meeting during which each non-employee director
received the second option to purchase 15,000 shares of common stock, the 1999
Director Stock Plan grants to each continuing director an option to purchase
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7,500 shares of common stock. Stock options granted pursuant to the 1999
Director Stock Plan become exercisable and vested upon the director's completion
of 12 months of service during which he or she attended at least 75% of the
board meetings. Each subsequent option will be fully vested at grant.
Our board of directors may amend or modify the 1999 Director Stock Plan at
any time. The 1999 Director Stock Plan will terminate in March 2009, unless our
board of directors decides to terminate the plan sooner.
GLOBESPAN, INC. 2000 STOCK OPTION PLAN FOR FRENCH EMPLOYEES. Our board of
directors adopted the GlobeSpan, Inc. 2000 Stock Option Plan for French
Employees, or the GlobeSpan French Sub-Plan, in April 2000 in its resolutions
approving the acquisition of T.sqware. This plan is a sub-plan of the GlobeSpan
1999 Supplemental Stock Option Plan and is governed by the terms of that plan,
except as set forth in the following paragraphs.
The maximum number of shares that may be issued as a result of options
granted under the French Sub-Plan cannot exceed one-third of GlobeSpan's share
capital and must come from the available pool of shares under the 1999
Supplemental Stock Option Plan. Options may only be granted to salaried
employees (including officers and directors who are also employees) of
T.sqware's wholly owned subsidiary, T.sqware, S.A., who are residents of France
and who do not own more than 10% of GlobeSpan's issued capital stock.
The exercise price of the shares issued under the GlobeSpan French Sub-Plan
cannot not be lower than five percent less than the average closing price, as
quoted on the Nasdaq National Market, for the last 20 days preceding the date of
determination for the stock being granted.
The exercise price for the options granted under the GlobeSpan French
Sub-Plan may be paid in cash, a cashless exercise method or wire transfer, or
any combination of the foregoing.
T.SQWARE, INC. 1997 STOCK PLAN. Our board of directors approved the
adoption of the T.sqware, Inc. 1997 Stock Plan, or the T.sqware US Plan, in
April 2000 in connection with the acquisition of T.sqware. We have reserved
177,755 shares for issuance under the T.sqware US Plan. With limited
restrictions, if shares awarded under T.sqware US Plan are forfeited, then those
shares will again become available for new awards under the plan.
The T.sqware US Plan includes a requirement that in the event of a merger,
such as the one completed between T.sqware and GlobeSpan, all of the unvested
options would fully vest unless the T.sqware US Plan was assumed by the
acquiring company. Accordingly, GlobeSpan adopted the T.sqware US Plan in
connection with its acquisition T.sqware. Except for options issued under the
T.sqware, Inc. 1997 Stock Option Plan sub-plan for French employees, all options
issued under the T.sqware US Plan were converted into options on GlobeSpan
common stock and the number of shares subject to the options and the exercise
prices were appropriately adjusted.
The eligible individuals under this plan are employees, officers, directors
and consultants of T.sqware. Options may be incentive stock options that qualify
for favorable tax treatment for the optionee under Section 422 of the Internal
Revenue Code of 1986 or nonstatutory stock options not designed to qualify for
such favorable tax treatment. Incentive stock options may be granted only to
employees and nonstatutory stock options can be granted to officers, directors
or consultants.
Options issued under the plan will not be exercisable after the expiration
of ten years from the date the option is granted. The exercise price for
incentive stock options granted under the plan may not be less than 100% of the
fair market value of our common stock on the option grant date.
The consideration to be paid for the shares issue upon exercise of the
option can consist of cash, check, promissory note or other shares, or any
combination of the foregoing.
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The board of directors of T.sqware may amend, alter, terminate or suspend
the T.sqware US Plan at any time, but needs stockholder approval in order to
take any actions which require stockholder approval under the laws governing the
T.sqware US Plan. No amendment, alteration, suspension or termination of the
T.sqware US Plan may be made which impairs the rights of any option holder
without such holder's permission.
T.SQWARE, INC. 1997 STOCK OPTION PLAN FOR FRENCH EMPLOYEES. Our board of
directors adopted the T.sqware, Inc. 1997 Stock Option Plan for French
Employees, or the T.sqware French Sub-Plan, in April 2000 in connection with the
acquisition of T.sqware. This plan is a sub-plan of the T.sqware US Plan and is
governed by the terms of that plan, except as set forth in the following
paragraphs.
The maximum number of shares that may be issued as a result of options
granted under the T.sqware French Sub-Plan is equal to the number available for
grant under the T.sqware US Plan. Options may only be granted to salaried
employees (including officers and directors who are also employees) of T.sqware,
S.A. who are residents of France.
The exercise price of the shares issued under the French Sub-Plan cannot not
be lower than 100% of the fair market value of our common stock on the date that
the option is issued. Fair market value is the average closing price for the
last 20 days preceding the date of termination for the stock being granted, as
quoted on the Nasdaq National Market.
The exercise price of the options may be paid in cash, a cashless exercise
method or wire transfer, or any combination of the foregoing.
ICOMPRESSION, INC. 1998 EQUITY INCENTIVE PLAN AND THE INTERNEXT
COMPRESSION, INC. 1997 EQUITY INCENTIVE PLAN. Our board of directors adopted
the iCompression, Inc. 1998 Equity Incentive Plan and the Internext
Compression, Inc. 1997 Equity Incentive Plan, or the iCompression Plans, in June
2000 in connection with the acquisition of iCompression. The number of shares
reserved and available for grant and issuance pursuant to these plans is
approximately 522,806 and 6,849 shares respectively.
The iCompression Plans provide that in the event of a merger like the one
between iCompression and GlobeSpan, one quarter of all unvested options awarded
pursuant to the plans will automatically vest. With limited restrictions, if
shares awarded under these plans are forfeited, then those shares will again
become available for new awards under the plans. All outstanding options issued
under the iCompression Plans were converted into options to purchase GlobeSpan
common stock and the number of shares subject to the options and the exercise
prices were appropriately adjusted.
The eligible individuals under these plans are employees, officers,
directors and consultants of iCompression, its parent or any subsidiaries.
Options may be incentive stock options that qualify for favorable tax treatment
for the optionee under Section 422 of the Internal Revenue Code of 1986 or
nonstatutory stock options not designed to qualify for such favorable tax
treatment. Incentive stock options may be granted only to employees (including
officers and directors who are also employees) of iCompression, its parent, or
subsidiaries.
The exercise price for incentive stock options granted under the plans may
not be less than 100% of the fair market value of our common stock on the option
grant date. The exercise price for non-qualified options granted under the plan
may not be less than 85% of the fair market value of the common stock on the
option grant date. The exercise price for any option granted to a person who,
whether directly or by attribution, owns more than ten percent of iCompression,
may not be less than 110% of the fair market value of our common stock on the
date of the grant.
The plans also allow for the granting of restricted stock awards. The
purchase price of any shares sold pursuant to the plans as restricted stock is
determined by the committee or the board of directors and must be at least 85%
of the fair market value of our common stock on the date of the grant except in
the case of any restricted stock awarded to a person who, whether directly or by
attribution,
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owns more than ten percent of iCompression, in which case the purchase price
must be (i) at least 110% of fair market value for any shares sold pursuant to
the iCompression, Inc. 1998 Equity Incentive Plan and (ii) 100% of fair market
value for any shares sold pursuant to the Internext Compression, Inc. 1997
Equity Incentive Plan.
The exercise price for the options must be paid in cash unless the committee
expressly allows the holders of the options to pay by means of another method
such as by promissory note, through a cashless exercise method, the pledge of
shares to a broker, or through the cancellation of indebtedness. The committee
may help the option holder pay for any exercise by authorizing a guarantee by
iCompression of a third party loan to the option holder.
The board of directors of iCompression may terminate or amend the
iCompression Plans in any respect. However, without shareholder vote, the board
cannot amend the plans in any way which requires shareholder vote pursuant to
the Internal Revenue Code of 1986, as amended.
CHANGE OF CONTROL ARRANGEMENTS AND EMPLOYMENT AGREEMENTS
Upon specified defined events causing a change in control of GlobeSpan, an
option or other award under the 1999 Equity Incentive Plan will become fully
exercisable and fully vested if the option or award is not assumed by the
surviving corporation or its parent or if the surviving corporation or its
parent does not substitute another award on substantially the same terms. If an
optionee or other participant under the 1999 Equity Incentive Plan is
involuntarily terminated within 12 months after a change in control in which the
option or award was assumed or substituted, then the option or award becomes
fully exercisable and vested.
Except for Mr. Geday, our President and Chief Executive Officer, none of our
executive officers have an employment agreement with us, and they may resign at
any time and we may terminate their employment at any time. We entered into an
employment agreement with Mr. Geday, dated April 1, 1997.
The employment agreement with Mr. Geday provided for an annual base salary
of $225,173 in 1999. Mr. Geday is eligible to earn quarterly and two-level
revenue bonuses based upon goals and revenue targets as determined by our board
of directors and Mr. Geday. When we entered into this employment agreement in
1997, we granted to Mr. Geday an option for 1,395,900 shares of our common
stock. If a corporate transaction occurs in which more than 50.0% of our stock
is transferred, then 50.0% of Mr. Geday's unvested options will become vested.
If we are valued at more than $100.0 million in such corporate transaction, then
100% of Mr. Geday's unvested options will become vested. If we terminate
Mr. Geday's employment without cause or he resigns for good reason, then he will
be paid as severance any bonuses that have been earned by him and will continue
to receive his base salary until the earlier of the date that is 12 months from
his termination date or the date on which he starts comparable employment. The
aggregate severance payment will not be less than $500,000 prorated for the
number of months that Mr. Geday is entitled to receive his base salary as a
severance benefit. In addition, if we terminate Mr. Geday without cause or he
resigns for good reason, his options will become vested, as if he provided
another 18 months of service following his termination date, and his vested
option will have a 10-year term from the date of his employment agreement.
Mr. McMullan, our Chief Financial Officer, Vice President and Treasurer,
received an offer letter from us in which we promised that if a change in
control occurs and Mr. McMullan is not offered a comparable position with
comparable responsibilities with the acquiring entity, then his options vest for
50.0% of his unvested shares.
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CERTAIN TRANSACTIONS
ZiLOG currently manufactures products for us. ZiLOG is controlled by an
affiliate of the Texas Pacific Group, an investment firm that is our controlling
shareholder and has two representatives on our board. David Stanton, one of our
directors, is also a member of the board of directors of ZiLOG. For the three
months ended March 31, 2000, and for the year ended December 31, 1999, we
purchased $1.2 million and $1.0 million, respectively, of products and
engineering services from ZiLOG.
Current members of our board of directors and our executive committee,
Messrs. Epley, Geeslin and Stanton, are also directors of Paradyne Corporation.
During the years ended December 31, 1999, 1998, and 1997, the Company
recorded product sales of $3.2 million, $962,000 and $373,000, respectively,
related to goods sold to Paradyne Corporation. Receivables related to such
product sales as of December 31, 1999 and 1998 amounted to $146,000 and $73,000,
respectively. Sales reflect, through June 30, 1998, a discount, equal to cost
plus 15%, provided to Paradyne pursuant to a Cooperative Development Agreement.
In July 1998, the Company revised its discounted pricing arrangement with
Paradyne which had existed under the Cooperative Development Agreement. Paradyne
agreed to modify the pricing terms such that Paradyne purchased products from
the Company at preferential prices. In exchange, the Company agreed to pay a
1.25% fee based on net revenues up to an aggregate amount of $1.5 million.
In March 1999, the Company and Paradyne agreed to terminate the Cooperative
Development Agreement. In connection with this termination agreement, the
Company agreed to pay Paradyne an aggregate of $1.5 million, less the amounts
previously paid of approximately $300,000 (or approximately $1.2 million) to
terminate the July discount pricing arrangement with Paradyne Corporation. Such
payment was made in 1999 and has been charged to cost of sales. In addition,
GlobeSpan and Paradyne Corporation, as part of the termination agreement,
affirmed that the earlier technology license provisions of the Cooperative
Development Agreement were never implemented.
In conjunction with the signing of the termination agreement, GlobeSpan and
Paradyne also entered into a four-year Supply Agreement with Paradyne under
which Paradyne receives preferential pricing and the benefit of other terms in
connection with the sale by GlobeSpan of products to Paradyne. Under the terms
of the Supply Agreement, GlobeSpan is required to fill Paradyne's orders for our
products in quantities at least consistent with Paradyne's past ordering
practices and must afford Paradyne at least the same priority for Paradyne's
orders as we afford our other similarly situated customers. We also granted
Paradyne a standard customer immunity under our intellectual property rights
with respect to any of Paradyne's products which incorporate our products.
In 1998 and 1997, Paradyne provided operating, management and other
administrative services for us pursuant to an Intercompany Services Agreement.
Paradyne charged us for the cost of such services, without markup, in accordance
with the Intercompany Services Agreement, which amounted to $231,000 and
$155,000 for the years ended December 31, 1998 and 1997, respectively. In the
opinion of management, the method of allocation was reasonable.
In fiscal 1997, we purchased fixed assets from Paradyne approximating
$350,000. In February and December 1998, we purchased fixed assets from Paradyne
for an aggregate cost of $1.4 million. These assets were sold at their net book
value since the transaction involved entities under common control.
In 1997, we paid Paradyne $194,000 as a reimbursement for their cost of chip
sets purchased on our behalf. These payments were equal to the amount paid by
Paradyne for the initial purchase of the inventory.
In December 1997 and September 1998, we purchased from Paradyne some of our
chip sets which it held in its inventory in the amounts of $98,000 and $29,000,
respectively. We purchased these chip sets for resale to other customers.
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In December 1998, we subleased additional office space from Paradyne. In
connection therewith, we reimbursed approximately $392,000 of Paradyne's moving
expenses, the cost of which is included in operating expenses for the year ended
December 31, 1998.
We participate in a 401(i) plan covering substantially all employees which
is maintained by Paradyne. In 1999, we adopted our own 401(i) plan for our
employees. Contributions paid by Paradyne on behalf of us amounted to
approximately $242,000 for the year ended December 31, 1999. All payments made
by Paradyne on behalf of us have been reimbursed to Paradyne Corporation.
Contributions to our 401(k) plan amounted to approximately $540,000 for the year
ended December 31, 1999.
LOANS TO EXECUTIVE OFFICERS. On May 27, 1999, we loaned approximately
$1,233,300 to Robert McMullan and $1,166,630 to each of Thomas Sennhauser and
Nicholas Aretakis, secured by a stock pledge agreement, in connection with their
purchase of approximately 107,775, 101,108 and 101,108 shares of our common
stock, respectively. Each full recourse note accrues interest at the rate of
5.22% per annum and is payable upon the earlier of the fifth anniversary of the
note or 30 days following termination of employment. In June 1999, we loaned
approximately $2,200,000 to Armando Geday in connection with his purchase of
approximately 525,316 shares of our common stock. Mr. Geday's loan is on
substantially the same terms as the loans to Messrs. McMullan, Sennhauser and
Aretakis.
LOAN TO KEY EMPLOYEE. We loaned approximately $149,850 to Daniel Amrany,
secured by a stock pledge agreement, in connection with the purchase by
Mr. Amrany of approximately 450,000 shares of our common stock. Mr. Amrany's
loan was made on October 28, 1997. The full recourse notes of Mr. Amrany accrue
interest at the rate of 6.06% per annum. The note is payable upon the earlier of
the fifth anniversary of such note or termination of employment. Mr. Amrany's
note was repaid in October 1999.
All future transactions, including any loans from GlobeSpan to its officers,
directors, principal stockholders or affiliates, will be approved by a majority
of the board of directors, including a majority of the independent and
disinterested members of the board of directors or, if required by law, a
majority of disinterested stockholders. These transactions, if any, will be on
terms no less favorable to GlobeSpan than could be obtained from unaffiliated
third parties.
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PRINCIPAL AND SELLING STOCKHOLDERS
The table below sets forth information regarding the beneficial ownership of
our common stock as of June 30, 2000 and as adjusted to reflect the sale of
common stock in this offering, by:
- each person or entity who is known by us to own beneficially more than 5%
of our outstanding stock;
- each of our executive officers;
- each of our directors;
- all of our directors and executive officers as a group; and
- each selling stockholder.
Applicable percentage ownership in the following table is based on
69,146,906 shares of common stock outstanding as of June 30, 2000. To the extent
that any shares are issued upon exercise of options, warrants or other rights to
acquire our capital stock that are presently outstanding or granted in the
future or reserved for future issuance under our stock plans, there will be
further dilution to new public investors. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and
generally includes voting or investment power with respect to securities,
subject to community property laws, where applicable. Shares or our common stock
subject to options or conversion rights that are presently exercisable or
exercisable within 60 days of June 30, 2000 are deemed to be outstanding and
beneficially owned by the person holding such options for the purpose of
computing the percentage of ownership of such person but are not treated as
outstanding for the purpose of computing the percentage of any other person.
The address of each person in the table below is c/o GlobeSpan, Inc., 100
Schulz Drive, Red Bank, NJ 07701, unless otherwise indicated. In the event the
underwriters' over-allotment option is exercised, the shares subject to this
option will be sold to the underwriters by all of the selling stockholders on a
pro rata basis.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
SHARES BENEFICIALLY OWNED PRIOR OWNED AFTER THIS
TO THIS OFFERING OFFERING
-------------------------------------------- ---------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT SHARES BEING OFFERED NUMBER PERCENT
------------------------------------ ---------- -------- -------------------- ---------- --------
<S> <C> <C> <C> <C> <C>
5% STOCKHOLDERS:
Entities Associated with Texas
Pacific Group(1)(2)............. 23,155,444 33.4% 4,687,500 18,467,944 26.1%
ADC DSL Systems, Inc.(3).......... 6,162,826 8.6 790,062 2,453,529 3.5
DIRECTORS AND EXECUTIVE OFFICERS:
Barbara Connor(4)................. 30,000 * -- 30,000 *
James Coulter(5).................. 23,155,444 33.4 -- 18,467,944 26.1
Dipanjan Deb(6)................... 15,000 * -- 15,000 *
Thomas Epley(7)................... 1,106,867 1.6 -- 1,106,867 1.6
Federico Faggin(8)................ 60,177 * -- 60,177 *
Keith Geeslin(9).................. 66,740 * -- 66,740 *
John Marren(5).................... 23,155,444 33.4 -- 18,467,944 26.1
David Stanton(10)................. 15,000 * -- 15,000 *
Armando Geday(11)................. 2,010,228 2.8 93,750 1,916,478 2.7
Robert McMullan(12)............... 566,325 * 79,687 486,638 *
Nicholas Aretakis(13)............. 545,013 * 76,641 468,372 *
All directors and executive officers
as a group (11 persons) (14)...... 27,570,794 39.3 4,937,578 22,633,216 31.6
</TABLE>
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<TABLE>
<CAPTION>
SHARES BENEFICIALLY
SHARES BENEFICIALLY OWNED PRIOR OWNED AFTER THIS
TO THIS OFFERING OFFERING
-------------------------------------------- ---------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT SHARES BEING OFFERED NUMBER PERCENT
------------------------------------ ---------- -------- -------------------- ---------- --------
<S> <C> <C> <C> <C> <C>
OTHER SELLING STOCKHOLDERS:
Michel Desbard...................... 62,246 * 8,747 53,499 *
Cesar Douady........................ 62,246 * 8,747 53,499 *
Alain Fanet......................... 62,246 * 8,747 53,499 *
Neal Margulis(15)................... 229,876 * 47,412 182,464 *
Govind Kizhepat(16)................. 360,998 * 56,250 304,748 *
Saiyed Atiq Raza and Noreen T.
Raza(17).......................... 9,220 * 1,901 7,319 *
Saiyed Atiq Raza and Noreen T. Raza,
Trustees, N&A Raza Revocable
Trust(17)......................... 8,088 * 1,668 6,420 *
Peter Richards(18).................. 7,146 * 1,326 5,820 *
Empire Capital Management LLC(19)... 190,324 * 35,329 154,995 *
Empire Capital Partners LP(19)...... 76,322 * 14,168 62,154 *
Benchmark Capital Partners II,
L.P.(20).......................... 704,186 * 145,238 558,948 *
Lucent Venture Partners Inc.(21).... 197,046 * 36,577 160,469 *
</TABLE>
------------------------
* Indicates less than 1%.
(1) Consists of 342,585 shares held by Communication GenPar, Inc., 20,663,579
shares and 90,000 stock options issued under the 1999 Director Stock Option
Plan granted to TPG affiliate directors which are exercisable within 60 days
of June 21, 2000, held by TPG Partners, L.P. and 2,059,280 shares held by
TPG Parallel I, L.P. TPG Partners, L.P. and TPG Parallel I, L.P., affiliates
of Texas Pacific Group, are shareholders in Communication GenPar, Inc. James
Coulter, one of our directors, is the sole director and President of
Communication GenPar, Inc. James Coulter and John Marren, two of our
directors, are partners of the general partner of the Texas Pacific Group
entities. The address of Texas Pacific Group is 301 Commerce Street,
Suite 3300, Fort Worth, Texas 76102.
(2) Shares being offered include 4,262,691 shares by TPG Partners, L.P. and
424,809 shares by TPG Parallel I, L.P.
(3) Includes 2,919,235 shares reserved for issuance pursuant to the $90 million
subordinated redeemable convertible note which is exercisable within 60 days
of June 30, 2000. Since we intend to redeem the note with a portion of the
proceeds of this offering, none of those shares will be owned by ADC DSL
Systems, Inc. (formerly known as PairGain Technologies, Inc.) after this
offering. The address of ADC DSL Systems, Inc. is 12501 Whitewater Drive,
Minnetonka, Minnesota 55343.
(4) Includes 30,000 shares subject to options which are exercisable within
60 days of June 30, 2000.
(5) Includes 23,155,444 shares held by entities associated with the Texas
Pacific Group. Mr. Coulter and Mr. Marren are partners of the general
partner of the Texas Pacific Group entities, and, as such, may be deemed to
have voting and dispositive power over the Texas Pacific Group shares.
However, Mr. Coulter and Mr. Marren disclaim beneficial ownership of the
Texas Pacific Group shares except to the extent of their pecuniary interest
therein.
(6) Includes 15,000 shares subject to options which are exercisable within 60
days of June 30, 2000.
(7) Includes 410,192 shares held by Thomas E. Epley Trust, 195,000 shares held
by Anderson Epley Family Trust and 20,460 shares held by Jacqueline Epley
Trust, 20,460 shares held by Thomas Epley, Jr. Trust and 430,755 shares held
and 30,000 shares subject to options exercisable within 60 days of June 30,
2000 by Mr. Epley individually.
(8) Includes 30,000 shares subject to options which are exercisable within
60 days of June 30, 2000.
(9) Includes 30,000 shares subject to options which are exercisable within
60 days of June 30, 2000.
(10) Includes 15,000 shares subject to options which are exercisable within 60
days of June 30, 2000.
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(11) Includes 480,048 shares subject to options which are exercisable within
60 days of June 30, 2000.
(12) Includes 150,000 shares subject to options which are exercisable within
60 days of June 30, 2000.
(13) Includes 150,000 shares subject to options which are exercisable within
60 days of June 30, 2000.
(14) Includes 1,020,048 shares subject to options which are exercisable within
60 days of June 30, 2000.
(15) The address for Mr. Margulis is c/o iCompression, Inc., 2500 Walsh Avenue,
Santa Clara, California 95051.
(16) The address for Mr. Kizhepat is c/o iCompression, Inc., 2500 Walsh Avenue,
Santa Clara, California 95051.
(17) The address for Mr. and Mrs. Raza is c/o Raza Foundries, 2480 North First
Street, Suite 280, San Jose, California 95131.
(18)The address for Mr. Richards is c/o Empire Capital, 1 Gorham Island, 2nd
Floor, Westport, Connecticut 06880.
(19) The address for Empire Capital is 1 Gorham Island, 2nd Floor, Westport,
Connecticut 06880.
(20) The address for Benchmark Capital Partners is 2480 Sand Hill Road,
Suite 200, Menlo Park, California 94025.
(21) The address for Lucent Venture Partners is 3180 Porter Avenue, Suite 3,
Palo Alto, California 94304.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
On the closing of this offering, our authorized capital stock will consist
of 400,000,000 shares of common stock, $.001 par value, and 10,000,000 shares of
Preferred Stock, $.001 par value.
COMMON STOCK
As of June 30, 2000, there were 69,146,906 shares of common stock
outstanding that were held of record by approximately 2,000 stockholders. There
will be 70,553,156 shares of common stock outstanding (assuming no exercise of
the underwriters' over-allotment option and assuming no exercise after June 30,
2000, of outstanding options), after giving effect to the sale of the shares of
common stock to the public offered hereby.
Holders of our common stock are entitled to one vote per share on all
matters to be voted upon by our stockholders. Holders of common stock are also
entitled to receive any dividends on a pro rata basis declared by our board of
directors out of legally available funds. In the event of our liquidation,
dissolution or winding up, holders of our common stock are entitled to share on
a pro rata basis in all assets remaining after payment of liabilities. Our
common stock has no preemptive or conversion rights or other subscription
rights. There are no redemption or sinking fund provisions applicable to our
common stock. All outstanding shares of our common stock are fully paid and
nonassessable, and the shares of common stock to be issued upon completion of
this offering will be fully paid and nonassessable.
PREFERRED STOCK
On the closing of this offering, 10,000,000 shares of our preferred stock
will be authorized, none of which will be outstanding. Our board of directors
has the authority to issue the preferred stock in one or more series and to fix
the rights, preferences, privileges and restrictions of our preferred stock,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences and the number
of shares constituting any series or the designation of such series, without
further vote or action by our stockholders. The issuance of preferred stock may
have the effect of delaying, deferring or preventing a change in control without
further action by our stockholders and may adversely affect the voting and other
rights of holders of our common stock. The issuance of preferred stock with
voting and conversion rights may adversely affect the voting power of holders of
our common stock, including the loss of voting control to others. At present, we
have no plans to issue any preferred stock.
WARRANTS
In May 1999, each of Cisco Systems, Inc. and Intel Corporation was issued a
warrant to purchase an aggregate of 450,000 shares of our common stock, with a
five year term expiring June 23, 2004, at an exercise price determined as
follows:
- For the first 112,500 shares, the exercise price is $5.00 per share;
- For the second 112,500 shares, the exercise price is $6.25 per share;
- For the third 112,500 shares, the exercise price is $7.50 per share; and
- For the remaining 112,500 shares, the exercise price is $8.75 per share.
Each of the foregoing warrants can either be exercised by payment for the
underlying shares in cash or by a net exercise.
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ANTITAKEOVER EFFECTS OF DELAWARE LAW AND PROVISIONS OF OUR AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION AND BYLAWS
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AND BYLAWS. Our amended
and restated certificate of incorporation provides that all stockholder actions
must be effected at a duly called meeting and not by a consent in writing. Our
amended and restated certificate of incorporation and bylaws provide that
directors may be removed only for cause and only upon the vote of eighty percent
(80%) of our outstanding shares. Our bylaws provide that our stockholders may
call a special meeting of stockholders only upon a request of stockholders
owning at least 25.0% of our capital stock. These provisions of our amended and
restated certificate of incorporation and bylaws could discourage potential
acquisition proposals and could delay or prevent a change in control of our
company. These provisions are intended to enhance the likelihood of continuity
and stability in the composition of our board of directors and in the policies
formulated by our board of directors and to discourage some types of
transactions that may involve an actual or threatened change of control of our
company. These provisions are designed to reduce our vulnerability to an
unsolicited acquisition proposal and also are intended to discourage some
tactics that may be used in proxy fights. However, such provisions could have
the effect of discouraging others from making tender offers for our shares and,
as a consequence, they also may inhibit fluctuations in the market price of our
shares that could result from actual or rumored takeover attempts. Such
provisions also may have the effect of preventing changes in our management.
EXCLUSION FROM SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
DELAWARE BUSINESS COMBINATION LAW. Section 203 of the Delaware General
Corporation Law is a business combination statute that generally prohibits an
"interested stockholder," defined generally as a person beneficially owning 15%
or more of a corporation's voting stock or an affiliate or associate of such
person, from engaging in a "business combination," defined to include a variety
of transactions, including mergers and sales of 10% or more of a corporation's
assets, with a Delaware corporation for three years following the time at which
this person became an interested stockholder. This prohibition does not apply
if:
- the transaction resulting in a person becoming an interested stockholder,
or the business combination, is approved by the board of directors of the
corporation before the person becomes an interested stockholder;
- the interested stockholder acquired 85% or more of the outstanding voting
stock of the corporation in the same transaction that makes it an
interested stockholder, excluding shares owned by persons who are both
officers and directors of the corporation, and shares held by employee
stock ownership plans; or
- at or subsequent to the time the person becomes an interested stockholder,
the business combination is approved by the corporation's board of
directors and by the holders of at least 66 2/3% of the corporation's
outstanding voting stock at an annual or special meeting, excluding shares
owned by the interested stockholder.
Section 203 permits the board of directors of a corporation to defend
against takeover attempts and could act as a deterrent to potential takeover
attempts as well. By opting out of Section 203, it will be easier for us to
enter into transactions with our large stockholders without giving at least
66 2/3% of our unaffiliated stockholders the opportunity to approve the
transaction.
Our board has determined that it is in the best interests of our company not
to deter our large stockholders from engaging in a business combination with us
and to ensure that we maintain maximum flexibility in pursuing business
opportunities, including opportunities with our current large stockholders. Our
waiver of Section 203 will make it easier for an interested stockholder,
including Texas Pacific Group, to engage in a business combination with us by
lowering the requirement of 66 2/3% approval of the disinterested stockholders
to a requirement that only a majority of all stockholders
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approve the transaction. Our board has determined that placing our large
stockholders on an equal footing with potential outside acquirors is both in the
interests of us and our unaffiliated stockholders.
TRANSFER AGENT AND REGISTRAR
Our transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of common stock, including shares issued
upon exercise of outstanding options and warrants, in the public market
following this offering could adversely affect prevailing market prices of our
common stock from time to time and could impair our ability to raise capital
through sale of our equity securities.
Upon completion of this offering, we will have 70,553,156 shares of common
stock outstanding, based on shares outstanding as of June 30, 2000. All of these
shares are freely tradeable without restriction, with the following exceptions:
- 28,093,917 shares that were issued in private transactions currently
constitute "restricted securities" within the meaning of Rule 144 under
the Securities Act of 1933. All but 6,409,469 of these shares may be
resold publicly at any time, subject to the volume and other restrictions
of Rule 144. A total of 444,165; 2,453,529; and 1,854,223 shares may be
resold publicly, subject to the volume and other restrictions of
Rule 144, beginning on January 28, 2001, February 24, 2001 and April 27,
2001, respectively. We have an obligation to register all of the foregoing
shares pursuant to various registration rights agreement described below;
- shares acquired in the open market but held by our "affiliates," as that
term is defined in Rule 144, are subject to the volume and other
restrictions of Rule 144; and
- shares held by our officers and directors, as well as some of our other
stockholders, are subject to "lock-up" agreements that prohibit the public
resale of those shares until 91 days after the date of this prospectus.
These prohibitions are described in greater detail under "--Lock-up
agreements" below.
LOCK-UP AGREEMENTS
We, our executive officers and directors, and some of our stockholders,
including our selling stockholders, have agreed with respect to an aggregate of
29,880,736 shares, not to offer, pledge, sell, contract to sell, sell any option
or contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase, or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities convertible
into or exercisable or exchangeable for common stock, or enter into any swap or
similar agreement that transfers, in whole or in part, the economic risk of
ownership of the common stock, for a period of 90 days after the date of this
prospectus, without the prior written consent of FleetBoston Robertson Stephens
Inc., subject to limited exceptions.
Additionally, some stockholders who were issued common stock in private
transactions in connection with acquisitions are subject to lockup agreements
which restrict their right to sell their shares beyond the restrictions imposed
by Rule 144. Under the terms of these lockup agreements, approximately 578,081
additional shares will become freely tradeable between June 2001 and January
2003.
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RULE 144
In general, under Rule 144, as currently in effect, a person who has
beneficially owned restricted shares of our common stock for at least one year
would be entitled to sell within any three-month period a number of shares that
does not exceed the greater of:
- 1.0% of the number of shares of our common stock then outstanding, which
is expected to be approximately 705,532 shares immediately after this
offering; or
- the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of the
notice of sale on Form 144 with the Securities and Exchange Commission.
Sales under Rule 144 are also subject to some manner of sale provisions and
notice requirements and to the availability of current public information about
us. Under Rule 144(k), a person who is not deemed to have been our affiliate at
any time during the three months preceding a sale and who has beneficially owned
the shares proposed to be sold for at least two years is entitled to sell such
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
STOCK OPTIONS
We have filed registration statements on Form S-8 to register approximately
21,629,800 shares of common stock reserved for issuance under our stock option
plans and those of recent acquisitions. Each year as the number of shares
reserved for issuance under our stock option plans automatically increases, we
intend to file amendments to the registration statements covering the additional
shares.
As of June 30, 2000, options to purchase a total of 14,732,293 shares were
outstanding and 3,698,438 shares were reserved for future issuance under our
equity and incentive plans.
REGISTRATION RIGHTS
Following this offering, the holders of 28,334,958 shares of our common
stock are entitled to the following rights with respect to the registration of
their shares under the Securities Act. Any sales of securities by these
stockholders could cause the trading price of our common stock to decrease.
INTEL, CISCO AND COMMUNICATION PARTNERS. Intel Corporation and Cisco
Systems, Inc. each hold a warrant to purchase 450,000 shares of common stock.
Intel Corporation and Cisco Systems, Inc. are entitled to certain registration
rights for sale of the warrant shares in the public market. Registration of such
shares under the Securities Act would result in such shares becoming freely
tradable without restriction under the Securities Act, except for shares
purchased by affiliates, immediately upon the effectiveness of such
registration.
Concurrently with the purchase of our Series A preferred stock by Intel
Corporation and Cisco Systems, Inc., we entered into agreement with Intel
Corporation, Cisco Systems, Inc. and Communication Partners, L.P. (a partnership
controlled by Texas Pacific Group, our controlling shareholder) on May 6, 1999
which grants registration rights.
Holders of 15% of the shares held by Intel Corporation, Cisco Systems, Inc.
and the limited partners of Communication Partners, L.P. may request that we
file a registration statement on Form S-3, covering all or a portion of our
securities held by them, provided that the aggregate public offering price is at
least $500,000. These holders can request two S-3 registrations per year.
These registration rights will be subject to our right to delay the filing
of a registration statement in some circumstances, not more than once in any
12-month period, for not more than 45 days after the appropriate number of
holders have requested we file a registration statement.
In addition, Intel Corporation, Cisco Systems, Inc. and the general partner
and limited partners of Communication Partners, L.P. will have "piggyback"
registration rights. If we propose to register any common stock or other
securities under the Securities Act, other than pursuant to the registration
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rights noted above and other than a registration relating to a stock plan or
corporate reorganization or similar transaction, Intel Corporation, Cisco
Systems, Inc. and the general partner and limited partners of the Communication
Partners, L.P. may require us to include all or a portion of our securities held
by them in the registration. However, the managing underwriter, if any, of any
offering has the right to limit the number of securities proposed to be included
in the registration under certain circumstances.
We are required to bear all registration expenses incurred in connection
with these registrations. Intel Corporation, Cisco Systems, Inc. and the general
partner and limited partners of Communication Partners, L.P. would pay all
underwriting discounts and selling commissions applicable to the sale of their
securities.
We also agreed to indemnify Intel Corporation, Cisco Systems, Inc. and the
general partner and limited partners of Communication Partners, L.P. for any
damages they suffer due to any untrue statement or omission that we make in a
registration statement covering their shares or any breach by us of our
agreement with them.
The registration rights of Intel Corporation, Cisco Systems, Inc. and the
general partner and limited partners of Communication Partners, L.P. will
terminate in June 2004 or, as to each of them, when it may sell all its shares
in a three-month period under Rule 144 of the Securities Act.
FICON. In connection with our acquisition of Ficon, we granted the former
shareholders of Ficon the right to receive up to 1,959,999 shares of our common
stock and placed those shares in escrow. The exact number of shares received
will depend upon Ficon achieving specified performance levels. Concurrently with
our purchase of Ficon, we entered into a registration rights agreement with the
shareholders of Ficon dated January 28, 2000. Following the release of the
shares of our common stock from escrow and our qualification under the
Securities Act to register stock on Form S-3, the holders of the shares held by
the former stockholders of Ficon may demand that we file a registration
statement under the Securities Act on Form S-3 covering all or a portion of the
securities of GlobeSpan held by them. However, the securities to be registered
must have an anticipated aggregate public offering price of at least
$1.0 million. These holders can request two registrations on Form S-3 per year.
In addition, the former stockholders of Ficon have "piggyback" registration
rights. If we propose to register any common stock under the Securities Act,
other than pursuant to the registration rights noted above and other than a
registration relating to a stock plan or corporate reorganization or similar
transaction, these holders may require us to include all or a portion of their
securities in the registration. However, the managing underwriter, if any, of
any offering has the right to limit the number of securities proposed to be
included in the registration under certain circumstances.
We are required to bear all registration expenses incurred in connection
with these registrations. The former stockholders of Ficon would pay all
underwriting discounts and selling commissions applicable to the sale of their
securities.
We also agreed to indemnify these holders for any damages they suffer due to
any untrue statement or omission that we make in a registration statement
covering their shares or any breach by us of our agreement with them.
PAIRGAIN. Concurrently with the our acquisition of the Microelectronics
Group of PairGain, we entered into a registration rights agreement with PairGain
dated as of February 24, 2000. PairGain may demand that we file a registration
statement under the Securities Act covering all or a portion of our common stock
held by PairGain. However, the securities to be registered must have an
anticipated aggregate public offering price of at least $30.0 million. We are
not required to file such demand registrations more frequently than once every
six months.
These registration rights will be subject to our right to delay the filing
of a registration statement in some circumstances, not more than twice in any
twelve-month period, for not more than 45 days
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after the appropriate number of holders have requested we file a registration
statement, provided that the second deferral cannot be for more than 30 days.
In addition, PairGain has certain "piggyback" registration rights. If we
propose to register any common stock or other securities under the Securities
Act, other than pursuant to the PairGain registration rights noted above and
other than a registration relating to a stock plan or corporate reorganization
or similar transaction, PairGain may require us to include all or a portion of
our securities held by them in the registration.
The underwriters have the right to limit the number of PairGain's securities
proposed to be included in any such demand or piggyback registration under
certain circumstances. We are required to bear all registration expenses
incurred in connection with these registrations. PairGain would pay all
underwriting discounts and selling commissions applicable to the sale of its
securities.
We also agreed to indemnify PairGain for any damages it suffers due to any
untrue statement or omission that we make in a registration statement covering
their shares or any breach by us of our agreement with them.
The registration rights of PairGain will terminate if PairGain holds less
than 1% of our outstanding stock, or when PairGain may sell all its shares in a
three-month period under Rule 144 of the Securities Act.
The shares of our common stock being sold by PairGain in this offering were
registered upon the exercise of PairGain's demand right.
T.SQWARE. Pursuant to the Agreement and Plan of Merger, dated April 20,
2000, among T.sqware, Needles Acquisition Corp. and us, we are obligated to
file a registration statement to permit the sale by the former T.sqware
stockholders of all of the shares of our common stock received by them in
connection with the acquisition. We are obligated to use commercially reasonable
efforts to cause a registration statement for these shares to become effective
upon the expiration of the 90-day lock-up agreement with FleetBoston Robertson
Stephens Inc.
We are required to bear all registration expenses incurred in connection
with the registration of the shares of the former T.sqware stockholders. The
former T.sqware stockholders will pay all underwriting commissions.
We also agreed to indemnify these holders for any damages they suffer due to
any untrue statement or omission that we make in a registration statement
covering their shares or any breach by us of any securities law.
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UNDERWRITING
The underwriters named below, acting through their representatives,
FleetBoston Robertson Stephens Inc., Morgan Stanley & Co. Incorporated, Thomas
Weisel Partners LLC, SG Cowen Securities Corporation, Prudential Securities
Incorporated, UBS Warburg LLC and Jefferies & Company, Inc. have severally
agreed with us and the selling stockholders, subject to the terms and conditions
of the underwriting agreement, to purchase from us and the selling stockholders
the number of shares of common stock set forth below opposite their respective
names. The underwriters are committed to purchase and pay for all shares if any
are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
FleetBoston Robertson Stephens Inc. and FleetBoston
Robertson Stephens
International Limited..................................... 2,625,000
Morgan Stanley & Co. Incorporated and Morgan Stanley & Co.
International Limited..................................... 2,625,000
Thomas Weisel Partners LLC.................................. 1,125,000
SG Cowen Securities Corporation............................. 375,000
Prudential Securities Incorporated.......................... 300,000
UBS Warburg LLC............................................. 300,000
Jefferies & Company, Inc.................................... 150,000
---------
Total................................................... 7,500,000
=========
</TABLE>
The representatives have advised us and the selling stockholders that the
underwriters propose to offer the shares of common stock to the public at the
public offering price set forth on the cover page of this prospectus and to
certain dealers at that price less a concession of not in excess of $2.40 per
share, of which $0.10 may be reallowed to other dealers. After this offering,
the public offering price, concession and reallowance to dealers may be reduced
by the representatives. No such reduction shall change the amount of proceeds to
be received by us or the selling stockholders as set forth on the cover page of
this prospectus. The common stock is offered by the underwriters as stated
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part.
The representatives have advised us that the underwriters do not expect
sales to discretionary accounts to exceed five percent of the total number of
shares offered.
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since December
1998, Thomas Weisel Partners has been named as a lead or co-manager on 166 filed
public offerings of equity securities, of which 122 have been completed, and has
acted as a syndicate member in an additional 95 public offerings of equity
securities. Thomas Weisel Partners acted as our financial advisor in connection
with a recent acquisition, for which it received customary fees. Thomas Weisel
Partners does not have any material relationship with us or any of our officers,
directors or other controlling persons, except with respect to its contractual
relationship with us pursuant to the underwriting agreement entered into in
connection with this offering.
OVER-ALLOTMENT OPTION
The selling stockholders have granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to 1,125,000 additional shares of common stock to cover
over-allotments, if any at the public offering price less the underwriting
discounts and commissions set forth on the cover page of this prospectus. If the
underwriters exercise their over-allotment option to purchase any of the
1,125,000 additional shares of common stock, the underwriters have severally
agreed, subject to specified conditions, to purchase approximately the same
percentage
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thereof as the number of shares to be purchased by each of them bears to the
total number of shares of common stock offered in this offering. If purchased,
these additional shares will be sold by the underwriters on the same terms as
those on which the shares offered hereby are being sold. The selling
stockholders who have granted the over-allotment option will be obligated,
pursuant to the over-allotment option, to sell shares to the underwriters to the
extent the over-allotment option is exercised. The underwriters may exercise the
over-allotment option only to cover over-allotments made in connection with the
sale of the shares of common stock offered in this offering.
The following table summarizes the total compensation to be paid to the
underwriters by us and the selling stockholders who have granted the
underwriters this option:
<TABLE>
<CAPTION>
WITHOUT WITH
OVER- OVER-
PER SHARE ALLOTMENT ALLOTMENT
--------- -------------- --------------
<S> <C> <C> <C>
Underwriting discounts and
commissions payable by us.......... 4.00 5,625,000.00 5,625,000.00
Underwriting discounts and
commissions payable by selling
stockholders....................... 4.00 24,375,000.00 28,875,000.00
</TABLE>
We estimate expenses payable by us in connection with this offering, other
than the underwriting discounts and commissions referred to above, will be
approximately $2.3 million.
INDEMNITY
The underwriting agreement contains covenants of indemnity among the
underwriters, us and the selling stockholders against various civil liabilities,
including liabilities under the Securities Act.
LOCK-UP AGREEMENTS
Each executive officer and director and certain other holders of our common
stock have agreed, subject to specified exceptions, not to offer to sell,
contract to sell, or otherwise sell, dispose of, loan, pledge or grant any
rights with respect to any shares of our common stock or any options or warrants
to purchase any shares of our common stock, or any securities convertible into
or exchangeable for shares of our common stock owned as of the date of this
prospectus or thereafter acquired directly by these holders or with respect to
which they have the power of disposition, without the prior written consent of
FleetBoston Robertson Stephens Inc. This restriction terminates after the close
of trading of the shares on the 90th day following (and including) the day the
shares offered by this prospectus commenced trading on the Nasdaq National
Market. However, FleetBoston Robertson Stephens Inc. may, in its sole
discretion, at any time or from time to time before the termination of the
90-day period, without notice, release all or any portion of securities subject
to the lock-up agreements. There are no existing agreements between the
representatives and any of our stockholders who have executed a lock-up
agreement providing consent to the disposition of securities prior to the
expiration of the lock-up period, except with respect to Thomas Epley, one of
our directors, who in lieu of participating in this offering has been granted
the right to sell up to 100,000 shares beneficially owned by him during the
lock-up period.
In addition, we have agreed that during the lock-up period we will not,
without the prior written consent of FleetBoston Robertson Stephens Inc.,
subject to specified exceptions, consent to the disposition of any securities
held by stockholders subject to lock-up agreements prior to the expiration of
the lock-up period, or issue, sell, contract to sell, or otherwise dispose of,
any shares of our common stock, any options or warrants to purchase any shares
of our common stock or any securities convertible into, exercisable for or
exchangeable for shares of our common stock, other than our sale of shares in
this offering, the issuance of our common stock upon the exercise of outstanding
options or warrants, the issuance of shares of our common stock in connection
with future acquisitions, the
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issuance of options under existing stock option and incentive plans provided
that those options do not vest prior to the expiration of the lock-up period and
the preparation and filing with the Securities and Exchange Commission of a
registration statement to permit the sale by the former T.sqware stockholders
after the expiration of the lock-up period of all of the shares of our common
stock received by them in connection with our acquisition of T.sqware. See
"Shares Eligible for Future Sale."
LISTING
Our common stock is currently quoted on the Nasdaq National Market under the
symbol "GSPN."
STABILIZATION
The representatives have advised us that, pursuant to Regulation M under the
Securities Act, some persons participating in this offering may engage in
transactions, including stabilizing bids, syndicate covering transactions or the
imposition of penalty bids, that may have the effect of stabilizing or
maintaining the market price of shares of our common stock at a level above that
which might otherwise prevail in the open market. A "stabilizing bid" is a bid
for or the purchase of shares of common stock on behalf of the underwriters for
the purpose of fixing or maintaining the price of the common stock. A "syndicate
covering transaction" is the bid for or purchase of common stock on behalf of
the underwriters to reduce a short position incurred by the underwriters in
connection with the offering. A "penalty bid" is an arrangement permitting the
underwriters to reclaim the selling concession otherwise accruing to an
underwriter or syndicate member in connection with the offering if the common
stock originally sold by such underwriter or syndicate member is purchased by
the underwriters in a syndicate covering transaction and has therefore not been
effectively placed by such underwriter or syndicate member. The representatives
have advised us that such transactions may be effected on the Nasdaq National
Market or otherwise and, if commenced, may be discontinued at any time.
PASSIVE MARKET MAKING
In connection with this offering and before the commencement of offers or
sales of the common stock, certain underwriters who are qualified market makers
on the Nasdaq National Market may engage in passive market making transactions
in the common stock on the Nasdaq National Market in accordance with Rule 103 of
Regulation M under the Securities Exchange Act of 1934, during the business day
prior to the pricing of the offering. Passive market makers must comply with
applicable volume and price limitations and must be identified as such. In
general, a passive market maker must display its bid at a price not in excess of
the highest independent bid for such security; if all independent bids are
lowered below the passive market maker's bid, however, such bid must then be
lowered when certain purchase limits are exceeded.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Reboul, MacMurray, Hewitt, Maynard & Kristol, New York, New York. Some legal
matters in connection with the offering will be passed upon for the underwriters
by Sidley & Austin, New York, New York.
EXPERTS
The financial statements of GlobeSpan, Inc. as of December 31, 1999 and 1998
and for each of the three years in the period ended December 31, 1999 and the
financial statements of Ficon Technology, Inc. as of December 31, 1999 and for
the year then ended, included in this prospectus have been so included in
reliance on the reports of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in accounting and auditing.
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<PAGE>
The consolidated financial statements of T.sqware, Inc. (a development stage
company) at December 31, 1998 and 1999 and for the years then ended and for the
period from February 11, 1997 (Inception) to December 31, 1999, appearing in
this Prospectus and Registration Statement have been audited by Ernst & Young
LLP, independent auditors as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given on the
authority of such firm as experts in accounting and auditing.
The financial statements of iCompression, Inc. (a development stage company)
as of December 31, 1999 and 1998 and for each of the years then ended and for
the period from August 1, 1996 (Inception) to December 31, 1999, included in
this prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein, and are included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-3 under the Securities Act with respect to the shares of
common stock offered by this prospectus. This prospectus does not contain all of
the information set forth in the registration statement and the exhibits and
schedules to the registration statement. For further information with respect to
us and our common stock offered hereby, see the registration statement and the
exhibits thereto. Statements contained in this prospectus concerning the
contents of any contract or any other document referred to are not necessarily
complete, and, in each instance where a copy of such contract or other document
has been filed as an exhibit to the registration statement, reference is made to
the copy so filed, each such statement being qualified in all respects by such
reference. You may inspect a copy of the registration statement without charge
at the Securities and Exchange Commission's principal office in Washington, D.C.
and obtain copies of all or any part thereof upon payment of fees from the
Public Reference Room of the Securities and Exchange Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, or at the Securities and Exchange
Commission's regional offices in New York, located at 7 World Trade Center,
Suite 1300, New York, New York 10048, or in Chicago, located at 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. You may call the SEC at
1-800-SEC-0330 for further information about the Public Reference Room. Our SEC
filings are also available to the public on the SEC's website at
http://www.sec.gov. We also maintain a Web site at http://www.GlobeSpan.net. The
information contained on our Web site does not constitute a part of this
prospectus.
We file periodic reports, proxy statements and other information with the
Securities and Exchange Commission. Such periodic reports, proxy statements and
other information is also available for inspection and copying at the SEC's
Public Reference Room and on the SEC web site referred to above. We intend to
furnish holders of our common stock with annual reports containing, among other
information, audited financial statements certified by an independent public
accounting firm and quarterly reports containing unaudited condensed financial
information for the first three quarters of each fiscal year. We intend to
furnish such other reports as it may determine or as may be required by law.
The SEC allows us to "incorporate by reference" into the prospectus the
information we have filed with them. The information incorporated by reference
is an important part of this prospectus and the information that we file
subsequently with the SEC will automatically update this prospectus. The
information incorporated by reference is considered to be part of this
prospectus. We incorporate by reference the documents listed below and any
filings we make with SEC under Sections 13(a), 13(c), 14 or 15(d) of the
Exchange Act after the initial filing of this registration statement that
contains this prospectus and prior to the time that we sell all the securities
offered by this prospectus:
- our Annual Report on Form 10-K for the fiscal year ended December 31,
1999;
- our Quarterly Report on Form 10-Q for the quarter ended March 31, 2000;
84
<PAGE>
- our Current Reports on Form 8-K dated January 26, 2000, March 10, 2000,
April 14, 2000, May 12, 2000, May 18, 2000, July 14, 2000 and July 31,
2000; and
- the description of our Common Stock contained in our Registration
Statement on Form 8-A filed on June 16, 1999 under Section 12 of the
Exchange Act, including any amendment or report updating this description.
You may request a copy of these documents, at no cost, by writing or
telephoning us at the following address:
GlobeSpan, Inc.
100 Schulz Drive
Red Bank, New Jersey 07701
(732) 345-7500
85
<PAGE>
GLOBESPAN, INC
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
GLOBESPAN, INC.
Report of Independent Accountants..................... F-2
Balance Sheets........................................ F-3
Statements of Operations.............................. F-4
Statements of Changes In Stockholders' Equity......... F-5
Statements of Cash Flows.............................. F-6
Notes to Financial Statements......................... F-7
FICON TECHNOLOGY, INC.
Report of Independent Accountants..................... F-28
Balance Sheet......................................... F-29
Statement of Operations............................... F-30
Statement of Changes In Stockholders' Equity.......... F-31
Statement of Cash Flows............................... F-32
Notes to Financial Statements......................... F-33
T.SQWARE, INC.
Report of Ernst & Young LLP, Independent Auditors..... F-39
Consolidated Balance Sheets........................... F-40
Consolidated Statements of Operations................. F-41
Consolidated Statements of Redeemable Convertible
Preferred Stock and Stockholders' Equity (Net Capital
Deficiency).......................................... F-42
Consolidated Statements of Cash Flows................. F-43
Notes to Consolidated Financial Statements............ F-44
ICOMPRESSION, INC.
Independent Auditors' Report.......................... F-59
Balance Sheets........................................ F-60
Statements of Operations.............................. F-61
Statements of Shareholders' Equity.................... F-62
Statements of Cash Flows.............................. F-63
Notes to Financial Statements......................... F-64
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of GlobeSpan, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, changes in stockholders' equity (deficit) and cash flows present
fairly, in all material respects, the financial position of GlobeSpan, Inc. (the
"Company") as of December 31, 1998 and 1999, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Florham Park, New Jersey
February 1, 2000, except as to Note 17 which is as of February 25, 2000
F-2
<PAGE>
GLOBESPAN, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------- -----------
1998 1999 2000
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 12 $24,657 $27,107
Short-term investments.................................... -- 12,011 4,359
Accounts receivable, less allowance for doubtful accounts
of $61, $337 and $846, respectively..................... 3,823 9,160 15,407
Accounts receivable from affiliates....................... 73 146 1,155
Inventories............................................... 912 10,656 16,662
Prepaid income taxes...................................... 1,178 190 96
Prepaid expenses and other current assets................. 564 2,911 1,267
------- ------- -------
Total current assets.................................. 6,562 59,731 66,053
Property and equipment, net................................. 6,680 5,853 7,506
Intangible assets, net...................................... -- -- 248,148
Other assets................................................ 188 5,407 5,191
------- ------- -------
Total assets.......................................... $13,430 $70,991 326,898
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under line of credit........................... $ 2,466 $ -- $ 200
Accounts payable.......................................... 2,131 4,333 6,242
Accounts payable to affiliates............................ 327 80 82
Accrued expenses and other liabilities.................... 1,482 2,049 10,318
Payroll and benefit related liabilities................... 2,519 7,688 10,884
Current portion of capital lease obligations.............. 292 965 1,269
------- ------- -------
Total current liabilities............................. 9,217 15,115 28,995
Subordinated note payable to Communication Partners, L.P.... 5,000 -- --
Subordinated redeemable convertible note payable............ -- -- 52,023
Capital lease obligations, less current portion............. 506 443 674
------- ------- -------
Total liabilities..................................... 14,723 15,558 81,692
------- ------- -------
Commitments and contingencies (Note 14)
Stockholders' equity:
Preferred stock, par value $0.001; 10,000,000 shares
authorized; none issued or outstanding.................... -- -- --
Common stock, par value $0.001; 100,000,000 shares
authorized; 36,795,795, 58,134,678 and 63,472,407 shares
issued and outstanding, respectively...................... 37 58 63
Stock purchase warrant...................................... 3,654 1 1
Additional paid-in capital.................................. 3,604 77,378 366,752
Notes receivable from stock sales........................... (725) (7,412) (7,169)
Deferred stock compensation................................. (76) (1,218) (78,185)
Accumulated other comprehensive loss........................ -- (22) (5)
Accumulated deficit......................................... (7,787) (13,352) (36,251)
------- ------- -------
Total stockholders' equity (deficit).................. (1,293) 55,433 245,206
------- ------- -------
Total liabilities and stockholders' equity............ $13,430 $70,991 326,898
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
GLOBESPAN, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------- -----------------------
1997 1998 1999 1999 2000
----------- ----------- ------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues...................................... $ 22,546 $ 31,464 $ 56,220 $ 8,641 $ 31,060
Cost of sales..................................... 7,565 9,882 20,879 2,901 11,480
Cost of sales related to termination charge....... -- -- 1,119 1,119 --
----------- ----------- ----------- ---------- ----------
Gross profit...................................... 14,981 21,582 34,222 4,621 19,580
----------- ----------- ----------- ---------- ----------
Operating expenses:
Research and development (exclusive of non-cash
compensation expense of $1,879 for the three
months ended March 31, 2000).................. 8,358 18,694 26,531 5,380 10,880
Selling, general and administrative (exclusive
of non-cash compensation expense of $1,569 for
the three months ended March 31, 2000)........ 4,572 10,217 14,389 2,928 6,242
Amortization of intangible assets............... 1,000 583 -- -- 11,310
Non-cash compensation expense................... -- -- -- -- 3,448
In process research and development............. -- -- -- -- 1,343
----------- ----------- ----------- ---------- ----------
Total operating expenses........................ 13,930 29,494 40,920 8,308 33,223
----------- ----------- ----------- ---------- ----------
(Loss) income from operations..................... 1,051 (7,912) (6,698) (3,687) (13,643)
Interest income................................. 91 55 1,581 -- 606
Interest expense................................ -- (189) (448) (182) (498)
Interest expense, non-cash...................... -- -- -- -- (9,364)
----------- ----------- ----------- ---------- ----------
(Loss) income before income taxes................. 1,142 (8,046) (5,565) (3,869) (22,899)
Provision for income tax........................ 300 (217) -- -- --
----------- ----------- ----------- ---------- ----------
Net (loss) income................................. 842 (7,829) (5,565) (3,869) (22,899)
Preferred stock deemed dividend and accretion... -- -- (3,466) -- --
----------- ----------- ----------- ---------- ----------
Net loss attributable to common stockholders...... 842 (7,829) (9,031) (3,869) (22,899)
=========== =========== =========== ========== ==========
Other comprehensive loss:
Unrealized loss on marketable securities........ -- -- (22) -- 17
----------- ----------- ----------- ---------- ----------
Comprehensive loss/earning attributable to common
shareholders.................................... 842 (7,829) (9,053) (3,869) (22,882)
=========== =========== =========== ========== ==========
Earnings (loss) per share.........................
Basic........................................... $ 0.02 $ (0.22) $ (0.19) $ (0.11) $ (0.39)
=========== =========== =========== ========== ==========
Diluted......................................... $ 0.02 $ (0.22) $ (0.19) $ (0.11) $ (0.39)
=========== =========== =========== ========== ==========
Weighted averages shares of common stock
outstanding used in computing net (loss)
earnings per share..............................
Basic........................................... 34,546,614 36,254,133 46,612,752 36,412,767 58,640,432
Diluted......................................... 38,119,296 36,254,133 46,612,752 36,412,767 58,640,432
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
GLOBESPAN, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NOTES ACCUMULATED
COMMON STOCK STOCK ADDITIONAL RECEIVABLE DEFERRED OTHER
--------------------- PURCHASE PAID-IN FROM STOCK COMPREHENSIVE
SHARES AMOUNT WARRANT CAPITAL STOCK SALES COMPENSATION LOSS
---------- -------- -------- ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance--December 31, 1996.......... 34,312,500 $ 34 $ 1 $ 6,072 $ -- $ -- $ --
Net income..........................
Asset allocation charge............. 244
Exercise of employee stock
options........................... 2,547,522 3 846 (794)
Non-employee stock options.......... 52 (52)
---------- ---- ------- -------- ------- -------- -----
Balance--December 31, 1997.......... 36,860,022 $ 37 $ 1 $ 7,214 $ (794) $ (52) $ --
Net loss............................
Distribution to Communication
Partners, L.P. (Note 9)........... 3,653 (3,653)
Exercise of employee stock
options........................... 127,962 61
Non-employee stock options.......... 44 (44)
Amortization of non-employee stock
options........................... 20
Benefit from exercise of
nonqualified stock options........ 2
Repayment of note receivable........ 5
Forfeiture of restricted stock...... (192,189) (64) 64
---------- ---- ------- -------- ------- -------- -----
Balance--December 31, 1998.......... 36,795,795 $ 37 $ 3,654 $ 3,604 $ (725) $ (76)
Net loss............................
Issuance of common stock due to
initial public offering, net of
costs............................. 11,212,500 11 49,729
Net exercise of warrants............ 2,173,500 2 (3,653) 3,651
Forgiveness of subordinated loan to
Communication Partners, L.P....... 100
Issuance of common stock and
exercise of stock options......... 3,568,521 4 7,091 (6,775)
Issuance and conversion of Series A
preferred stock, net of costs..... 4,384,362 4 14,601
Preferred dividend attributable to
beneficial conversion feature..... (2,616)
Stock options issued at less than
fair market value................. 1,218 (1,162)
Amortization of non-employee stock
options........................... 20
Repayment of notes receivable....... 336
Interest earned on notes
receivable........................ (248)
Accumulated other comprehensive
loss.............................. (22)
---------- ---- ------- -------- ------- -------- -----
Balance--December 31, 1999.......... 58,134,678 $ 58 $ 1 $ 77,378 $(7,412) $ (1,218) $ (22)
Net loss............................ -- -- -- -- -- -- --
Issuance of common stock and
exercise of stock options......... 1,134,138 $ 1 -- 2,436 -- -- --
Ficon, acquisition and stock options
issued at less than fair value.... 960,000 $ 1 -- 68,171 -- (58,071) --
PairGain, acquisition and stock
options issued at less than fair
value............................. 3,243,591 $ 3 -- 218,767 -- (18,333) --
Interest earned on and repayment of
note receivable................... -- -- -- -- 243 -- --
Stock options issued at less than
fair market value................. -- -- -- -- -- (563) --
Accumulated comprehensive gain...... -- -- -- -- -- -- 17
---------- ---- ------- -------- ------- -------- -----
Balance--March 31, 2000
(unaudited)....................... 63,472,407 $ 63 $ 1 $366,752 $(7,169) $(78,185) $ (5)
========== ==== ======= ======== ======= ======== =====
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
----------- -------------
<S> <C> <C>
Balance--December 31, 1996.......... $ (800) $ 5,307
Net income.......................... 842 842
Asset allocation charge............. 244
Exercise of employee stock
options........................... 55
Non-employee stock options.......... --
-------- --------
Balance--December 31, 1997.......... $ 42 $ 6,448
Net loss............................ (7,829) (7,829)
Distribution to Communication
Partners, L.P. (Note 9)........... --
Exercise of employee stock
options........................... 61
Non-employee stock options.......... --
Amortization of non-employee stock
options........................... 20
Benefit from exercise of
nonqualified stock options........ 2
Repayment of note receivable........ 5
Forfeiture of restricted stock...... --
-------- --------
Balance--December 31, 1998.......... $ (7,787) $ (1,293)
Net loss............................ (5,565) (5,565)
Issuance of common stock due to
initial public offering, net of
costs............................. 49,740
Net exercise of warrants............ --
Forgiveness of subordinated loan to
Communication Partners, L.P....... 100
Issuance of common stock and
exercise of stock options......... 320
Issuance and conversion of Series A
preferred stock, net of costs..... 14,605
Preferred dividend attributable to
beneficial conversion feature..... (2,616)
Stock options issued at less than
fair market value................. 56
Amortization of non-employee stock
options........................... 20
Repayment of notes receivable....... 336
Interest earned on notes
receivable........................ (248)
Accumulated other comprehensive
loss.............................. (22)
-------- --------
Balance--December 31, 1999.......... $(13,352) $ 55,433
Net loss............................ $(22,899) $(22,899)
Issuance of common stock and
exercise of stock options......... -- 2,437
Ficon, acquisition and stock options
issued at less than fair value.... -- 10,101
PairGain, acquisition and stock
options issued at less than fair
value............................. -- 200,437
Interest earned on and repayment of
note receivable................... -- 243
Stock options issued at less than
fair market value................. -- (563)
Accumulated comprehensive gain...... -- 17
-------- --------
Balance--March 31, 2000
(unaudited)....................... $(36,251) $245,206
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
GLOBESPAN, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------- -------------------
1997 1998 1999 1999 2000
-------- -------- --------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flow (used in) provided by operating activities:
Net (loss) income......................................... $ 842 $(7,829) $ (5,565) $(3,869) $(22,899)
Adjustments to reconcile net (loss) income to cash (used
in) provided by operating activities:
Amortization of intangible assets....................... -- -- -- -- 11,310
Interest on convertible note payable.................... -- -- -- -- 444
In-process research and development..................... -- -- -- -- 1,343
Deferred income taxes................................... (500) 500 -- -- --
Provision for bad debts................................. 49 12 276 -- 509
Provision for inventory obsolescence.................... -- 95 -- -- --
Non-Cash Interest Expense............................... -- -- -- -- 9,364
Non-Cash Compensation Expense........................... -- -- -- -- 3,448
Amortization and depreciation........................... 1,702 2,657 3,513 746 1,034
Changes in assets and liabilities:
(Increase) decrease in accounts receivable.............. (3,315) 1,059 (5,686) 923 (7,322)
(Increase) in inventories............................... (119) (888) (9,744) (1,688) (5,914)
(Increase) in prepaid expenses and other assets......... (229) (1,698) (3,278) (520) 1,923
Increase (decrease) in accounts payable................. 1,589 (194) 1,955 4,886 1,873
Increase in accrued expenses and other current
liabilities........................................... 874 2,886 5,736 1,458 6,076
------- ------- --------- ------- --------
Net cash (used in) provided by operating activities......... 893 (3,400) (12,793) 1,936 1,189
------- ------- --------- ------- --------
Cash flows used in investing activities:
Capital expenditures...................................... (3,359) (4,810) (1,229) (67) (1,578)
Acquisition of businesses................................. -- (6,638)
Purchases of marketable securities........................ -- -- (111,087) -- (1,386)
Proceeds from sale/maturities of marketable securities.... -- -- 97,564 -- 9,133
Investment in preferred stock............................. -- -- (2,000) -- --
------- ------- --------- ------- --------
Net cash used in investing activities....................... (3,359) (4,810) (16,752) (67) (469)
------- ------- --------- ------- --------
Cash flows provided by financing activities:
(Repayments of) proceeds from borrowings under
subordinated note payable............................... -- 5,000 (4,900) -- --
(Repayments of) proceeds from borrowings under line of
credit.................................................. -- 2,466 (2,466) (1,678) --
Proceeds from issuance of common and preferred stock...... 55 61 62,049 32 1,882
Interest on and proceeds from repayment of notes
receivable.............................................. -- 5 88 -- 243
Repayments of capital lease borrowings.................... -- (185) (581) (89) (395)
------- ------- --------- ------- --------
Net cash provided by financing activities................... 55 7,347 54,190 (1,735) 1,730
------- ------- --------- ------- --------
Net increase (decrease) in cash and cash equivalents........ (2,411) (863) 24,645 134 2,450
Cash and cash equivalents at beginning of period............ 3,286 875 12 12 24,657
------- ------- --------- ------- --------
Cash and cash equivalents at end of period.................. $ 875 $ 12 $ 24,657 146 27,107
======= ======= ========= ======= ========
Supplemental disclosure of cash flow Information:
Cash paid:
Interest................................................ $ -- $ 145 $ 442 $ 154 $ 52
======= ======= ========= ======= ========
Income taxes............................................ $ 1,000 $ 492 $ -- $ -- $ --
======= ======= ========= ======= ========
Supplemental noncash financing activities:
Conversion of preferred stock into common stock........... $ -- $ -- $ 12,000 $ -- $ --
======= ======= ========= ======= ========
Notes receivable for sale of stock........................ $ 794 $ -- $ 7,023 $ -- $ --
======= ======= ========= ======= ========
Forgiveness of subordinated note payable.................. $ -- $ -- $ 100 $ 100 $ --
======= ======= ========= ======= ========
Equipment acquired under capital lease.................... $ -- $ 861 $ 1,191 $ -- $ 511
======= ======= ========= ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
GLOBESPAN, INC. NOTES TO FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
GlobeSpan, Inc. is a leading worldwide developer of advanced digital
subscriber line (DSL) integrated circuits which enable high-speed data
transmission over the existing network of copper telephone wires known as the
local loop. We sell our integrated circuits as chip sets to manufacturers of DSL
equipment for incorporation into products which are sold to telecommunications
service providers and end users. Our products target the rapidly growing market
for high-speed data transmission applications such as Internet access,
telecommuting and networking between branch offices. We currently outsource the
manufacturing of our integrated circuits, which enables us to concentrate our
resources on the design, development and marketing of our chip set solutions.
Pursuant to a Purchase Agreement dated June 18, 1996, three direct
wholly-owned subsidiaries and two indirect wholly-owned subsidiaries of
Communication Partners, L.P. (formerly Paradyne Partners, L.P.), acquired
certain assets of AT&T Paradyne Corporation from its parent company, Lucent
Technologies Inc. ("Lucent"), in exchange for $146 million in cash and notes and
the assumption of certain liabilities effective July 31, 1996. The assets and
liabilities were purchased by four separate operating subsidiaries of
Communication Partners, L.P., including GlobeSpan Technologies (subsequently
GlobeSpan, Inc.) (the "Company").
Assets acquired by the Company for $2.0 million consisted of specified
research and development activities, patents and customer licenses related to
carrierless amplitude phase modulation technique (generally referred to as "CAP
Technology") which is used to transmit data over copper telephone wires. In
addition, specified customer rent and lease agreements of AT&T Paradyne
Corporation were acquired directly by Rental Acquisition Corp. and Lease
Acquisition Corp., and specified net assets relating to the manufacturing,
marketing and research activities for data communications and networking
products for commercial end users and network service providers were acquired by
Paradyne Corporation (all of which are direct or indirect subsidiaries of
Communication Partners, L.P.). Paradyne Corporation also entered into a product
distribution agreement with Lucent. Additionally, certain assets and liabilities
of AT&T Paradyne Corporation were retained by Lucent or disposed of prior to the
transaction. All assets and liabilities and activities acquired by subsidiaries
of Communication Partners, L.P., other than the Company, or retained by Lucent
have been excluded from the accompanying financial statements.
The total purchase price of the Company has been allocated as follows:
<TABLE>
<S> <C>
Core Technology (see Note 2)................................ $2,000
------
Total Assets.............................................. $2,000
======
Liabilities Assumed......................................... $ --
------
Total Net Assets Acquired................................. $2,000
======
</TABLE>
The accompanying financial statements include the accounts of the Company.
See discussion of related party transactions in Notes 9 and 15. As of
December 31, 1998, December 31, 1999, and March 31, 2000, Communication
Partners, L.P. owned 93%, 59% and 40%, respectively, of the Company's
outstanding stock.
The Company is a leading worldwide developer of advanced digital subscriber
line (DSL) integrated circuits which enable high-speed data transmission over
the existing network of copper
F-7
<PAGE>
GLOBESPAN, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION (CONTINUED)
telephone wires known as the local loop. The Company sells integrated circuits
as chip sets to manufacturers of DSL equipment for incorporation into products
which are sold to telecommunications service providers and end users. On
June 23, 1999, the Company completed its initial public offering ("IPO") of
11,212,500 shares of common stock at $5.00 per share. Net proceeds received by
the Company, after deducting offering costs, totaled $49.7 million.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting principles and practices used in the preparation
of the accompanying financial statements are summarized below:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods presented. These estimates include assessing the
collectability of accounts receivable, the use and recoverability of inventory,
the realizability of deferred tax assets and useful lives or amortization
periods of intangible assets. Actual results could differ from those estimates.
The markets for the Company's products are characterized by intense competition,
rapid technological development and frequent new product introductions, all of
which could impact the future value of the Company's assets.
REVENUE RECOGNITION
Revenue from product sales is recognized upon shipment to the customer, when
no significant vendor obligations exist and collection of the resulting
receivable is probable. Substantially all revenues are from product sales.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories, substantially all of which are finished goods, are stated at
the lower of cost or market. Cost is determined on a first-in, first-out basis.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of the related assets,
ranging from three to five years. Leasehold improvements are amortized on a
straight-line basis over the lesser of the terms of the leases or the estimated
useful lives of the assets. Gains or losses on disposals of property and
equipment are recorded in current operations.
F-8
<PAGE>
GLOBESPAN, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CORE TECHNOLOGY
Core technology, which consists of patents, trademarks and technical
know-how of $2,000 acquired by the Company at inception (see Note 1) is stated
at acquisition cost, which approximates fair value. Amortization is provided on
a straight-line basis over the estimated useful life of two years. The estimated
useful life was based primarily on the expected utilization of the assets and
rapid technological changes in the integrated circuit and telecommunications
industries. Amortization expense associated with such core technology was $1,000
and $583 for the years ended December 31, 1997 and 1998, respectively. As of
December 31, 1998 this core technology was fully amortized.
The recoverability of carrying values was evaluated on a recurring basis
with consideration of changes in circumstances based on an evaluation of such
factors as the industry and environment in which the Company operates and the
expected future cash flows from the core technology.
PRODUCT WARRANTIES
The Company provides purchasers of its products with warranties that
correspond with the warranties from its contract manufacturers. Warranty expense
has been immaterial for all periods presented.
RESEARCH AND DEVELOPMENT COSTS
Costs incurred in connection with the research and development of the
Company's products and enhancements to existing products are expensed as
incurred unless technological feasibility has been established. Based on the
Company's product development process, technological feasibility is established
upon completion of a working model. Costs incurred by the Company between
completion of the working model and the point at which the product is ready for
general release have not been material. Accordingly, research and development
costs have been expensed as incurred.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES, which
requires use of the asset and liability method. Deferred income taxes are
recorded for temporary differences between financial statement carrying amounts
and the tax bases of assets and liabilities. Deferred tax assets and liabilities
reflect the tax rates expected to be in effect for the years in which the
differences are expected to reverse. A valuation allowance is provided if it is
more likely than not that some or all of the deferred tax asset will not be
realized.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE
INCOME ("FAS No. 130"). This statement requires companies to classify items of
other comprehensive income by their nature in the financial statements and
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of the
statement of operations. FAS No. 130 is effective for financial statements
issued for fiscal years beginning after December 15,
F-9
<PAGE>
GLOBESPAN, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
1997. The Company adopted Fas No. 130 in 1998. The Company reported other
comprehensive loss of $0, $22 and $0 for the years ended December 31, 1998 and
1999 and the three months ended March 31, 2000.
LONG-LIVED ASSETS
The impairment of long-lived assets is assessed by Management using factors
including probable comparable fair market values, anticipated future cash flows,
and the aggregate value of the related businesses taken as a whole. These
factors are periodically reviewed to determine whether current events or
circumstances required adjustments to carrying values or estimated useful lives
of fixed or intangible assets in accordance with the provisions of FAS No. 121,
"Accounting for the Impairment of Long-Lived Assets."
STOCK SPLITS
In 1996, the board of directors approved an 8.75 to 1 stock split. In
November 1997, the board of directors approved a 2 to 1 stock split. In
February 1998, the board of directors approved a 1.5 to 1 stock split. In
March 1999, the board of directors approved a 1 for 3 reverse stock split. All
share, stock option and stock warrant information included in the accompanying
financial statements and related notes have been restated for all periods to
reflect these stock splits. (See Note 17)
INTERIM FINANCIAL DATA
The unaudited financial data as of March 31, 2000 and for the three months
ended March 31, 1999 and 2000 has been prepared by management and includes all
adjustments, consisting of normal recurring adjustments, considered necessary
for a fair presentation of the financial position, results of operations and
cash flows of the Company. The results of operations for the three months ended
March 31, 2000 are not necessarily indicative of the operating results to be
expected for the year ending December 31, 2000.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999 the Securities and Exchange Commissions issued Staff
Accounting Bulletin 101 (SAB 101), as amended in June 2000, which summarizes the
staff's views in applying generally accepted accounting principles to revenue
recognition in financial statements. The Company will adopt SAB 101 in the
fourth quarter of 2000 and believes that adoption will not have a significant
effect on its consolidated results of operations or financial position.
In June 1998, FASB issued FAS No. 133, "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. FAS No. 133 is effective for all
fiscal quarters or fiscal years beginning after June 15, 2000, as amended by FAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral
of the Effective Date of FASB Statement No. 133," issued in June 1999. The
Company does not expect the adoption of this statement to have a significant
impact on the Company's consolidated results of operations or financial
position.
F-10
<PAGE>
GLOBESPAN, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
3. CONCENTRATION OF RISK AND CUSTOMER INFORMATION
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of cash equivalents and trade receivables.
The Company does not generally require collateral from its customers and
substantially all of its trade receivables are not subject to collateral
requirements. At December 31, 1997, 1998 and 1999 and at March 31, 2000, five of
the Company's customers accounted for $3,582 (79.2%), $3,492 (91.3%), $6,473
(67.1%) and $8,201 (49.4%) of net accounts receivable, respectively.
Sales to three customers amounted to approximately $9,818 (43.5%), $22,042
(70.1%), $30,854 (54.9%), $5,022 (58.1%) and $15,605 (50.2%) of total revenues
for the years ended December 31, 1997, 1998 and 1999 and for the three months
ended March 31, 1999 and 2000. Revenues from customers who represented more than
10% of net revenues were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------ --------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Net revenues:
Customer A................... $ 4,832 $ -- $ -- $ -- $ --
Customer B................... 2,811 -- -- -- --
Customer C................... -- 15,190 23,185 3,410 9,166
Customer D................... -- 3,974 -- -- --
Customer E................... -- -- -- -- 4,545
</TABLE>
The Company's sales to overseas customers are denominated in the U.S.
dollar. Revenues by geographic region for the years ended December 31, 1997,
1998 and 1999 and the three months ended March 31, 2000 and 1999 were as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------ --------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues:
North America................ $11,458 $21,214 $29,760 $ 4,983 $16,604
Europe....................... 3,940 3,712 5,091 1,073 1,415
Mexico/Latin America......... 98 3,063 7,725 1,508 4,620
Asia......................... 6,964 2,973 13,061 979 8,390
Australia.................... 86 502 583 98 31
------- ------- ------- ------- -------
$22,546 $31,464 $56,220 $ 8,641 $31,060
======= ======= ======= ======= =======
</TABLE>
A single vendor manufactures substantially all of the chip sets sold by the
Company. Purchases from this vendor approximated 98%, 81%, 75%, 63% and 90%, of
total inventory purchases for the years ended December 31, 1997, 1998 and 1999
and for the three months ended March 31, 1999 and 2000, respectively. If this
vendor were to become unwilling or unable to continue to manufacture these chip
sets in required volumes, the Company would have to identify and qualify
acceptable alternative vendors. The inability to develop alternative sources, if
required in the future, could result in delays or reductions in product
shipments.
F-11
<PAGE>
GLOBESPAN, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
4. TECHNOLOGY LICENSING AGREEMENTS
The Company has entered into technology licensing and right to use
agreements whereby the Company received fees for the use and/or sale of specific
patented technology. Revenues from these agreements amounted to $1,931, $310,
$119, $9 and $25 for the years ended December 31, 1997, 1998 and 1999 and for
the three months ended March 31, 1999 and 2000, respectively. (See Note 15).
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------- ----------------
1998 1999 2000
-------- -------- ----------------
(UNAUDITED)
<S> <C> <C> <C>
Computers and equipment........................ $ 5,110 $ 5,604 $ 6,352
Office furniture and fixtures.................. 131 156 213
Software....................................... 1,991 2,668 3,644
Leasehold improvements......................... 1,099 1,132 1,132
Property under capital leases.................. 861 2,052 2,958
------- ------- ----------------
9,192 11,612 14,299
Less: accumulated depreciation................. (2,512) (5,759) (6,793)
------- ------- ----------------
$ 6,680 $ 5,853 $ 7,506
======= ======= ================
</TABLE>
Included in operating expenses is depreciation expense of $702, $2,054,
$3,247, $740, and $1,034 for the years ended December 1997, 1998 and 1999 and
for the three months ended March 31, 1999 and 2000, respectively. Accumulated
amortization on assets accounted for as capital leases, amounted to
approximately $47, $484 and $714 as of December 1998 and 1999 and March 31,
2000.
6. MARKETABLE SECURITIES
Marketable securities are included in cash equivalents, short-term
investments and other long-term assets, as appropriate. At December 31, 1999,
marketable securities totaling $13,545 were available-for-sale and recorded at
fair value:
<TABLE>
<CAPTION>
GROSS UNREALIZED GROSS UNREALIZED UNREALIZED
COST HOLDING GAINS HOLDING LOSSES MARKET VALUE
---- ---------------- ---------------- ------------
<S> <C> <C> <C>
$13,545............................ $0 $22 $13,523
</TABLE>
There were no marketable securities at December 31, 1998.
7. DEFINED CONTRIBUTION PLAN
The Company participates in a 401(k) plan covering substantially all
employees, which was maintained by Paradyne until June 1999. Benefits vest based
on number of years of service. The Company's policy is to match two-thirds of an
employee's contributions, up to 6.0% of an employee's annual salary.
Additionally, the board of directors may grant discretionary contributions based
on an employee's age. Contributions to the plan paid by Paradyne on behalf of
the Company amounted to
F-12
<PAGE>
GLOBESPAN, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
7. DEFINED CONTRIBUTION PLAN (CONTINUED)
approximately $242, $348 for the years ended December 31, 1997 and 1998,
respectively. In addition, the Company accrued $179 for discretionary
contributions as of December 31, 1998. Contributions to the plan paid by the
Company amounted to approximately $541, $126 and $272 for the year ended
December 31, 1999 and for the three months ended March 31, 1999 and 2000,
respectively.
8. TERMINATION OF BANKAMERICA BUSINESS CREDIT LINE OF CREDIT
Effective September 30, 1999, a termination agreement and mutual release was
signed by BankAmerica Business Credit and the Company with regard to a
$5.0 million revolving line of credit (the "Credit Line"), which bore interest
at the bank's prime rate plus 1.5%. The Credit Line contained certain financial
covenants and restrictions as to various matters including our ability to pay
cash dividends or to effect mergers or acquisitions, incur certain other
indebtedness or to make certain investments without the bank's prior approval.
The Company was in compliance with such financial covenants and restrictions at
the time of termination of the agreement. Borrowings under the Credit Line were
collateralized by substantially all of the Company's assets. The Credit Line was
scheduled to expire in May 2003.
9. STOCK PURCHASE WARRANT
In connection with the Company's inception (see Note 1), the Company issued
a warrant to acquire 3,937,500 shares of its common stock at an exercise price
of $2.24 per share to Lucent. The warrant was due to expire upon payment or
transfer by Paradyne Corporation, an affiliated company ("Paradyne"), of
Paradyne's long-term debt maturing June 30, 2000 and upon the sale or merger of
the Company (as provided in the Stock Warrant Agreement) at a price less than
the exercise price. The warrant includes other provisions, including
anti-dilution provisions.
In August 1998, Paradyne settled its outstanding long-term debt which was
due on June 30, 2000. As a term of such settlement, the Company agreed to extend
the exercise period of the outstanding stock purchase warrant to the earlier of
June 30, 2001 or the consummation of a qualifying business combination, as
defined. In connection therewith, the Company recorded a $3,653 distribution to
the Parent based on the increase in the fair value of the warrant resulting from
the extension of the outstanding warrant term. (See Note 15).
Upon the closing of the initial public offering, the outstanding warrant to
purchase common stock issued to Lucent Technologies was net exercised for
2,173,500 shares of common stock.
F-13
<PAGE>
GLOBESPAN, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
10. INCOME TAXES
Deferred tax assets are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Amortization of intangibles............................... $ 670 $ 616
Depreciation.............................................. (190) (48)
Accrued expenses.......................................... 386 219
Other..................................................... 25 136
Inventory obsolescence reserve............................ 38 38
Net operating loss carryforwards.......................... 2,121 3,965
------- -------
3,050 4,926
------- -------
Less valuation allowance.................................. (3,050) (4,926)
------- -------
Net deferred tax asset.................................... $ -- $ --
======= =======
</TABLE>
The Company anticipates continuing investments to research and development
and corporate infrastructure in advance of revenues. As such, as of
December 31, 1999 and 1998, the Company has established a full valuation
allowance against its net deferred tax asset based on management's current
belief that it is more likely than not that the benefits related to such net
deferred tax asset will not be realized.
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal........................................... $ 700 $ (649) $ --
State............................................. 100 (23) --
------- ------- -------
800 (672) --
------- ------- -------
Deferred:
Federal........................................... (172) (1,834) (1,595)
State............................................. (60) (761) (281)
Change in valuation allowance..................... (268) 3,050 1,876
------- ------- -------
(500) 455 --
------- ------- -------
Income tax provision (benefit).................... $ 300 $ (217) $ --
======= ======= =======
</TABLE>
The Company has generated net operating loss carryforwards of approximately
$3,051 and $14,330 as of December 31, 1998 and December 31, 1999, respectively,
which are due to expire between 2018 and 2019. Section 382 of the Internal
Revenue Code of 1986, as amended, places a limitation on the utilization of
federal net operating loss carryforwards when an ownership change occurs.
Generally, an ownership change occurs when a greater than 50% change in
ownership takes place over a three-year test period. The annual utilization of
net operating loss carryforwards generated prior to such change in
F-14
<PAGE>
GLOBESPAN, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
10. INCOME TAXES (CONTINUED)
ownership is limited, in any one year, to a percentage of the fair market value
of the Company at the time of the ownership change.
The provision (benefit) for income taxes differs from the amount of income
tax determined by applying the applicable U.S. income tax rate to income before
taxes as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
U.S. statutory rate................................. 34.0% (34.0)% (34.0)%
State taxes......................................... 2.0 (6.6) (5.9)
Other............................................... 6.3 0.0 0.0
Net operating loss utilized......................... (10.0) 0.0 0.0
Change in valuation allowance....................... (6.0) 37.9 39.9
----- ----- -----
Effective tax rate.................................. 26.3% (2.7)% 0.0%
===== ===== =====
</TABLE>
11. EARNINGS PER SHARE
The Company has adopted Statement of Financial Accounting Standards
No. 128, EARNINGS PER SHARE ("FAS 128"), which requires the presentation of
basic earnings per share ("Basic EPS") and diluted earnings per share ("Diluted
EPS") by all entities that have publicly traded common stock or potential common
stock. Basic EPS is computed by dividing income available to common stockholders
by the weighted average number of common shares outstanding during the period.
Diluted EPS gives effect to all dilutive potential common shares outstanding
during the period. The computation of Diluted EPS does not assume conversion,
exercise or contingent exercise of securities that would have an anti-dilutive
effect on earnings. The dilutive effect of the outstanding stock warrants and
options is required to be computed using the treasury stock method.
The computations of Basic EPS and Diluted EPS for the years ended
December 31, 1997, 1998 and 1999 and for the three months ended March 31, 1999
and 2000 are as follows:
<TABLE>
<CAPTION>
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Net income................................................ $ 842
Basic EPS:
Income available to common stockholders................. 842 34,546,614 0.02
Effect of dilutive stock options........................ -- 3,572,682 --
-------- ---------- ------
Diluted EPS:
Income available to common stockholders................. $ 842 38,119,296 $ 0.02
======== ========== ======
</TABLE>
F-15
<PAGE>
GLOBESPAN, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
11. EARNINGS PER SHARE (CONTINUED)
<TABLE>
<CAPTION>
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Net loss.................................................. $ (7,829)
Basic EPS:
Loss attributable to common stockholders................ (7,829) 36,254,133 (0.22)
Effect of dilutive stock options........................ -- -- --
-------- ---------- ------
Diluted EPS:
Loss attributable to common stockholders plus assumed
conversions........................................... $ (7,829) 36,254,133 $(0.22)
======== ========== ======
YEAR ENDED DECEMBER 31, 1999
Net loss.................................................. $ (5,565)
Preferred stock dividend and accretion.................... (3,466)
--------
Basic EPS:
Loss attributable to common stockholders................ (9,031) 46,612,752 (0.19)
Effect of dilutive stock options........................ -- -- --
-------- ---------- ------
Diluted EPS:
Income available to common stockholders plus assumed
conversions........................................... $ (9,031) 46,612,752 $(0.19)
======== ========== ======
THREE MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
Net loss.................................................. $ (3,869)
Basic EPS:
Loss attributable to common stockholders................ (3,869) 36,412,767 (0.11)
Effect on dilutive stock options........................ -- -- --
-------- ---------- ------
Diluted EPS:
Loss attributable to common stockholder................. $ (3,869) 36,412,767 $(0.11)
======== ========== ======
THREE MONTHS ENDED MARCH 31, 2000 (UNAUDITED)
Net loss.................................................. $(22,899)
Basic EPS:
Loss attributable to common stockholders................ (22,899) 58,640,432 (0.39)
Effect on dilutive stock options........................ -- -- --
-------- ---------- ------
Diluted EPS:
Net loss plus assumed conversions....................... $(22,899) 58,640,432 $(0.39)
======== ========== ======
</TABLE>
As of December 31, 1998 and 1999 and March 31, 2000, the Company had
outstanding options, restricted stock and a warrant to purchase an aggregate
10,122,543, 8,572,575 and 12,530,908 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.
F-16
<PAGE>
GLOBESPAN, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
12. STOCKHOLDERS' EQUITY
In March 1999, the Company's board of directors approved the amendment of
the certificate of incorporation to increase its authorized capital to
10,000,000 shares of preferred stock, $0.001 par value and 100,000,000 shares of
common stock $0.001 par value. The increase in the authorized preferred shares
was approved by the Company's stockholders in May 1999 and was executed on
June 18, 1999.
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK
In May 1999, the Company designated 1,461,454 shares of preferred stock as
Series A Preferred Stock ("Series A Stock"). The Series A Stock was convertible,
at the option of the holder, into shares of common stock at any time after the
date of issuance at a conversion rate of $8.211 per share and automatically
converted upon consummation of the company's IPO. Holders of Series A Stock were
entitled to receive dividends prior to any payment of dividends on the Company's
common stock, at a rate of $0.81 per share per annum, when and if declared by
the Company's board of directors. Such dividends were not cumulative. In the
event of a liquidation, dissolution or winding up of the Company, holders of the
Series A Stock were entitled to a distribution ratably with other common
stockholders of the Company, on an as-if converted basis. The Series A Stock
carried voting rights equal to one vote per share, on an as-converted basis. In
addition, the Company was precluded from specific corporate actions without the
consent of at least 66.6% of the holders of the Series A Stock.
In May 1999, the Company completed the sale of an aggregate 1,461,454 shares
of Series A Stock and warrants to purchase an aggregate 900,000 shares of common
stock for gross proceeds of $12.0 million to two investors (the "Series A
Investors"). The warrants issued to the Series A Investors are exercisable for a
five year term and at exercise prices equal to $5.00 per share for the first
225,000 shares, $6.25 per share for the second 225,000 shares, $7.50 per share
for the third 225,000 shares and $8.75 per share for the last 225,000 shares.
Since the issuance of the aforementioned Series A Stock included a
non-detachable conversion feature, that was "in-the-money" at the date of
issuance and was immediately exercisable, the Company recognized a charge of
approximately $2.6 million for the beneficial conversion feature attributable to
the common stockholders for the year ended December 31, 1999. In addition, the
carrying value of the Series A Stock was accreted to its redemption value in
1999. The accretion which totaled $0.9 million, and the beneficial conversion
feature related to the Series A Stock have been included in the net loss
attributable to common stockholders for the year ended December 31, 1999.
Upon consummation of the IPO, the Series A Stock converted to 4,384,362
shares of common stock.
13. STOCK OPTION PLANS AND EMPLOYEE STOCK PURCHASE PLAN
1996 EQUITY INCENTIVE PLAN
In December 1996, the Company adopted the 1996 Equity Incentive Plan (the
"1996 Plan") pursuant to which, as amended, nonqualified or incentive stock
options, stock bonus and restricted stock awards (collectively, "Stock Awards")
to purchase up to 10,165,899 of the Company's common stock may be granted to
employees, directors and consultants. Stock Awards granted under the 1996 Plan
generally vest in equal installments over a four-year period. The exercise price
of incentive stock options granted under the 1996 Plan may not be less than the
fair market value of the underlying
F-17
<PAGE>
GLOBESPAN, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
13. STOCK OPTION PLANS AND EMPLOYEE STOCK PURCHASE PLAN (CONTINUED)
shares (110% of the fair market value in the case of a 10% voting shareholder)
at the grant date. Each stock option is exercisable for ten years (five years in
the case of a 10% voting stockholder) from the date of grant. Through
December 31, 1999, no stock options had been granted to a 10% stockholder.
Under the 1996 Plan, some individuals to whom stock options have been
granted may elect to exercise those options prior to the lapse of the full
vesting period. Upon termination of employment, the Company may repurchase any
unvested shares issued pursuant to such election at the exercise price. During
the year ended December 31, 1998, the Company repurchased 192,189 shares under
such provision. No shares had been repurchased during the year ended
December 31, 1999. At December 31, 1997, 1998 and 1999, there were 1,260,000,
506,250 and 2,249,784 shares, respectively, issued and outstanding that were
subject to this repurchase provision.
Stock bonuses and restricted stock awards issued under the 1996 Plan provide
that shares awarded may not be sold or otherwise transferred until restrictions
established by the underlying agreements have elapsed. Upon termination of
employment, the Company may repurchase shares upon which restrictions have not
lapsed. The 1996 Plan provides that the price for each restricted stock award
shall not be less than 85% of the fair market value of the share at the date of
grant.
Notes receivable from stock sales result from the exercise of stock options
for promissory notes. The notes are full recourse promissory notes bearing
interest at fixed rates ranging from 5.22% to 6.16% and are collateralized by
the stock issued upon exercise of the stock options. The notes including accrued
interest thereon mature five years from the date of issuance.
1999 SUPPLEMENTAL STOCK OPTION PLAN
In December 1999, the Company's board of directors approved the adoption of
the 1999 Supplemental Stock Option Plan (the "1999 Supplemental Plan"). Upon
adoption of the 1999 Supplemental Plan, the Company reserved 6,000,000 shares of
its common stock, for issuance under the 1999 Supplemental Plan. Under the 1999
Supplemental Plan, the Company may grant incentive or nonqualified stock options
to non-officer employees and consultants. The 1999 Supplemental Plan will be
administered by the Compensation Committee of the board of directors in
accordance with the terms of the 1999 Supplemental Plan.
1999 EQUITY INCENTIVE PLAN
In March 1999, the Company's board of directors approved the adoption of the
1999 Equity Incentive Plan (the "1999 Plan"). The 1999 Plan was approved by the
Company's stockholders in May 1999. Upon adoption of the 1999 Plan with the
closing of the Company's IPO, the Company reserved 3,000,000 shares of its
common stock, together with the shares of common stock remaining available for
issuance under the 1996 Plan, for issuance under the 1999 Plan. The number of
shares reserved for issuance under the 1999 Plan shall automatically increase
each year beginning May 1, 2000, by the lesser of 5.0% of the total number of
shares of common stock then outstanding or 3,000,000 shares. Under the 1999
Plan, the Company may grant incentive or nonqualified stock options, stock
appreciation rights, restricted stock or stock units to employees, non-employee
directors and consultants. The 1999 Plan will be administered by the
Compensation Committee of the board of directors in accordance with the terms of
the 1999 Plan.
F-18
<PAGE>
GLOBESPAN, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
13. STOCK OPTION PLANS AND EMPLOYEE STOCK PURCHASE PLAN (CONTINUED)
1999 DIRECTOR STOCK OPTION PLAN
In March 1999, the Company's board of directors approved the adoption of the
1999 Director Stock Plan (the "Director Plan"). The Director Plan was approved
by the Company's shareholders in May 1999. The Company reserved 750,000 shares
of its common stock for issuance under the Director Plan. Under the Director
Plan, the Company may only grant nonqualified stock options to non-employee
directors. The Director Plan provides for automatic grants to non-employee
directors of the Company at defined intervals. Each non-employee director of the
Company was granted an option to purchase 30,000 shares of common stock at the
fair market value at the date in which the non-employee director was appointed
or at $5.00 with the consummation of the Company's IPO, an additional option to
purchase 15,000 shares of common stock on the date of the Company's annual
stockholders' meeting in the year 2000 and an additional option to purchase
15,000 shares of common stock on the date of the Company's annual stockholders'
meeting in the year 2001, provided that the director continues to serve as a
director of the Company. Each non-employee director elected to serve will be
granted an option to purchase 30,000 shares of common stock on the date he or
she is first elected to the board of directors and an additional option to
purchase 15,000 shares of common stock on the date of the Company's annual
stockholder's meeting in the calendar year following such initial election. At
each annual stockholders' meeting following the annual meeting during which each
non-employee director received the second option to purchase 15,000 shares of
common stock, each non-employee director will be granted an option to purchase
7,500 shares of common stock. Stock options granted pursuant to the Director
Plan vest upon the director's completion of twelve months of service during
which he or she attended at least 75% of the meetings of the Company's board of
directors.
A summary of the Company's Stock Option Plans as of December 31, 1997, 1998
and 1999 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OPTIONS EXERCISE PRICE
---------- --------------
<S> <C> <C>
Balance at December 31, 1997........................ 4,097,778 $ 0.33
Granted............................................. 1,855,875 $ 3.01
Exercised........................................... (127,962) $ 0.49
Forfeited........................................... (146,898) $ 1.14
----------
Balance at December 31, 1998........................ 5,678,793 $ 1.18
Granted............................................. 5,806,191 $14.86
Exercised........................................... (3,563,583) $ 2.00
Forfeited........................................... (71,808) $ 2.95
----------
Balance at December 31, 1999........................ 7,849,593 $10.91
==========
</TABLE>
F-19
<PAGE>
GLOBESPAN, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
13. STOCK OPTION PLANS AND EMPLOYEE STOCK PURCHASE PLAN (CONTINUED)
The following table summarizes information about outstanding stock options
as of December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------- ---------------------------------
WEIGHTED-AVERAGE EXERCISABLE AT
ACTUAL RANGES OF OUTSTANDING AT REMAINING CONTRACTUAL WEIGHTED-AVERAGE DECEMBER 31, WEIGHTED-AVERAGE
EXERCISE PRICES DECEMBER 31, 1999 LIFE EXERCISE PRICE 1999 EXERCISE PRICE
------------------------------ ----------------- --------------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
$0.33-0.33.................... 2,195,601 7.0 $ 0.33 2,195,601 $ 0.33
$1.33-1.33.................... 205,488 8.0 $ 1.33 205,488 $ 1.33
$2.00-2.00.................... 380,955 8.2 $ 2.00 380,955 $ 2.00
$3.33-3.33.................... 1,200,498 9.2 $ 3.33 1,170,150 $ 3.33
$5.00-5.00.................... 151,998 9.5 $ 5.00 76,998 $ 5.00
$14.10-20.13.................. 1,389,903 9.8 $17.83 312,453 $18.47
$21.25-25.46.................. 2,325,150 9.8 $23.34 1,353,750 $23.33
--------- --- ------ --------- ------
$0.33-25.46................... 7,849,593 8.8 $10.91 5,695,395 $ 7.64
========= === ====== ========= ======
</TABLE>
EMPLOYEE STOCK OPTIONS
The Company accounts for stock options granted to employees in accordance
with Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES. Had the compensation cost for the Stock Option Plan been determined
based on the fair value at the grant dates for awards under the 1996 Plan
consistent with the method of Statement of Financial Accounting Standards
No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION ("FAS 123"), the Company's net
(loss) income on a pro forma basis would have been $823, ($9,236) and ($14,368)
for the years ended December 31, 1997, 1998 and 1999, respectively, calculated
with the use of the Black-Scholes option-pricing model. The pro forma basic and
diluted net (loss) income per share were $0.02, ($0.25) and ($0.31) for the
years ended December 31, 1997, 1998 and 1999, respectively. The following
assumptions were used for the years ended December 31, 1997, 1998 and 1999:
(1) risk-free interest rate of 6.6%, 4.6% and 5.9% respectively; (2) dividend
yield of 0.00%; (3) expected life of five years for December 31, 1997 and 1998
and four years for December 31, 1999; and (4) volatility of 0.001% for
December 31, 1998 and 1997 and 100% for December 31, 1999. Results may vary
depending on the assumptions applied within the model.
During 1999, the Company granted stock options to employees to purchase
shares of common stock at exercise prices less than the estimated fair market
value of the Company's common stock at the time of grant. In connection with
these issuances, the Company recorded $1,218 of deferred compensation, of which
$56 was recognized during 1999 as compensation expense. The deferred
compensation is being amortized over the vesting period, which is generally four
years. The Company determined the amount of deferred compensation as the
difference between the estimated fair market value of the options granted and
the exercise price on the date of grant.
NON-EMPLOYEE OPTIONS
In fiscal 1997 and 1998, the Company granted 669,000 and 16,500 stock
options, respectively, to non-employees. In accordance with the requirements of
FAS 123, the Company recorded $52 and $44,
F-20
<PAGE>
GLOBESPAN, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
13. STOCK OPTION PLANS AND EMPLOYEE STOCK PURCHASE PLAN (CONTINUED)
respectively, reflecting the estimated fair value of these options utilizing the
Black-Scholes option-pricing model. The Company will amortize this obligation to
expense over the period services are performed. In 1999, there were no stock
options granted to non-employees.
EMPLOYEE STOCK PURCHASE PLAN
On March 12, 1999, the Company's board of directors approved the adoption of
an Employee Stock Purchase Plan (the "Purchase Plan"). The Purchase Plan was
approved by the Company's stockholders in May 1999 and was contingent upon the
closing of the Company's initial public offering of its common stock (the "IPO")
on June 22, 1999. The Company reserved 1,200,000 shares of its common stock for
issuance under the Purchase Plan, which shall automatically increase each year
beginning February 1, 2000, by the lesser of 2.0% of the total number of shares
of common stock then outstanding or 1,200,000 shares. The Purchase Plan permits
each eligible employee, as defined, to purchase shares of the Company's common
stock through payroll deductions, provided that the aggregate amount of each
employee's payroll deductions does not exceed 15.0% of his cash compensation.
Purchases of common stock will occur on January 31 and July 31 of each year. The
Purchase Plan is administered by the Compensation Committee of the board of
directors in accordance with the terms of the Purchase Plan.
14. COMMITMENTS AND CONTINGENCIES
In October 1996, the Company became the sub-tenant of Paradyne under a
non-cancelable operating lease for office and research and development
facilities located in Red Bank, New Jersey which expires April 30, 2002. In
addition, the Company leases some computer and office equipment under agreements
that are classified as capital leases, the net book value of which was $814,
$1,568 and $2,958 at December 31, 1998, 1999, respectively and March 31, 2000.
Minimum required future lease payments under the Company's capital and operating
leases at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEARS ENDED DECEMBER 31, LEASES LEASES
------------------------ -------- ---------
<S> <C> <C>
2000...................................................... $1,057 $ 813
2001...................................................... 395 835
2002...................................................... 78 317
2003...................................................... 4 --
------ ------
Total minimum lease payments............................ $1,534 $1,965
====== ======
Less: amount representing interest........................ (126)
------
Present value of net minimum lease payments............... 1,408
Less: current portion..................................... (965)
------
$ 443
======
</TABLE>
Rent expense for the years ended December 31, 1997, 1998 and 1999 and for
the three months ended March 31, 1999 and 2000 approximated $467, $868, $1,049,
$245 and $286 respectively, and is included in operating expenses. In
December 1998, the Company subleased additional office space from
F-21
<PAGE>
GLOBESPAN, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
14. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Paradyne on a month to month basis. Rent expense relating to these additional
spaces amounted to $44 for the year ended December 31, 1999.
In July 1995, AT&T Paradyne entered into a technology development agreement
with Bell Atlantic Network Services, Inc. ("Bell Atlantic"). Under the terms of
the agreement, the Company's predecessor entity provided use of specified
Digital Subscriber Line ("DSL") technologies to third party suppliers for the
purpose of development of DSL network access products incorporating CAP
technology. Bell Atlantic paid $5.0 million under the agreement in return for
the right to receive up to $7.0 million of commission fees based on future sales
of products to Bell Atlantic or other qualified third party companies, as
defined in the agreement. In connection with the Company's inception (see
Note 1), this agreement was assigned to the Company as the successor entity. No
commission fees have been accrued related to this agreement since such fees are
only payable based on future sales. Through the year ended December 31, 1999, no
fees have been paid to Bell Atlantic under this agreement. All research and
development requirements of the agreement were completed by the Company's
predecessor entity in 1995.
The semiconductor and telecommunications industries are characterized by
substantial litigation regarding patent and other intellectual property rights.
The Company is party to various inquiries or claims in connection with these
rights. Although the ultimate outcome of these matters is not presently
determinable, management believes that the resolution of these matters will not
have a material adverse effect on the Company's financial position and results
of operations.
15. RELATED PARTY TRANSACTIONS
During the years ended December 1997, 1998 and 1999 and the three months
ended March 31, 1999 and 2000, the Company recorded product sales of $373, $962,
$3,224, $662 and $1,870, respectively, related to goods sold to Paradyne
Corporation. Receivables related to such product sales as of December 31, 1998
and 1999 and March 31, 1999 and 2000 amounted to $73, $146, $622 and $1,155.
Sales reflect, through June 30, 1998, a discount, equal to cost plus 15%,
provided to Paradyne pursuant to a Cooperative Development Agreement. In
July 1998, the Company revised its discounted pricing arrangement with Paradyne
which had existed under the Cooperative Development Agreement. Paradyne agreed
to modify the pricing terms such that Paradyne purchased products from the
Company at preferential prices. In exchange, the Company agreed to pay a 1.25%
fee based on net revenues up to an aggregate amount of $1.5 million. In
March 1999, the Company and Paradyne agreed to terminate the Cooperative
Development Agreement. In connection with such termination agreement, the
Company agreed to pay Paradyne an aggregate of $1.5 million, less the amounts
previously paid of approximately $0.3 million (or approximately $1.2 million) to
terminate the July discount pricing arrangement with Paradyne Corporation. Such
payment was made in 1999 and has been charged to cost of sales.
In addition, GlobeSpan and Paradyne Corporation as part of the Termination
Agreement affirmed that the earlier technology license provisions of the
Cooperative Development Agreement were never implemented. In conjunction with
the signing of the Termination Agreement, GlobeSpan and Paradyne Corporation
also entered into a four-year Supply Agreement which gave Paradyne Corporation
preferential pricing and other terms in connection with the sale by GlobeSpan of
products to Paradyne Corporation. Under the terms of the Supply Agreement,
GlobeSpan is required to honor Paradyne
F-22
<PAGE>
GLOBESPAN, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
15. RELATED PARTY TRANSACTIONS (CONTINUED)
Corporation's orders for GlobeSpan's products in quantities at least consistent
with Paradyne Corporation's past ordering practices and must afford Paradyne
Corporation at least the same priority for Paradyne Corporation's orders as
GlobeSpan affords its other similarly situated customers. GlobeSpan also granted
Paradyne Corporation a standard customer immunity under GlobeSpan's intellectual
property rights with respect to any of Paradyne Corporation's products which
incorporate GlobeSpan's products.
In 1998 and 1997, Paradyne provided operating, management and other
administrative services for the Company pursuant to an Intercompany Services
Agreement. Paradyne charged the Company for the cost of such services, without
markup, in accordance with the Intercompany Services Agreement, which amounted
to $231 and $155 for the years ended December 31, 1998 and 1997, respectively.
In the opinion of management, the method of allocation was reasonable.
In fiscal 1997, the Company purchased fixed assets from Paradyne
approximating $350. In February and December 1998, the Company purchased fixed
assets from Paradyne for an aggregate cost of $1,442. These assets were sold at
their net book value since the transaction involved entities under common
control.
In 1997, the Company paid Paradyne $194 as a reimbursement for their cost of
chip sets purchased on GlobeSpan's behalf. These payments were equal to the
amount paid by Paradyne for the initial purchase of the inventory.
In December 1997 and September 1998, the Company purchased from Paradyne
some GlobeSpan chip sets which it held in its inventory in the amounts of $98
and $29, respectively. GlobeSpan purchased these chip sets for resale to other
customers.
In December 1998, the Company subleased additional office space from
Paradyne (see related disclosure in Note 14). In connection therewith, the
Company reimbursed approximately $392 of Paradyne's moving expenses, the cost of
which is included in operating expenses for the year ended December 31, 1998.
ZiLOG, Inc. currently manufactures products for the Company. ZiLOG is
controlled by an affiliate of the Texas Pacific Group, an investment firm, and
whose managing partner and partner also are the Company's board members. For the
year ended December 31, 1999 and three months ended March 31, 2000, the Company
purchased $1.0 million and $1.2 million, respectively, of products from ZiLOG.
F-23
<PAGE>
GLOBESPAN, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
16. VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS-- BALANCE AT
BEGINNING COSTS AND END OF
CLASSIFICATION OF PERIOD EXPENSES DEDUCTIONS PERIOD
-------------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997:
Allowance for doubtful accounts.................... $ -- $ 49 $ -- $ 49
YEAR ENDED DECEMBER 31, 1998:
Allowance for doubtful accounts.................... $ 49 $ 61 $ (49)(a) $ 61
Inventory reserve.................................. -- 95 -- 95
Reserve for product return......................... -- 112 -- 112
Valuation allowance--deferred tax asset............ -- 3,050 -- 3,050
YEAR ENDED DECEMBER 31, 1999:
Allowance for doubtful accounts.................... $ 61 $ 306 $ (30)(a) $ 337
Inventory reserve.................................. 95 -- -- 95
Reserve for product return......................... 112 -- (112)(b) --
Valuation allowance--deferred tax asset............ 3,050 1,876 -- 4,926
</TABLE>
------------------------
(a) Represents accounts written off as uncollectible
(b) Represents write-off of reserve
17. SUBSEQUENT EVENTS--STOCK SPLIT
On January 21, 2000, the Company's Board of Directors approved a 3-for-1
stock split applicable to all issued and outstanding shares of its common stock,
par value $0.001. The 3-for-1 stock split was effected in the form of a stock
dividend and became effective on February 25, 2000 when stockholders of record
received two additional shares of common stock for each outstanding share of
common stock held on the record date. All share stock option and stock warrant
information included in the accompanying financial statements and related notes
have been restated for all periods to reflect this stock split.
18. SUBSEQUENT EVENTS--ACQUISITIONS (UNAUDITED)
On January 31, 2000, the Company acquired all of the issued and outstanding
shares of Ficon Technologies, Inc. ("Ficon"), a leading provider of solutions in
the areas of IP, ATM and Voice over Packet, which enable service providers to
build next generation communications infrastructure. The transaction will be
accounted for as a purchase transaction. The Company acquired such Ficon shares
for $5 million in cash and the right for Ficon shareholders to receive up to a
maximum of 1,959,999 shares of the Company's common stock (the "Shares"). The
Shares may be issued in the future based upon the continued employment of
certain Ficon shareholders and the completion of development milestones mutually
agreed to by the parties.
On February 24, 2000, the Company acquired the technology and employees of
the Microelectronics Group of PairGain Technologies, Inc. ("PairGain"),
designers of integrated circuits and software for DSL applications. The
transaction will be accounted for as an asset purchase. The
F-24
<PAGE>
GLOBESPAN, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
18. SUBSEQUENT EVENTS--ACQUISITIONS (UNAUDITED) (CONTINUED)
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>
<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>
<S> <C>
Cash........................................................ $ 346
Account receivable.......................................... 444
Prepaid and other assets.................................... 139
Property and equipment...................................... 203
Goodwill and intangibles.................................... 259,458
--------
260,590
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;
F-25
<PAGE>
GLOBESPAN, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
18. SUBSEQUENT EVENTS--ACQUISITIONS (UNAUDITED) (CONTINUED)
-- 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 had 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
FOR THE YEAR ENDED -------------------------------
DECEMBER 31, 1999 MARCH 31, 1999 MARCH 31, 2000
------------------ -------------- --------------
<S> <C> <C> <C>
Revenue.......................... $ 60,939 $ 9,821 $ 31,120
======== ======= ========
Net loss attributable to common
stockholders................... $(23,263) $(7,427) $(23,418)
======== ======= ========
Net loss per common share........ $ (.50) $ (.20) $ (.40)
======== ======= ========
</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.
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
2,022,182 shares of its common stock and assumed the outstanding T.sqware
options for the equivalent of 177,569 Company stock options.
F-26
<PAGE>
GLOBESPAN, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
18. SUBSEQUENT EVENTS--ACQUISITIONS (UNAUDITED) (CONTINUED)
On May 16, 2000, the Company announced that it agreed to acquire all the
issued and outstanding shares of iCompression, a leading supplier of advanced
signal processing technology for delivering voice, video and data for the
broadband infrastructure in applications such as Voice over Packet (VoP) and
broadband video conferencing. The transaction will be accounted for as a
purchase. The Company will issue approximately 4,000,000 shares of common stock.
The transaction is expected to close prior to June 30, 2000.
19. SUPPLEMENTAL CASH FLOW DATA (UNAUDITED)
For the three months ended March 31, 2000, the Company used cash of
approximately $6.6 million for business acquisitions in connection with the
purchase of Ficon and for the purchase of technology and employees of the
Microelectronics Group of PairGain:
<TABLE>
<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>
20. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------------------------
MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31,
1998 1998 1998 1998 1999 1999 1999 1999 2000
-------- -------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Net revenues............ $ 7,568 $ 7,683 $ 7,765 $ 8,448 $ 8,641 $ 9,434 $17,032 $21,113 $ 31,060
Gross profit............ 5,720 5,371 5,437 5,054 4,621 6,198 10,448 12,955 19,580
(Loss) income from
operations............ 778 (1,721) (2,688) (4,281) (3,687) (2,246) (811) 46 (13,643)
Net (loss) income
attributed to common
shareholders.......... 516 (1,174) (1,728) (5,443) (3,869) (5,830) (258) 926 (22,899)
Net (loss) income per
common share--basic... $ 0.01 $ (0.03) $ (0.05) $ (0.15) $ (0.11) $ (0.14) $ (0.01) $ 0.02 $ (0.39)
======= ======= ======= ======= ======= ======= ======= ======= ========
Net (loss) income per
common share--fully
diluted............... $ 0.01 $ (0.03) $ (0.05) $ (0.15) $ (0.11) $ (0.14) $ (0.01) $ 0.01 $ (0.39)
======= ======= ======= ======= ======= ======= ======= ======= ========
</TABLE>
F-27
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Ficon Technology, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of cash flows and of changes in stockholders' equity present fairly,
in all material respects, the financial position of Ficon Technology, Inc. at
December 31, 1999 and the results of its operations and its cash flows for the
year then ended, in conformity with accounting principles generally accepted in
the United States. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Florham Park, New Jersey
January 14, 2000
except as to Note 10 which is as of February 25, 2000
F-28
<PAGE>
FICON TECHNOLOGY, INC.
BALANCE SHEET
AT DECEMBER 31, 1999
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------
<S> <C>
ASSETS
Current assets
Cash and cash equivalents............................... $ 899,223
Accounts receivable..................................... 786,882
Prepaid expenses and other current assets............... 135,802
----------
Total current assets.................................. 1,821,907
Property and equipment, net............................... 241,322
----------
Total assets.......................................... $2,063,229
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Borrowings under line of credit......................... $ 200,000
Accounts payable........................................ 35,796
Payroll and benefit related liabilities................. 374,187
Accrued expenses and other liabilities.................. 205,587
Current tax liabilities................................. 166,168
Current portion of capital lease obligations............ 12,351
----------
Total current liabilities............................. 994,089
Deferred tax liabilities.................................. 149,894
Deferred revenue.......................................... 230,800
Capital lease obligations, less current portion........... 13,116
----------
Total liabilities..................................... 1,387,899
----------
Commitments and contingencies (Note 7)
Stockholders' equity
Class A common stock, no par value; 7,000,000 shares
authorized; 6,790,000 shares issued and outstanding... 970
Class B common stock, no par value; 1,433,735 share
authorized; 210,000 shares issued and outstanding..... 30
Additional paid-in capital.............................. 106,277
Retained earnings....................................... 568,053
----------
Total stockholders' equity............................ 675,330
----------
Total liabilities and stockholders' equity.......... $2,063,229
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
FICON TECHNOLOGY, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED
DECEMBER 31,
1999
-------------
<S> <C>
REVENUES
Development and other revenues............................ $4,719,402
----------
Total revenues.......................................... 4,719,402
----------
EXPENSES
Research and development (including related party amount
of $504,000)............................................ 4,078,800
Selling, general and administrative....................... 556,099
----------
Total operating expenses................................ 4,634,899
----------
Income from operations...................................... 84,503
Interest expense............................................ (3,862)
----------
Income before income taxes.................................. 80,641
Income tax provision........................................ 34,384
----------
Net income................................................ $ 46,257
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
FICON TECHNOLOGY, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK ADDITIONAL RETAINED TOTAL
-------------------- ------------------- PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
--------- -------- -------- -------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1999 (unaudited)....... 6,790,000 $970 210,000 $30 $106,277 $521,796 $629,073
Net income............. -- -- -- -- -- 46,257 46,257
--------- ---- ------- --- -------- -------- --------
Balance at December 31,
1999................... 6,790,000 $970 210,000 $30 $106,277 $568,053 $675,330
========= ==== ======= === ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-31
<PAGE>
FICON TECHNOLOGY, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED
DECEMBER 31, 1999
------------------
<S> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES
Net income................................................ $ 46,257
Adjustments to reconcile net income to cash (used in)
provided by operating activities
Deferred income taxes................................... (139,925)
Amortization and depreciation........................... 90,785
Changes in assets and liabilities
(Increase) decrease in accounts receivable............ 603,731
(Increase) in prepaid expenses and other current
assets.............................................. (102,952)
Increase (decrease) in accounts payable............... (42,874)
Decrease in deferred revenue.......................... (58,737)
Increase in accrued expenses and other current
liabilities......................................... 344,754
Increase in current tax liabilities................... 166,168
---------
Net cash provided by operating activities............... 907,207
---------
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchase of equipment..................................... (222,846)
---------
Net cash used in investing activities................... (222,846)
---------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
Proceeds from borrowings under line of credit............. 200,000
Repayment of capital lease obligation..................... (9,689)
---------
Net cash provided by financing activities............... 190,311
---------
Net increase in cash and cash equivalents................... 874,672
Cash and cash equivalents at beginning period............... 24,551
---------
Cash and cash equivalents at end of period.............. $ 899,223
=========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid
Interest................................................ $ 3,317
=========
Income taxes............................................ $ 15,391
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
FICON TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Ficon Technology, Inc. (the "Company") was incorporated in October 1996
under the laws of the State of New Jersey. The Company is a leading provider of
communication software, testing tools and services for the packet switching,
Digital Subscriber Line (DSL) and cable markets, primarily in the United States.
The Company develops products that are used by manufacturers in various products
including IP edge switches and routers, ATM edge and core switches, Voice
Gateways, DSL modems, cable modem and termination systems.
In January 2000, the Company was acquired by GlobeSpan, Inc. in a purchase
transaction. See Note 10.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting principles and practices used in the preparation
of the accompanying financial statements are summarized below:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods presented. Actual results could differ from those estimates.
The markets for the Company's products are characterized by intense competition,
rapid technological development and frequent new product introductions, all of
which could impact the future value of the Company's assets.
REVENUE RECOGNITION
Revenues from development fees, which amounted to approximately $2,700,000
for the year ended December 31, 1999, are recognized upon customer acceptance or
over the period in which services are provided if customer acceptance is not
required. Service revenues consist of customer support and maintenance fees.
Service revenues are recognized ratably over the term of the agreement, which is
typically one year.
Revenue from the sale of software is recognized when persuasive evidence of
an arrangement exists, delivery has occurred, the vendor's fee is fixed and
determinable and collectibility is probable. When a software arrangement
includes multiple elements, the Company allocates the revenue to each component
of the arrangement based on vendor-specific objective evidence of value ("VSOE")
and recognizes the revenue for each component as appropriate. Where sufficient
VSOE does not exist, the Company defers revenue recognition for the entire
arrangement until all elements of the arrangement have been delivered. Revenues
from license fees amounted to approximately $1,500,000 for the year ended
December 31, 1999.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents.
F-33
<PAGE>
FICON TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of the related assets,
ranging from three to five years. Leasehold improvements are amortized on a
straight-line basis over the lesser of the terms of the leases or the estimated
useful lives of the assets. Gains or losses on disposals of property and
equipment are recorded in current operations.
LONG-LIVED ASSETS
The impairment of long-lived assets is assessed by Management using factors
including probable comparable fair market values, anticipated future cash flows,
and the aggregate value of the related businesses taken as a whole. These
factors are periodically reviewed to determine whether current events or
circumstances require adjustments to carrying values or estimated useful lives
of fixed or intangible assets in accordance with the provisions of FAS No. 121,
"Accounting for the Impairment of Long-Lived Assets."
FINANCIAL INSTRUMENTS
The carrying value of accounts receivable, accounts payable and borrowings
under the revolving credit agreement approximate their fair values due to the
relatively short-term nature of these instruments.
RESEARCH AND DEVELOPMENT COSTS
Costs in connection with the development activities performed for others are
expensed over the period services are provided or deferred until customer
acceptance, if required by the development agreement.
Costs incurred in connection with the research and development of the
Company's products and enhancements to existing products are expensed as
incurred unless technological feasibility has been established. Based on the
Company's product development process, technological feasibility is established
upon completion of a working model. Costs incurred by the Company between
completion of the working model and the point at which the product is ready for
general release have not been material. Accordingly, research and development
costs have been expensed as incurred.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes", which
requires use of the asset and liability method. Deferred income taxes are
recorded for temporary differences between financial statement carrying amounts
and the tax bases of assets and liabilities. Deferred tax assets and liabilities
reflect the tax rates expected to be in effect for the years in which the
differences are expected to reverse. A valuation allowance is provided if it is
more likely than not that some or all of the deferred tax assets will not be
realized.
F-34
<PAGE>
FICON TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1999 consists of the following:
<TABLE>
<S> <C>
Computer equipment.......................................... $376,450
Office furniture and fixtures............................... 30,978
Office equipment............................................ 14,380
--------
421,808
Less, accumulated depreciation.............................. (180,486)
--------
$241,322
========
</TABLE>
Included in operating expenses is depreciation expense of approximately
$91,000 for the year ended December 31, 1999. Included in accumulated
depreciation is $12,000 related to amounts under capitalized leases.
4. REVOLVING CREDIT AGREEMENT
In April 1999, the Company entered into a credit agreement with Summit Bank
pursuant to which the Company may borrow up to $300,000. Outstanding borrowings
under this credit agreement bear interest, payable on a monthly basis, at rate
of 1.0% in excess of Summit Bank's prevailing base rate (9.5% at December 31,
1999). Interest and fees related to this credit agreement amounted to
approximately $3,000 for the year ended December 31, 1999. The credit agreement
expires in April 2000.
Substantially all of the Company's assets are pledged as collateral under
the credit agreement. Under the terms of the credit agreement, the Company's
deposits with Summit Bank may be used to offset outstanding borrowings. The
Company's president and principal stockholder has personally guaranteed the
credit agreement. The credit agreement also contains various covenants, which,
among other things, restrict certain corporate actions including, but not
limited to, mergers, acquisitions and sales of assets.
5. STOCKHOLDERS' EQUITY
In October 1999, the Company amended its certificate of incorporation and
authorized 7,000,000 shares of Class A common stock, no par value ("Class A
Stock"), and 1,433,735 shares of Class B common stock, no par value ("Class B
Stock"). The Class A Stock and the Class B Stock are identical in all respects
except that the Class B Stock does not carry voting rights in the Company.
6. INCOME TAXES
Deferred tax liabilities at December 31, 1999 are comprised of the
following:
<TABLE>
<S> <C>
Change in tax accounting method............................. $(156,012)
Depreciation................................................ (5,366)
Other....................................................... 11,484
---------
Deferred tax liability.................................... $(149,894)
=========
</TABLE>
F-35
<PAGE>
FICON TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
The components of the provision for income taxes for the year ended
December 31, 1999 are as follows:
<TABLE>
<S> <C>
Current
Federal................................................... $ 135,030
State..................................................... 39,279
---------
174,309
---------
Deferred
Federal................................................... (108,395)
State..................................................... (31,530)
---------
(139,925)
---------
Income tax provision...................................... $ 34,384
=========
</TABLE>
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. income tax rate to income before
taxes as follows:
<TABLE>
<S> <C>
U.S. statutory rate......................................... 34%
State taxes................................................. 6
Other....................................................... 3
--
Effective tax rate........................................ 43%
==
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
The Company leases its office facilities under a noncancelable operating
lease that expires June 30, 2000. In addition, the Company leases certain
computer and office equipment under both capital and
F-36
<PAGE>
FICON TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
operating leases agreements. Minimum required future lease payments under the
Company's operating and capital leases at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- --------
<S> <C> <C>
Year ended December 31,
2000.................................................. $ 96,386 $ 16,954
2001.................................................. 19,290 14,306
2002.................................................. 14,845 3,485
2003.................................................. -- --
2004.................................................. -- --
Thereafter............................................ -- --
-------- --------
Total minimum lease payments........................ $130,521 34,745
========
Less: amount representing interest...................... (9,278)
--------
Present value of minimum lease payments............. 25,467
Less: current portion................................... (12,351)
--------
$ 13,116
========
</TABLE>
Rent expense for the year ended December 31, 1999 approximated $164,000.
8. RELATED PARTY TRANSACTIONS
The Company outsources certain development activities to Ficon Technology
India, Pty. The father of the Company's President and Chief Executive Officer is
the principal shareholder of Ficon India. Ficon India charges the Company for
development services on a cost plus a basis. During the year ended December 31,
1999, the Company recorded development expenses of $504,000, relating to
development services provided by Ficon India.
9. CONCENTRATION OF RISK AND CUSTOMER INFORMATION
Sales to four individual customers amounted to 14.8%, 12.6%, 12.0% and 11.3%
of net sales in 1999.
10. SUBSEQUENT EVENTS
On January 12, 2000, as amended on January 28, 2000, the Company entered
into a definitive merger agreement with GlobeSpan, Inc. ("GlobeSpan") pursuant
to which the Company shall be merged with and into a wholly owned subsidiary of
GlobeSpan. In exchange for the outstanding shares of the Company, the
shareholders' will receive a pro-rata share of $5,000,000, the right to receive
up to an aggregate 960,000 shares of GlobeSpan common stock and the right to
receive contingent shares up to an aggregate of 999,999 shares of GlobeSpan
common stock.
The 999,999 shares represent additional shares of GlobeSpan common stock to
be distributed the shareholders of the Company upon the completion of certain
development activities as provided in the merger agreement.
F-37
<PAGE>
FICON TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. SUBSEQUENT EVENTS (CONTINUED)
On January 21, 2000, GlobeSpan's board of directors approved a 3-for-1 stock
split applicable to all issued and outstanding shares of its common stock, par
value $0.001. The 3-for-1 stock split was effected in the form of a stock
dividend and became effective on February 25, 2000 when stockholders of record
received two additional shares of common stock for each outstanding share of
common stock held on the record date. The shares to be paid in consideration for
the acquisition of Ficon by GlobeSpan have been restated for all periods to
reflect the stock split.
On January 30, 2000, the Company entered into a Share Purchase Agreement
(the "Agreement") with the four stockholders of Ficon Technology India, Pty
("Ficon India"). The Agreement calls for the Ficon India stockholders to
transfer to the Company and the Company shall purchase and accept from Ficon
India stockholders all of the Ficon India shares. In consideration of the
transfer of the Ficon India shares, the Company shall pay the Ficon India
stockholders approximately $330,000. The Agreement is subject to Indian
government and regulatory approval and is expected to close during the second
quarter of 2000.
The merger with GlobeSpan closed on January 31, 2000.
F-38
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
T.sqware, Inc.
We have audited the accompanying consolidated balance sheets of
T.sqware, Inc. (a development stage company) as of December 31, 1998 and 1999,
and the related consolidated statements of operations, redeemable convertible
preferred stock and stockholders' equity (net capital deficiency), and cash
flows for the period from February 11, 1997 (inception) to December 31, 1999 and
the years ended December 31, 1998 and 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of T.sqware, Inc.
at December 31, 1998 and 1999, and the consolidated results of its operations
and its cash flows for the period from February 11, 1997 (inception) to
December 31, 1999 and the years ended December 31, 1998 and 1999, in conformity
with accounting principles generally accepted in the United States.
<TABLE>
<S> <C>
San Jose, California
March 15, 2000, except for
Note 11, as to which the date is
April 20, 2000 /s/ ERNST & YOUNG LLP
</TABLE>
F-39
<PAGE>
T.SQWARE, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------------------- -----------
1998 1999 2000
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 6,620,877 $ 1,776,928 $16,418,728
Short-term investments -- -- 8,076,413
Accounts receivable................................ 87,734 113,191 185,775
Other current assets............................... 113,680 638,699 816,089
Note receivable from officer, short-term........... 140,000 85,000 85,000
------------ ------------ -----------
Total current assets................................. 6,962,291 2,613,818 25,582,005
Property and equipment, net.......................... 1,630,605 1,356,964 1,697,763
Note receivable from officer, long-term.............. 65,000 65,000 65,000
Restricted cash...................................... 40,000 220,000 220,000
Other assets......................................... 311,788 143,738 147,428
------------ ------------ -----------
Total assets......................................... $ 9,009,684 $ 4,399,520 $27,712,196
============ ============ ===========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable................................... $ 556,921 $ 1,169,909 $ 575,470
Accrued expenses................................... 876,122 1,247,069 1,601,190
Equipment loan..................................... 750,000 562,500 562,500
Other current liabilities.......................... -- 63,000 82,084
------------ ------------ -----------
Total current liabilities............................ 2,183,043 3,042,478 2,821,244
Equipment loan, long-term............................ 1,500,570 1,171,875 1,031,250
Other long-term liabilities.......................... 358,037 264,770 239,432
Commitments
Redeemable convertible preferred stock, issuable in
series, $0.001 par value:
Authorized, issued, and outstanding
shares--16,780,001 in 1998, 20,327,134 in 1999
and 26,902,511 at March 31, 2000
Aggregate liquidation preferences of $27,860,701
in 1999 and $57,499,898 at March 31, 2000...... 21,542,421 28,478,153 55,973,223
Stockholders' equity (net capital deficiency):
Common stock, $0.001 par value:
Authorized shares--25,000,000
Issued and outstanding shares--2,795,360 in 1998,
3,130,524 in 1999 and 3,134,564 at March 31,
2000........................................... 2,795 3,130 3,134
Additional paid-in capital......................... 276,740 2,501,262 4,096,126
Deficit accumulated during the development stage... (16,485,800) (28,779,840) (32,713,177)
Deferred stock compensation........................ -- (1,947,449) (3,373,321)
Accumulated other comprehensive income (loss):
Cumulative translation adjustment................ (90,773) (57,510) (88,366)
------------ ------------ -----------
(16,297,038) (28,280,407) (32,075,604)
Less notes receivable from stockholders............ (277,349) (277,349) (277,349)
------------ ------------ -----------
Total stockholders' equity (net capital
deficiency)........................................ (16,574,387) (28,557,756) (32,352,953)
------------ ------------ -----------
Total liabilities, redeemable convertible preferred
stock and stockholders' equity (net capital
deficiency)........................................ $ 9,009,684 $ 4,399,520 $27,712,196
============ ============ ===========
</TABLE>
SEE ACCOMPANYING NOTES.
F-40
<PAGE>
T.SQWARE, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 11, YEARS ENDED THREE MONTHS
1997 (INCEPTION) DECEMBER 31, ENDED MARCH 31,
TO DECEMBER 31, -------------------------- --------------------------
1999 1998 1999 1999 2000
---------------- ----------- ------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales...................... $ 968,802 $ 205,113 $ 636,126 $ 33,587 $ 505,354
Operating expenses:
Research and development
(1)........................ 13,796,410 3,204,289 6,847,749 1,694,317 1,733,931
Sales, general, and
administrative (2)......... 12,756,819 5,439,752 6,122,402 1,258,167 2,702,645
Purchase of in-process
research and development... 3,723,000 -- -- -- --
------------ ----------- ------------ ------------ -----------
Total operating expenses....... 30,276,229 8,644,041 12,970,151 2,952,484 4,436,576
------------ ----------- ------------ ------------ -----------
Loss from operations........... (29,307,427) (8,438,928) (12,334,025) (2,918,897) (3,931,222)
Other income (expense), net:
Interest expense and other
expense.................... (471,311) (110,050) (240,350) (48,509) (291,383)
Interest income and other
income..................... 998,898 463,980 280,335 60,164 289,268
------------ ----------- ------------ ------------ -----------
Loss before income taxes....... (28,779,840) (8,084,998) (12,294,040) (2,907,242) (3,933,337)
Provision for income taxes..... -- 583,500 -- -- --
------------ ----------- ------------ ------------ -----------
Net loss....................... $(28,779,840) $(8,668,498) $(12,294,040) $ (2,907,242) $(3,933,337)
============ =========== ============ ============ ===========
Basic and diluted net loss per
common share................. $ (13.84) $ (4.94) $ (4.24) $ (1.24) $ (1.26)
Shares used in computing basic
and diluted net loss per
common share................. 2,080,113 1,756,300 2,900,449 2,348,760 3,132,670
</TABLE>
--------------------------
(1) includes $0 in 1998, $45,043 in 1999, $10,900 for the three months ended
March 31, 1999 and $134,715 for the three months ended March 31, 2000 of
stock compensation expense
(2) includes $0 in 1998, $196,439 in 1999, $2,725 for the three months ended
March 31, 1999 and $33,678 for the three months ended March 31, 2000 of
stock compensation expense
SEE ACCOMPANYING NOTES.
F-41
<PAGE>
T.SQWARE, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
<TABLE>
<CAPTION>
DEFICIT
REDEEMABLE CONVERTIBLE ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL DURING THE DEFERRED
-------------------------- -------------------- PAID-IN DEVELOPMENT STOCK
SHARES AMOUNT SHARES AMOUNT CAPITAL STAGE COMPENSATION
------------ ----------- --------- -------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of shares of common
stock to founders in March 1997
for notes receivable at $0.10
per share...................... -- $ -- 2,773,485 $2,773 $ 274,576 $ -- $ --
Issuance of shares of Series A
preferred stock in March 1997
for cash and technology at
$1.00 per share, net of
issuance costs of approximately
$165,000....................... 10,783,000 10,618,026 -- -- -- -- --
Components of comprehensive loss:
Net loss....................... -- -- -- -- -- (7,817,302) --
Translation adjustment......... -- -- -- -- -- -- --
------------ ----------- --------- ------ ----------- ------------ -----------
Total comprehensive loss......... -- -- -- -- -- -- --
------------ ----------- --------- ------ ----------- ------------ -----------
Balance at December 31, 1997....... 10,783,000 10,618,026 2,773,485 2,773 274,576 (7,817,302) --
Issuance of shares of Series B
preferred stock in May 1998 for
cash at $1.50 per share, net of
issuance costs of approximately
$75,000........................ 8,220,001 12,255,145 -- -- -- -- --
Issuance of common stock pursuant
to option exercises by
employees...................... -- -- 21,875 22 2,164 -- --
Purchase of warrants and shares
of Series A preferred stock
from stockholders in July 1998
for cash....................... (2,223,000) (1,330,750) -- -- -- -- --
Components of comprehensive loss:
Net loss....................... -- -- -- -- -- (8,668,498) --
Translation adjustment......... -- -- -- -- -- -- --
------------ ----------- --------- ------ ----------- ------------ -----------
Total comprehensive loss......... -- -- -- -- -- -- --
------------ ----------- --------- ------ ----------- ------------ -----------
Balance at December 31, 1998....... 16,780,001 21,542,421 2,795,360 2,795 276,740 (16,485,800) --
Issuance of shares of Series B-1
preferred stock in January 1999
for cash at $1.50 per share,
net of issuance costs of
approximately $12,000.......... 2,447,133 3,657,857 -- -- -- -- --
Issuance of shares of Series C
preferred stock in January 1999
for cash at $3.00 per share,
net of issuance costs of
approximately $22,000.......... 1,100,000 3,277,875 -- -- -- -- --
Issuance of common stock pursuant
to option exercises by
employees...................... -- -- 335,164 335 35,591 -- --
Issuance of options to purchase
shares of common stock to
consultants for services....... -- -- -- -- 26,036 -- --
Deferred stock compensation
related to stock options....... -- -- -- -- 2,162,895 -- (2,162,895)
Amortization of deferred stock
compensation................... -- -- -- -- -- -- 215,446
Components of comprehensive loss:
Net loss....................... -- -- -- -- -- (12,294,040) --
Translation adjustment......... -- -- -- -- -- -- --
------------ ----------- --------- ------ ----------- ------------ -----------
Total comprehensive loss......... -- -- -- -- -- -- --
------------ ----------- --------- ------ ----------- ------------ -----------
Balance at December 31, 1999....... 20,327,134 28,478,153 3,130,524 3,130 2,501,262 (28,779,840) (1,947,449)
Issuance of Series D preferred
stock in January 2000 at $4.50,
net of issuance costs of
approximately $2,094,000
(unaudited)...................... 6,575,377 27,495,070
Issuance of common stock pursuant
to option exercises by employees
(unaudited)...................... 4,040 4 598
Deferred stock compensation related
to stock options (unaudited)..... -- -- -- -- 1,594,266 -- (1,594,266)
Amoritzation of deferred stock
compensation (unaudited)......... -- -- -- -- -- -- 168,394
Components of comprehensive loss
(unaudited):
Net loss (unaudited)............. -- -- -- -- -- (3,933,337) --
Translation adjustment
(unaudited)...................... -- -- -- -- -- -- --
------------ ----------- --------- ------ ----------- ------------ -----------
Total comprehensive loss
(unaudited)...................... -- -- -- -- -- (3,933,337) --
------------ ----------- --------- ------ ----------- ------------ -----------
Balance at March 31, 2000
(unaudited)...................... 26,902,511 $55,973,223 3,134,564 $3,134 $ 4,096,126 $(32,713,177) $(3,373,321)
============ =========== ========= ====== =========== ============ ===========
<CAPTION>
ACCUMULATED
OTHER NOTES RECEIVABLE
COMPREHENSIVE FROM
INCOME (LOSS) STOCKHOLDERS TOTAL
------------- ---------------- ------------
<S> <C> <C> <C>
Issuance of shares of common
stock to founders in March 1997
for notes receivable at $0.10
per share...................... $ -- $ (277,349) $ --
Issuance of shares of Series A
preferred stock in March 1997
for cash and technology at
$1.00 per share, net of
issuance costs of approximately
$165,000....................... -- -- --
Components of comprehensive loss:
Net loss....................... -- -- (7,817,302)
Translation adjustment......... (21,022) -- (21,022)
-------- ----------- ------------
Total comprehensive loss......... -- -- (7,838,324)
-------- ----------- ------------
Balance at December 31, 1997....... (21,022) (277,349) (7,838,324)
Issuance of shares of Series B
preferred stock in May 1998 for
cash at $1.50 per share, net of
issuance costs of approximately
$75,000........................ -- -- --
Issuance of common stock pursuant
to option exercises by
employees...................... -- -- 2,186
Purchase of warrants and shares
of Series A preferred stock
from stockholders in July 1998
for cash....................... -- -- --
Components of comprehensive loss:
Net loss....................... -- -- (8,668,498)
Translation adjustment......... (69,751) -- (69,751)
-------- ----------- ------------
Total comprehensive loss......... -- -- (8,738,249)
-------- ----------- ------------
Balance at December 31, 1998....... (90,773) (277,349) (16,574,387)
Issuance of shares of Series B-1
preferred stock in January 1999
for cash at $1.50 per share,
net of issuance costs of
approximately $12,000.......... -- -- --
Issuance of shares of Series C
preferred stock in January 1999
for cash at $3.00 per share,
net of issuance costs of
approximately $22,000.......... -- -- --
Issuance of common stock pursuant
to option exercises by
employees...................... -- -- 35,926
Issuance of options to purchase
shares of common stock to
consultants for services....... -- -- 26,036
Deferred stock compensation
related to stock options....... -- -- --
Amortization of deferred stock
compensation................... -- -- 215,446
Components of comprehensive loss:
Net loss....................... -- -- (12,294,040)
Translation adjustment......... 33,263 -- 33,263
-------- ----------- ------------
Total comprehensive loss......... -- -- (12,260,777)
-------- ----------- ------------
Balance at December 31, 1999....... (57,510) (277,349) (28,557,756)
Issuance of Series D preferred
stock in January 2000 at $4.50,
net of issuance costs of
approximately $2,094,000
(unaudited)...................... --
Issuance of common stock pursuant
to option exercises by employees
(unaudited)...................... 602
Deferred stock compensation related
to stock options (unaudited)..... -- -- --
Amoritzation of deferred stock
compensation (unaudited)......... -- -- 168,394
Components of comprehensive loss
(unaudited):
Net loss (unaudited)............. -- -- (3,933,337)
Translation adjustment
(unaudited)...................... (30,856) -- (30,856)
-------- ----------- ------------
Total comprehensive loss
(unaudited)...................... (30,856) -- (3,964,193)
-------- ----------- ------------
Balance at March 31, 2000
(unaudited)...................... $(88,366) $ (277,349) $(32,352,953)
======== =========== ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-42
<PAGE>
T.SQWARE, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM THREE MONTHS
FEBRUARY 11, ENDED
1997 (INCEPTION) YEARS ENDED DECEMBER 31, MARCH 31,
TO DECEMBER 31, -------------------------- --------------------------
1999 1998 1999 1999 2000
---------------- ----------- ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss..................................... $(28,779,840) $(8,668,498) $(12,294,040) $(2,907,242) $ (3,933,337)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization.............. 1,806,772 680,571 862,609 207,539 246,020
Stock compensation......................... 241,482 -- 241,482 13,625 168,394
Acquisition of in-process research and
development.............................. 3,723,000 -- -- -- --
Other...................................... (57,510) (69,751) 33,263 -- (30,856)
Interest expense included in warrant
obligation............................... 119,253 -- --
Changes in operating assets and
liabilities:
Accounts receivable...................... (113,191) 75,324 (25,457) 9,426 (72,584)
Other current assets and notes
receivable............................. (788,699) (62,839) (470,019) (196,783) (177,390)
Deferred and other tax assets............ -- 1,162,242 -- -- --
Restricted cash.......................... (220,000) -- (180,000) -- --
Other assets............................. (143,738) (279,290) 168,050 203,696 (3,690)
Accounts payable......................... 1,169,909 (793,140) 612,988 85,750 (594,439)
Accrued expenses......................... 1,247,069 538,083 370,947 190,631 354,122
Other current liabilities................ -- -- 63,000 (46,652) 19,084
Other long-term liabilities.............. 327,770 (440,802) (93,267) (31,079) (23,917)
------------ ----------- ------------ ----------- ------------
Net cash used in operating activities........ (21,467,723) (7,858,100) (10,710,444) (2,471,091) (4,048,593)
------------ ----------- ------------ ----------- ------------
INVESTING ACTIVITIES
Purchases of short-term investments.......... -- -- -- -- (8,076,413)
Purchases of property and equipment.......... (3,163,736) (830,298) (588,968) (25,425) (586,819)
------------ ----------- ------------ ----------- ------------
Net cash used in investing activities........ (3,163,736) (830,298) (588,968) (25,425) (8,663,232)
------------ ----------- ------------ ----------- ------------
FINANCING ACTIVITIES
Net (decrease) increase in equipment loan.... 1,734,375 1,858,293 (516,195) (94,320) (140,625)
Proceeds from sale of convertible preferred
stock...................................... 27,585,901 12,255,143 6,935,732 3,657,857 27,495,070
Principal payment on capital lease
obligation................................. -- -- -- -- (1,421)
Proceeds from notes payable.................. 100,000 -- -- -- --
Repayment of notes payable................... (100,000) -- -- -- --
Repurchase of common stock and warrant....... (2,950,000) (2,950,000) -- 26,742 --
Proceeds from exercise of common stock
options.................................... 38,111 2,186 35,926 -- 601
------------ ----------- ------------ ----------- ------------
Net cash provided by financing activities.... 26,408,387 11,165,622 6,455,463 3,590,279 27,353,625
------------ ----------- ------------ ----------- ------------
Net (decrease) increase in cash and cash
equivalents................................ 1,776,928 2,477,224 (4,843,949) 1,093,763 14,641,800
Cash and cash equivalents at beginning of
period..................................... -- 4,143,653 6,620,877 6,620,877 1,776,928
------------ ----------- ------------ ----------- ------------
Cash and cash equivalents at end of period... $ 1,776,928 $ 6,620,877 $ 1,776,928 $ 7,714,640 $ 16,418,728
============ =========== ============ =========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid for interest....................... $ (423,611) $ (110,050) $ (240,350) $ (39,580) $ (40,619)
Cash received for interest................... $ 998,898 $ 463,980 $ 280,335 $ 60,164 $ 289,260
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES
Common stock issued for notes receivable..... $ 277,349 $ -- $ -- $ -- $ --
Common stock issued on purchase of assets.... $ 2,223,000 $ -- $ -- $ -- $ --
Warrant issued on purchase of assets......... $ 1,500,000 $ -- $ -- $ -- $ --
Options to purchase common stock issued to
consultants for services rendered.......... $ -- $ -- $ 26,036 $ -- $ --
Deferred compensation related to stock option
grants..................................... $ -- $ -- $ 2,162,895 $ 218,000 $ 1,594,261
Amortization of deferred compensation........ $ -- $ -- $ -- $ -- $ 168,394
</TABLE>
SEE ACCOMPANYING NOTES.
F-43
<PAGE>
T.SQWARE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
1. ORGANIZATION
DESCRIPTION OF BUSINESS
T.sqware, Inc. (the Company) was incorporated in the state of Delaware on
February 11, 1997. The Company designs, develops, and markets digital
controllers for communication applications. Through December 31, 1999, the
Company has been active in product development, the acquisition of technology,
equipment and facilities, developing markets, and raising capital. Accordingly,
the Company was in the development stage.
ACQUISITION OF ASSETS FROM MATRA MHS
In March 1997, the Company acquired certain assets of Matra MHS in exchange
for 2,223,000 shares of Series A preferred stock valued at $2,223,000, a warrant
valued at $1,500,000, and cash of $440,000. These assets consisted of tangible
and intangible assets related to certain Matra MHS CPU technology that
incorporated an instruction set designed for telecommunications applications.
Approximately $440,000 of the total purchase price of $4,163,000 was allocated
to identifiable net tangible assets. Management determined that approximately
$3,723,000 of the purchase price was in-process research and development that
had no alternative use. This amount was expensed during 1997 upon consummation
of the acquisition. The Company has spent approximately 30 months and
$13.7 million developing a marketable product combining the CPU technology
acquired with other developed elements. Through December 31, 1999, revenues
derived from the technology acquired have not been significant.
In November 1998, the Company repurchased the stock and warrant issued to
Matra MHS on the acquisition of the assets in exchange for $2,950,000.
CAPITAL RESOURCES
The Company has funded its development activities and operations through
private sales of stock. Management is currently pursuing additional equity
financing opportunities with existing and new investors. Management believes
that current sources of financing, including the January 2000 financing (SEE
NOTE 7), will be sufficient to meet the Company's capital requirements through
December 31, 2000.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly owned French subsidiary, T.sqware, S.A. All intercompany balances
and transactions have been eliminated in consolidation. Net assets (liabilities)
of T.sqware, S.A. before eliminations totaled ($553,125) and $3,624,314 at
December 31, 1998 and 1999, respectively.
REVENUE RECOGNITION
The Company recognizes revenue upon product shipment and provides for
estimated returns.
F-44
<PAGE>
T.SQWARE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION
The functional currency for the Company's French subsidiary is the French
franc. Its assets and liabilities are translated into U.S. dollars at the
exchange rate in effect at the balance sheet date. Revenues and expenses are
translated at average rates of exchange prevailing during the period. All
adjustments resulting from the process of translating the French subsidiary's
financial statements into U.S. dollars have been accumulated and recorded as
accumulated other comprehensive income (loss) in stockholders' equity.
The Company funds its French research and development operations through
cash contributions and enters into forward exchange contracts for the purchase
of French francs. Since there is no firm commitment as to the timing or amount
of the cash contributions, such exchange contracts do not qualify as a hedge
under FAS 52 and, accordingly, the gains or losses are included in the statement
of operations.
INTERIM CONSOLIDATED FINANCIAL DATA
The consolidated financial information at March 31, 2000 and for the three
months ended March 31, 1999 and 2000 is unaudited but has been prepared on the
same basis as the annual consolidated financial statements and, in the opinion
of management, includes all adjustments, consisting only of normal recurring
adjustments, that T.sqware considers necessary for a fair presentation of the
consolidated financial position at these dates and the consolidated operating
results and cash flows for these periods. Results for the interim periods are
not necessarily indicative of the results to be expected for any subsequent
period.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
Cash equivalents consist of highly liquid financial instruments, including
investments in money market funds, commercial paper, and certificates of deposit
with original maturities of ninety days or less at the time of purchase.
Additionally, at December 31, 1998 and 1999, the Company had restricted cash
of $40,000 and $220,000, respectively, related to a $40,000 letter of credit
invested in a certificate of deposit at a financial institution as a security
deposit for its payroll service provider and a $180,000 letter of credit
invested in a certificate of deposit as a security deposit for foreign currency
forward exchange contracts.
F-45
<PAGE>
T.SQWARE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SHORT TERM INVESTMENTS
Short term investments as of March 31, 2000 are comprised of investments in
commercial paper with contractual maturities of less than 9 months. The fair
values of the Company's short term investments approximated the amortized cost.
Realized and unrealized gains or losses for all periods presented were
insignificant.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less accumulated depreciation.
Property and equipment are depreciated for financial reporting purposes using
the straight-line method over estimated useful lives from four to seven years.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company assesses the recoverability of its long-lived and intangible
assets by determining whether the amortization of the remaining balance over its
remaining useful life can be recovered through undiscounted future operating
cash flows. If impairment exists, the carrying amount of the related asset is
reduced to fair value.
RESEARCH AND DEVELOPMENT
Research and development expenditures are charged to operations as incurred.
STOCK-BASED COMPENSATION
The Company accounts for employee stock options in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB Opinion No. 25), and has adopted the "disclosure only"
alternative described in Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (FAS 123).
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109). Under
this method, deferred tax assets and liabilities are determined based on the
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates that will be in effect
when the differences are expected to reverse. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of investments in cash equivalents. The
Company invests in money market funds, commercial paper, and certificates of
deposit of high-credit quality institutions. The Company is
F-46
<PAGE>
T.SQWARE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
exposed to credit risks in the event of default by these institutions to the
extent of the amount recorded on the balance sheet.
Accounts receivable consists of balances due from a limited number of
customers. The Company generally requires no collateral from its customers. The
Company maintains an allowance for doubtful accounts based on the expected
collectibility of its accounts receivable. To date, the Company has not
experienced any significant losses with respect to its accounts receivable.
OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) includes revenues and expenses and gains
and losses that are not included in net loss but rather are recorded directly in
stockholders' equity.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of the Company's cash and cash equivalents, accounts
receivable, notes receivable, restricted cash, accounts payable, accrued
expenses, and bank line of credit approximates their fair values. The estimated
fair values may not be representative of actual values of the financial
instruments that could have been realized as of the year end or that will be
realized in the future.
NET LOSS PER SHARE
Basic net loss per share is computed using the weighted average number of
outstanding shares of common stock. Diluted net loss per share is computed using
the weighted average number of shares of common stock outstanding and, when
dilutive, potential common shares from options to purchase common stock using
the treasury stock method and from convertible securities using the
as-if-converted basis. All potential common shares have been excluded from the
computation of diluted net loss per share for all years presented because the
effect would be antidilutive.
The following table presents the calculation of basic and diluted net loss
per share:
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 11, 1997 THREE MONTHS
(INCEPTION) TO YEARS ENDED DECEMBER 31, ENDED MARCH 31,
DECEMBER 31, -------------------------- ---------------------------
1999 1998 1999 1999 2000
------------------ ----------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss........................ $(28,779,840) $(8,668,498) $(12,294,040) $ (2,907,242) $ (3,933,337)
============ =========== ============ ============ ============
Basic and diluted:
Weighted average common shares
outstanding................. 2,080,113 2,796,860 3,016,012 2,811,008 3,132,670
Less weighted average common
shares subject to
repurchase.................. -- (1,040,560) (115,563) (462,248) --
------------ ----------- ------------ ------------ ------------
Shares used to compute basic
and diluted net loss per
share....................... 2,080,113 1,756,300 2,900,449 2,348,760 3,132,670
============ =========== ============ ============ ============
Basic and diluted loss per
share......................... $ (13.84) $ (4.94) $ (4.24) $ (1.24) $ (1.26)
============ =========== ============ ============ ============
</TABLE>
F-47
<PAGE>
T.SQWARE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The total number of potential common shares excluded from the calculation of
diluted net loss per share is as follows:
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 11, FOR THREE MONTHS
1997 (INCEPTION) YEARS ENDED DECEMBER 31, MARCH 31,
TO DECEMBER 31, ------------------------- -------------------------
1999 1998 1999 1999 2000
---------------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Shares subject to
repurchase.................. 1,802,765 577,810 115,563 462,248 --
Potential dilutive securities:
Options..................... 968,158 1,840,658 2,283,536 1,942,269 2,634,622
Warrants.................... 3,999 3,999 3,999 3,999 3,999
Preferred stock............. 10,783,000 16,780,001 20,327,134 19,227,134 26,902,511
---------- ---------- ---------- ----------- -----------
13,557,922 19,202,468 22,730,232 21,635,650 29,541,132
========== ========== ========== =========== ===========
</TABLE>
These instruments have been excluded because their effect would be
antidilutive.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to the current
year presentation.
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 1999, the staff of the Securities and Exchange Commission
released Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition" to
provide guidance on the recognition, presentation, and disclosure of revenues in
financial statements. The Company believes that its revenue recognition policy
complied with the bulletin as of December 31, 1999.
In June 1998, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 133, "Accounting for Derivatives and Hedging
Activities" (FAS 133) which is effective as amended for fiscal years beginning
after June 15, 2000. FAS 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. Management does not
anticipate that the adoption of the new standard will have a significant effect
on earnings or the financial position of the Company.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation" (FIN 44). FIN 44 provides guidance for certain issues arising in
the application of APB Opinion No. 25 "Accounting for Stock Issued to
Employees." The Company believes that its accounting policy for stock issued to
employees is in compliance with FIN 44 as of December 31, 1999.
3. FOREIGN EXCHANGE CONTRACTS
At December 31, 1999, the Company held forward exchange contracts, all
having maturities of less than one year, to purchase French francs for U.S.
dollars in the amount of $3,190,445. At December 31, 1999, the unrealized loss
on these forward exchange contracts amounted to $47,733. The
F-48
<PAGE>
T.SQWARE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
3. FOREIGN EXCHANGE CONTRACTS (CONTINUED)
unrealized loss has been recorded in the Company's statement of operations and
approximates carrying value of these contracts. The Company did not hold any
forward exchange contracts at December 31, 1998.
4. PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------- -----------
1998 1999 2000
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Office and computer equipment............ $ 639,439 $1,310,027 $1,821,361
Furniture and fixtures................... 1,890,161 1,788,754 1,832,647
Software................................. 45,168 64,955 96,547
---------- ---------- ----------
2,574,768 3,163,736 3,750,555
Less accumulated depreciation............ 944,163 1,806,772 2,052,792
---------- ---------- ----------
$1,630,605 $1,356,964 $1,697,763
========== ========== ==========
</TABLE>
5. COMMITMENTS
The Company leases its office facilities under noncancelable operating
leases expiring in 2006. Future minimum lease payments under the noncancelable
operating leases at December 31, 1999 are as follows:
<TABLE>
<S> <C>
2000........................................................ $ 450,215
2001........................................................ 450,215
2002........................................................ 445,623
2003........................................................ 359,809
2004........................................................ 246,097
Thereafter.................................................. 212,815
----------
Total minimum payments...................................... $2,164,774
==========
</TABLE>
Total rent expense for operating leases was $464,554 in 1999, $406,250 in
1998, and $1,005,239 from February 11, 1997 (inception) to December 31, 1999.
6. BORROWINGS
In July 1997, the Company entered into a loan agreement that provided for
$2,250,000 of available borrowings, of which $750,000 related to a revolving
credit line and $1,500,000 related to an equipment loan. The agreement was
modified in April 1998, eliminating the revolving credit line and increasing the
equipment line of credit to $2,250,000. The equipment loan bears interest at
1.25% above the lender's prime rate and is payable in 48 equal monthly
installments of principal and interest through December 2002.
F-49
<PAGE>
T.SQWARE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
6. BORROWINGS (CONTINUED)
As of December 31, 1998 and 1999, $2,250,000 and $1,734,375, respectively,
were outstanding under the equipment loan. No amounts were outstanding under the
revolving line of credit at December 31, 1998 or 1999. The lender's prime rate
at December 31, 1999 was 8.00%.
Under the provisions of the loan agreement, the Company is required to
maintain certain financial ratios and other financial conditions. At
December 31, 1999, the Company was not in compliance with the provisions related
to a liquidity ratio and quarterly profitability minimums with such
noncompliance being waived by the lender. Substantially all of the Company's
assets are pledged as collateral for the loan. The loan was repaid subsequent to
December 31, 1999.
In 1998, the Company was granted an interest-free credit facility of
approximately $770,000 by the French government. Drawings can be made against
the credit facility on the achievement of certain research and development
targets. At December 31, 1999 and 1998, the Company had borrowed $308,761 under
this facility and had not performed sufficient research and development
activities to make further borrowings. The project has been abandoned by the
Company. Based on expenditures incurred, the Company is entitled to forgiveness
of the credit facility of approximately $245,700. The forgiveness will only be
recognized in the statement of operations when the Company receives approval
from the French government and is included in other long-term liabilties at
December 31, 1999. The balance of $63,000 is repayable in 2000 and is reflected
as other current liabilities at December 31, 1999. The total of $308,761 is
recorded within other long-term liabilities in the accompanying balance sheet at
December 31, 1998.
Future minimum principal payments under the equipment loan and credit
facility at December 31, 1999 are as follows:
<TABLE>
<S> <C>
2000........................................................ $ 699,468
2001........................................................ 647,021
2002........................................................ 594,989
2003........................................................ 47,243
----------
Total minimum payments...................................... 1,988,721
Less amount representing interest........................... 254,346
----------
1,734,375
Less current portion........................................ 562,500
----------
$1,171,875
==========
</TABLE>
7. STOCKHOLDERS' EQUITY
REDEEMABLE CONVERTIBLE PREFERRED STOCK
On January 26, 1999, the Company amended its Articles of Incorporation to
increase the number of authorized shares of preferred stock by 2,447,133 shares,
which were designated as Series B-1 preferred stock. The shares of Series B-1
preferred stock were sold at $1.50 per share. On September 28, 1999, the Company
further amended its Articles of Incorporation to increase the
F-50
<PAGE>
T.SQWARE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
7. STOCKHOLDERS' EQUITY (CONTINUED)
number of authorized shares of preferred stock by 1,100,000 shares, which were
designated as Series C preferred stock. The shares of Series C preferred stock
were sold at $3.00 per share. On January 19, 2000, the Company further amended
its articles of incorporation to increase the number of authorized shares of
preferred stock by 6,575,377, which were designated as Series D preferred stock.
The shares of Series D preferred stock were sold at $4.50 per share. Redeemable
convertible preferred stock at December 31, 1998 and 1999 and March 31, 2000 is
as follows:
<TABLE>
<CAPTION>
ISSUED AND
OUTSTANDING SHARES
-------------------------------------
PER SHARE DECEMBER 31, MARCH 31,
LIQUIDATION DESIGNATED ----------------------- -----------
SERIES PREFERENCE SHARES 1998 1999 2000
------ ----------- ---------- ---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
A.................... $1.00 8,560,000 8,560,000 8,560,000 8,560,000
B.................... $1.50 8,220,001 8,220,001 8,220,001 8,220,001
B-1.................. $1.50 2,447,133 -- 2,447,133 2,447,133
C.................... $3.00 1,100,000 -- 1,100,000 1,100,000
D.................... $4.50 6,575,377 -- -- 6,575,377
---------- ---------- ---------- ----------
26,902,511 16,780,001 20,327,134 26,902,511
========== ========== ========== ==========
</TABLE>
The holders of Series A, B, B-1, C, and D preferred stock are entitled to
receive noncumulative annual dividends of $0.08, $0.12, $0.12, $0.24, and $0.36
per share, respectively, when and if declared by the Board of Directors. No
dividends have been declared through December 31, 1999. The holders of preferred
stock have the right at any time to convert their shares into common stock on a
one-to-one basis, subject to adjustment for future dilution. In addition, each
share of preferred stock shall automatically be converted into shares of common
stock in the event of an initial public offering of the Company's common stock
with gross proceeds of at least $10,000,000 and a price per share of at least
$4.50, subject to adjustments for stock splits and stock dividends.
In addition, to the extent that preferred stock has not been converted or
redeemed prior to March 21, 2002, the holders of two-thirds of the Series A, B,
B-1, C, and D preferred stock can request redemption of their respective series.
The preferred stock is redeemable at a price per share of $1.00, $1.50, $1.50,
$3.00, and $4.50, respectively, plus any declared but unpaid dividends. The
Company shall redeem one-half of the redeemable shares at the date of the
request and the remaining one-half of the redeemable shares one year later.
In the event of liquidation, in addition to the amounts set forth in the
table above, the holders of preferred stock are entitled to all declared but
unpaid dividends for each outstanding share of Series A, B, B-1, C, and D
preferred stock. Any remaining assets will be distributed on a pro rata basis
among the holders of the common stock.
Except as otherwise required by law, each holder of convertible preferred
stock is entitled to one vote for each share of common stock into which the
shares of convertible preferred stock held by such holders are then convertible.
F-51
<PAGE>
T.SQWARE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
7. STOCKHOLDERS' EQUITY (CONTINUED)
At March 31, 2000, the Company has reserved 26,902,511 shares of common
stock for issuance on the conversion of the outstanding convertible preferred
stock.
In connection with the Company's Series A preferred stock financing,
warrants to purchase shares of Series A convertible preferred stock were issued
with an exercise price of $1.00 per share. At December 31, 1998 and 1999,
warrants to purchase 3,999 shares of Series A preferred stock were outstanding.
These warrants expire in February 2001.
COMMON STOCK REPURCHASE OPTION
In 1998, there were 1,802,763 shares of common stock issued to the Company's
founders that were subject to a repurchase option on issuance. Fifteen percent
of these shares vested at the end of the individuals' first year of employment,
and the remaining shares vest ratably over thirty-six months. In addition, in
the event of a change in control, as defined in the repurchase agreement, half
of those shares subject to the repurchase option at the date of the change will
be automatically released.
In the event that a founder ceases to be an employee of the Company, the
Company has the right to repurchase those shares subject to the repurchase
option at the original issuance price of $0.10. There were 1,040,560 and 115,563
shares of common stock subject to the repurchase option at December 31, 1998 and
1999, respectively.
NOTES RECEIVABLE FROM STOCKHOLDERS
The Company has accepted long-term full recourse promissory notes for the
issuance of common stock to its founders. These notes bear interest at 6% per
year and are payable over five years. The borrowers pledged 2,773,485 shares of
common stock as security against nonpayment of the loans.
In addition, a $140,000 full recourse loan, $85,000 outstanding at
December 31, 1999, bearing interest of 6.75% and a noninterest bearing loan of
$65,000 were granted to an officer and founder of the Company during the years
ended December 31, 1997 and 1998, respectively. Imputed interest on the
noninterest bearing loan approximates $4,500 and $4,700 for 1998 and 1999,
respectively.
STOCK OPTION PLANS
In March 1997, the Company adopted two stock option plans, the 1997 Stock
Option Plan (the U.S. Plan) and the 1997 Stock Option Plan for French Employees
(the French Plan).
The U.S. Plan provides for the granting of incentive stock options and
nonqualified stock options to employees and consultants. The Board of Directors
determines the term of each award and the award price. Under the U.S. Plan, the
exercise price of incentive stock options may be established at an amount not
less than the fair market value at the date of grant, and for employees owning
more than 10% of the voting power of all classes of stock of the Company or
subsidiary, the exercise price may be established at an amount not less than 10%
above fair market value at the date of grant. In the case of nonqualified stock
options, the exercise price may be established at an amount not less than 85% of
fair market value on the date of grant, and for employees owning more than 10%
of the voting power of all classes of stock of the Company or subsidiary, the
exercise price may be established at an amount
F-52
<PAGE>
T.SQWARE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
7. STOCKHOLDERS' EQUITY (CONTINUED)
not less than 10% above fair market value at the date of grant. Under the U.S.
Plan, options generally vest ratably over a four-year period commencing with the
grant date and expire no later than ten years from the date of grant.
The French Plan provides for the granting of stock options only to
employees. The Board of Directors determines the term of each award and the
award price. Under the French Plan, the exercise price of stock options may be
established at an amount not less than fair market value at the date of grant.
Under the French Plan, options generally vest over five years commencing with
the grant date and expire no later than nine and one-half years from the date of
grant.
F-53
<PAGE>
T.SQWARE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF MARCH 31, 2000 AND FOR
THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED
7. STOCKHOLDERS' EQUITY (CONTINUED)
At December 31, 1998 and 1999, 2,298,840 and 2,463,676 shares of common
stock, respectively, were reserved for issuance upon the exercise of stock
options or available for grant under the U.S. Plan and the French Plan. A
combined summary of activity under the U.S. Plan and the French Plan is as
follows:
<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS
------------------------------------------------
SHARES NUMBER PRICE WEIGHTED
AVAILABLE OF PER AVERAGE
FOR GRANT SHARES SHARE EXERCISE PRICE
---------- --------- ------------------- --------------
<S> <C> <C> <C> <C>
Balance at December 31, 1997................. 602,557 968,158 $ 0.10 $0.10
Shares reserved............................ 750,000 -- $ -- $ --
Options granted............................ (910,000) 910,000 $ 0.10-$0.15 $0.13
Options canceled........................... 15,625 (15,625) $ 0.10 $0.10
Options exercised.......................... -- (21,875) $ 0.10 $0.10
---------- ---------
Balance at December 31, 1998................. 458,182 1,840,658 $ 0.10-$0.15 $0.12
Shares reserved............................ 500,000 -- $ -- $ --
Options granted............................ (1,188,667) 1,188,667 $ 0.15-$0.35 $0.22
Options canceled........................... 410,625 (410,625) $ 0.10-$0.15 $0.14
Options exercised.......................... -- (335,164) $ 0.10-$0.35 $0.11
---------- ---------
Balance at December 31, 1999................. 180,140 2,283,536 $ 0.10-$0.35 $0.17
Shares reserved (unaudited)................ 1,380,000 -- $ -- --
Options granted (unaudited)................ (401,000) 401,000 $ 0.70 $0.70
Options canceled (unaudited)............... 45,834 (45,834) $ 0.10-$0.20 $0.18
Options exercised (unaudited).............. -- (4,040) $ 0.10-$0.35 $0.15
---------- ---------
Balance at March 31, 2000 (unaudited)........ 1,204,974 2,634,662 $0.25
========== =========
</TABLE>
A summary by range of exercise prices for optioned shares outstanding as of
December 31, 1999 from $0.10 to $0.35 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------- -------------------- WEIGHTED
WEIGHTED WEIGHTED AVERAGE
AVERAGE AVERAGE REMAINING
NUMBER OF EXERCISE NUMBER OF EXERCISE CONTRACTUAL
RANGE OF EXERCISE PRICES SHARES PRICE SHARES PRICE LIFE
------------------------ --------- -------- --------- -------- -----------
(YEARS)
<S> <C> <C> <C> <C> <C>
$0.10-$0.15................................ 1,477,536 $0.12 593,010 $0.11 4.6
$0.20-$0.35................................ 806,000 $0.25 500 $0.20 4.8
--------- -------
2,283,536 $0.07 593,510 $0.11 4.7
========= =======
</TABLE>
F-54
<PAGE>
T.SQWARE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF MARCH 31, 2000 AND FOR
THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED
7. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK-BASED COMPENSATION
As disclosed in Note 2, the Company has elected to follow APB Opinion
No. 25 and related interpretations in accounting for stock-based awards to
employees. Under APB Opinion No. 25, when the exercise price of the Company's
employee stock options equals the fair value of the underlying stock on the date
of grant, no compensation expense is recognized.
In January 2000, the Company approved an increase in the total authorized
number of shares under the US and French Plans of 1,119,760 and approved grants
to employees for options to purchase 401,000 shares of common stock at an
exercise price of $0.70 per share. The Company has recorded additional deferred
stock compensation of $1,594,266 with regard to these grants, which will be
amortized over the vesting period.
During the year ended December 31, 1999, the Company issued stock options to
employees with exercise prices which it believed represented the fair value of
the stock. In April 2000, after the Company entered into an agreement to merge
with Globespan, Inc., the Company reevaluated the fair value of its common
stock. In connection with the reevaluation, the Company recorded deferred stock
compensation of $2,162,895 representing the difference between the exercise
price and the deemed fair value of the Company's common stock at the date of
grant. Deferred compensation is included as a reduction of stockholders' equity
and is being amortized using the straight-line method over the vesting period,
generally four or five years. During 1999, the Company recorded amortization of
deferred compensation of approximately $215,446.
Pro forma information regarding net loss and net loss per share is required
by FAS 123 for awards granted after December 31, 1994 as if the Company had
accounted for its stock-based awards to employees under the fair value method of
FAS 123. The fair value of the Company's stock-based awards to employees was
estimated at the grant date using the Black-Scholes option pricing model with
the following assumptions: volatility of zero, a risk-free interest rate of
5.9%, an expected life equal to the option vesting period, and a dividend yield
of zero.
The weighted average fair value of options granted during 1998 and 1999 was
$0.13 and $2.23, respectively. Had compensation cost been determined in
accordance with FAS No. 123, net loss and net loss per share would have been
changed to the amounts indicated below:
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------- -------------------------
1998 1999 1999 2000
----------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net loss:
As reported............. $(8,668,498) $(12,294,040) $(2,907,242) $(3,933,337)
Pro forma............... $(8,668,498) $(12,299,810) $(2,907,242) $(3,933,337)
Basic and diluted net loss
per share:
As reported............. $ (4.94) $ (4.23) $ (1.24) $ (1.26)
Pro forma............... $ (4.94) $ (4.24) $ (1.24) $ (1.26)
</TABLE>
F-55
<PAGE>
T.SQWARE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF MARCH 31, 2000 AND FOR
THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED
8. INCOME TAXES
Due to operating losses and the Company's inability to recognize an income
tax benefit from these losses, there is no provision for income taxes for the
period from February 11, 1997 (inception) to December 31, 1999, for the year
ended December 31, 1999, and for the three month periods ended March 31, 1999
and 2000.
In 1998, the Company had an income tax provision of approximately $583,500,
which consisted of the write-off of foreign research and development refundable
tax credits previously recorded as a deferred tax asset.
The reconciliation of income tax expense (benefit) attributable to
continuing operations computed at the U.S. federal statutory rates to income tax
expense (benefit) for the fiscal years ended December 31, 1998 and 1999 is as
follows:
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 11, 1997
(INCEPTION) TO YEARS ENDED DECEMBER 31,
DECEMBER 31, -------------------------
1999 1998 1999
----------------- ----------- -----------
<S> <C> <C> <C>
Tax benefit at U.S. statutory rate.................. $(9,613,000) $(2,749,000) $(4,008,000)
U.S. loss for which no tax benefit is currently
recognizable...................................... 8,772,000 1,549,000 5,570,000
Foreign loss for which no tax benefit is currently
recognizable...................................... 2,403,000 1,200,000 --
Foreign income offset by net operating loss
carryforwards..................................... (1,562,000) -- (1,562,000)
Foreign research and development refundable tax
credits........................................... -- 583,500 --
----------- ----------- -----------
$ -- $ 583,500 $ --
=========== =========== ===========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1998 1999
----------- ------------
<S> <C> <C>
Deferred tax assets:
U.S. net operating loss carryforwards..................... $ 2,363,000 $ 7,800,000
Foreign net operating loss carryforwards.................. 2,346,000 785,000
Capitalized technology.................................... 1,688,000 1,751,000
Other....................................................... 28,000 (5,000)
Valuation allowance......................................... (6,425,000) (10,331,000)
----------- ------------
Net deferred tax assets..................................... $ -- $ --
=========== ============
</TABLE>
Realization of deferred tax assets is dependent on future earnings, if any,
the timing and the amount of which are uncertain. Accordingly, a valuation
allowance in an amount equal to the deferred tax assets at December 31, 1998 and
1999 has been established to reflect these uncertainties. The
F-56
<PAGE>
T.SQWARE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF MARCH 31, 2000 AND FOR
THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED
8. INCOME TAXES (CONTINUED)
change in the valuation allowance was a net increase of approximately $3,207,000
and $3,906,000 for the years ended December 31, 1998 and 1999.
As of December 31, 1999, the Company has federal and California net
operating loss carryforwards of approximately $21,691,000 and $17,284,000,
respectively, which expire in various years beginning in 2005 through 2019, if
not utilized. Utilization of net operating loss and tax credit carryforwards may
be subject to a substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code of 1986, as amended, and
similar state provisions. The annual limitation may result in the expiration of
net operating loss and tax credit carryforwards before full utilization.
The Company also has a foreign net operating loss carryforward of
approximately $2,378,000, which will expire in 2002 through 2004 if not
utilized.
9. EMPLOYEE BENEFIT PLAN
The Company adopted a 401(k) savings and retirement plan in September 1997.
The plan covers substantially all employees. The Company does not match employee
contributions.
10. SEGMENT DATA
The Company operates in one reportable segment, the design, development, and
marketing of digital controllers for communication applications.
Information related to the Company's geographic segments for the year ended
December 31, 1999 is as follows:
<TABLE>
<CAPTION>
U.S. FRANCE ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales.............................. $ 604,902 $ 119,163 $ (87,939) $ 636,126
Research and development............... 45,043 6,890,645 287,439 6,847,749
Selling, general, and administrative... 16,126,131 -- (10,003,729) 6,122,402
Cost recoveries........................ -- (10,003,729) 10,003,729 --
------------ ------------ ------------ ------------
Loss from operations................... $(15,566,272) $ 3,232,247 $ -- $(12,334,025)
============ ============ ============ ============
Identifiable assets.................... $ 13,857,730 $ 7,221,463 $(16,679,673) $ 4,399,520
============ ============ ============ ============
</TABLE>
F-57
<PAGE>
T.SQWARE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION AS OF MARCH 31, 2000 AND FOR
THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED
10. SEGMENT DATA (CONTINUED)
Information related to the Company's geographic segments for the year ended
December 31, 1998 is as follows:
<TABLE>
<CAPTION>
U.S. FRANCE ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales.............................. $ 166,134 $ 754,979 $ (716,000) $ 205,113
Research and development............... 78,658 3,125,631 -- 3,204,289
Selling, general, and administrative... 2,798,778 2,640,974 -- 5,439,752
------------ ------------ ------------ ------------
Loss from operations................... $ (2,711,302) $ (5,011,626) $ (716,000) $ (8,438,928)
============ ============ ============ ============
Identifiable assets.................... $ 4,357,760 $ 4,651,924 $ -- $ 9,009,684
============ ============ ============ ============
</TABLE>
In 1998, two customers accounted for 30% and 54% of the Company's revenues.
In 1999, four customers accounted for 24%, 19%, 15%, and 13% of the Company's
revenues. The Company had no other customers accounting for more than 10% of
revenues.
11. SUBSEQUENT EVENTS
On April 20, 2000, the Company entered into an agreement and plan of merger
with Globespan, Inc. and its wholly owned subsidiary, Needles Acquisition Corp.
(Needles). In accordance with the agreement, the Company will merge with Needles
with the Company being the surviving entity. All of the outstanding shares of
the Company will be exchanged for a minimum of 2,200,000 shares of
Globespan, Inc.'s common stock.
In April 2000, the Company and Sun Microsystems, Inc. (Sun) agreed to amend
their License and Distribution Agreement (the Agreement) dated August 18, 1994,
under which the Company licensed technology from Sun. Under the terms of the
amendment, the Company agreed to pay a total of $12,300,000 to Sun to settle its
royalty obligations under the Agreement. The payments due under the amendment
are as follows.
<TABLE>
<S> <C>
Within 30 days............................................ $ 3,075,000
July 31, 2000............................................. 3,075,000
October 31, 2000.......................................... 3,075,000
January 31, 2001.......................................... 3,075,000
$12,300,000
===========
</TABLE>
F-58
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of iCompression, Inc.:
We have audited the accompanying balance sheets of iCompression, Inc. (a
development stage company) as of December 31, 1999 and 1998, and the related
statements of operations, mandatorily redeemable convertible preferred stock and
shareholders' deficit, and cash flows for the years ended December 31, 1999 and
1998 and for the period from August 1, 1996 (inception) through December 31,
1999 (cumulative). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 1999 and 1998,
and the results of its operations and its cash flows for the periods stated
above in conformity with accounting principles generally accepted in the United
States of America.
DELOITTE & TOUCHE LLP
San Jose, California
April 21, 2000
(May 16, 2000 as to the second paragraph of Note 8)
F-59
<PAGE>
ICOMPRESSION, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------------- ------------
1998 1999 2000
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 1,433,014 $ 4,110,959 $ 18,781,229
Accounts receivable....................................... 8,210 82,930 119,561
Prepaid expenses and other................................ 203,678 305,111 340,747
----------- ------------ ------------
Total current assets.................................. 1,644,902 4,499,000 19,241,537
PROPERTY AND EQUIPMENT--Net................................. 1,171,451 1,513,116 1,658,017
OTHER ASSETS................................................ 137,355 53,371 57,662
----------- ------------ ------------
TOTAL ASSETS................................................ $ 2,953,708 $ 6,065,487 $ 20,957,216
=========== ============ ============
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable.......................................... $ 907,510 $ 496,925 $ 567,940
Accrued liabilities....................................... 11,636 143,262 223,251
Current portion of long-term debt......................... 85,742 427,785 198,144
Current portion of capital lease obligations.............. 19,260 16,999 799,873
----------- ------------ ------------
Total current liabilities............................. 1,024,148 1,084,971 1,789,208
LONG-TERM DEBT.............................................. 161,839 833,610 2,658,335
COMMITMENTS AND CONTINGENCIES (Note 4 and 8)
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK, no par
value; 9,300,000 shares authorized
Series A, 1,600,000 shares designated; 1,600,000 shares
outstanding; (aggregate liquidation preference of
$1,000,000)............................................. 958,277 958,277 958,277
Series B, 3,200,000 shares designated; 1,600,000 shares
outstanding; (aggregate liquidation preference of
$1,000,000)............................................. 729,509 729,509 729,509
Series C, 4,500,000 shares designated; 3,990,000 shares
outstanding; (aggregate liquidation preference of
$2,493,750)............................................. 2,464,966 2,464,966 2,464,966
Series D, 9,000,000 shares designated; 8,859,649 shares
outstanding; (aggregate liquidation preference of
$10,100,000)............................................ -- 10,093,278 10,093,278
Series E, 5,000,000 shares designated; 4,777,770 shares
outstanding; (aggregate liquidation preference of
$15,000,000)............................................ -- -- 14,974,152
SHAREHOLDERS' DEFICIT:
Common stock, no par value, 40,000,000 shares authorized;
shares outstanding: 1999--15,787,852; 1998--9,692,295... 715,636 11,923,246 14,812,081
Notes receivable from shareholders........................ -- (479,250) (465,750)
Deferred compensation..................................... -- (9,860,680) (11,942,884)
Deficit accumulated during development stage.............. (3,100,667) (11,682,440) (15,113,956)
----------- ------------ ------------
Total shareholders' deficit........................... (2,385,031) (10,099,124) (12,710,509)
----------- ------------ ------------
TOTAL LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND SHAREHOLDERS' EQUITY.................. $ 2,953,708 $ 6,065,487 $ 20,957,216
=========== ============ ============
</TABLE>
See notes to financial statements.
F-60
<PAGE>
ICOMPRESSION, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 1,
1996 YEAR ENDED FOR THREE MONTHS
(INCEPTION) DECEMBER 31, ENDED MARCH 31,
TO DECEMBER 31, ------------------------- -------------------------
1999 1998 1999 1999 2000
--------------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
PRODUCT REVENUE.............. $ 426,336 $ 27,292 $ 333,794 $ 44,650 $ 295,072
COSTS AND EXPENSES:
Cost of sales.............. 127,828 9,552 118,276 15,952 103,275
Research and development... 7,934,845 1,529,094 5,691,135 951,771 2,259,200
General and
administrative........... 1,307,837 397,853 662,048 143,508 147,523
Selling and marketing...... 1,824,024 277,473 1,546,056 293,975 543,768
Stock compensation......... 1,001,388 -- 1,001,388 -- 819,696
------------ ----------- ----------- ----------- -----------
Total cost and
expenses............. 12,195,922 2,213,972 9,018,903 1,405,206 3,873,462
------------ ----------- ----------- ----------- -----------
OPERATING LOSS............... (11,769,586) (2,186,680) (8,685,109) (1,360,556) (3,578,390)
------------ ----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income (expense)--
net...................... 91,427 (21,752) 108,827 (13,153) 128,874
Other income
(expense)--net........... 88,119 (7,079) (4,691) (1,100) 18,000
------------ ----------- ----------- ----------- -----------
Total other income
(expense)............ 179,546 (28,831) 104,136 (14,253) 146,874
------------ ----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAXES..... (11,590,040) (2,215,511) (8,580,973) (1,374,809) (3,431,516)
------------ ----------- ----------- ----------- -----------
PROVISION FOR INCOME TAXES... 2,400 800 800 -- --
------------ ----------- ----------- ----------- -----------
NET LOSS..................... $(11,592,440) $(2,216,311) $(8,581,773) $(1,374,809) $(3,431,516)
============ =========== =========== =========== ===========
</TABLE>
See notes to financial statements.
F-61
<PAGE>
ICOMPRESSION, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
SHAREHOLDERS' DEFICIT
<TABLE>
MANDATORY REDEEMABLE COVERTIBLE PREFERRED STOCK
--------------------------------------------------------------------------------
SERIES A SERIES B SERIES C SERIES D
-------------------- -------------------- ---------------------- ---------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES
--------- -------- --------- -------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, August 1, 1996 (inception)............ $ $ $
Common stock issued in August 1996 and
contributed capital...........................
Net income......................................
--------- -------- --------- -------- --------- ---------- ---------
BALANCES, December 31, 1996.....................
Issuance of Series A preferred shares ($.625 per
share), net of issuance costs of $41,723 in
February 1997................................. 1,600,000 958,277
Issuance of Series B preferred shares ($.625 per
share), and common stock warrants, net of
issuance costs of $270,491 in May 1997........ 1,600,000 729,509
Issuance of options for services................
Net loss........................................
--------- -------- --------- -------- --------- ---------- ---------
BALANCES, December 31, 1997..................... 1,600,000 958,277 1,600,000 729,509
Exercise of stock options.......................
Sales of common stock ($.06 per share)..........
Repurchase of common stock......................
Issuance of Series C preferred shares ($.625 per
share), net of issuance costs of $28,784 in
October 1998.................................. 3,590,000 2,214,966
Conversion of notes payable into Series C
preferred stock............................... 400,000 250,000
Issuance of common stock ($.06 per share) in
connection with Series C financing net of
issuance costs of $153........................
Issuance of common stock pursuant to
antidilution provisions.......................
Issuance of options for services................
Net loss........................................
--------- -------- --------- -------- --------- ---------- ---------
BALANCES, December 31, 1998..................... 1,600,000 958,277 1,600,000 729,509 3,990,000 2,464,966
Exercise of stock options.......................
Sales of common stock ($.06 per share)..........
Repurchase of common stock......................
Common stock issued for services................
Issuance of Series D preferred shares (at $1.14
per share), net of issuance costs of $6,722 in
March 1999.................................... 8,859,649
Issuance of options for services................
Deferred compensation...........................
Amortization of deferred stock compensation.....
Net loss........................................
--------- -------- --------- -------- --------- ---------- ---------
BALANCES, December 31, 1999..................... 1,600,000 $958,277 1,600,000 $729,509 3,990,000 $2,464,966 8,859,649
--------- -------- --------- -------- --------- ---------- ---------
Exercise of stock options (unaudited)...........
Sales of common stock ($.06 per share)
(unaudited)...................................
Repurchase of common stock (unaudited)..........
Common stock issued for services (unaudited)....
Issuance of Series E preferred shares (at $3.14
per share), net of issuance costs of $ 25,848
in February 2000 (unaudited)..................
Issuance of options for services (unaudited)....
Deferred compensation (unaudited)...............
Notes receivable repayments (unaudited).........
Amortization of deferred stock compensation
(unaudited)...................................
Net loss (unaudited)............................
--------- -------- --------- -------- --------- ---------- ---------
BALANCES, March 31, 2000 (unaudited)............ 1,600,000 $958,277 1,600,000 $729,509 3,990,000 $2,464,966 8,859,649
========= ======== ========= ======== ========= ========== =========
<S> <C> <C> <C> <C> <C> <C>
MANDATORY REDEEMABLE COVERTIBLE
SHAREHOLDERS' DEFICIT
PREFERRED STOCK -----------------------------------------
-------------------------------------
SERIES E COMMON STOCK NOTES
----------------------- --------------------------- RECEIVABLE
----------- ----------------------- --------------------------- FROM
AMOUNT SHARES AMOUNT SHARES AMOUNT SHAREHOLDERS
----------- --------- ----------- ---------- -------------- -----------
BALANCES, August 1, 1996 (inception)............ $ $ $
Common stock issued in August 1996 and
contributed capital........................... 4,000,000 101,000
Net income......................................
----------- --------- ----------- ---------- -------------- ---------
BALANCES, December 31, 1996..................... 4,000,000 $ 101,000
Issuance of Series A preferred shares ($.625 per
share), net of issuance costs of $41,723 in
February 1997.................................
Issuance of Series B preferred shares ($.625 per
share), and common stock warrants, net of
issuance costs of $270,491 in May 1997........ 270,491
Issuance of options for services................ 2,094
Net loss........................................
----------- --------- ----------- ---------- -------------- ---------
BALANCES, December 31, 1997..................... 4,000,000 373,585
Exercise of stock options....................... 677,000 40,620
Sales of common stock ($.06 per share).......... 1,175,295 70,518
Repurchase of common stock...................... (960,000) (57,600)
Issuance of Series C preferred shares ($.625 per
share), net of issuance costs of $28,784 in
October 1998..................................
Conversion of notes payable into Series C
preferred stock...............................
Issuance of common stock ($.06 per share) in
connection with Series C financing net of
issuance costs of $153........................ 3,300,000 197,847
Issuance of common stock pursuant to
antidilution provisions....................... 1,500,000 90,000
Issuance of options for services................ 666
Net loss........................................
----------- --------- ----------- ---------- -------------- ---------
BALANCES, December 31, 1998..................... 9,692,295 715,636
Exercise of stock options....................... 7,510,000 605,325 (479,250)
Sales of common stock ($.06 per share).......... 16,000 1,920
Repurchase of common stock...................... (1,438,333) (276,300)
Common stock issued for services................ 7,890 14,597
Issuance of Series D preferred shares (at $1.14
per share), net of issuance costs of $6,722 in
March 1999.................................... 10,093,278
Issuance of options for services................ 136,578
Deferred compensation........................... 10,725,490
Amortization of deferred stock compensation.....
Net loss........................................
----------- --------- ----------- ---------- -------------- ---------
BALANCES, December 31, 1999..................... $10,093,278 15,787,852 11,923,246 $(479,250)
----------- --------- ----------- ---------- -------------- ---------
Exercise of stock options (unaudited)........... 169,293 11,210
Sales of common stock ($.06 per share)
(unaudited)...................................
Repurchase of common stock (unaudited).......... (349,388) (24,275)
Common stock issued for services (unaudited)....
Issuance of Series E preferred shares (at $3.14
per share), net of issuance costs of $ 25,848
in February 2000 (unaudited).................. 4,777,070 14,974,152
Issuance of options for services (unaudited).... 69,363
Deferred compensation (unaudited)............... 2,832,537
Notes receivable repayments (unaudited)......... 13,500
Amortization of deferred stock compensation
(unaudited)...................................
Net loss (unaudited)............................
----------- --------- ----------- ---------- -------------- ---------
BALANCES, March 31, 2000 (unaudited)............ $10,093,278 4,777,070 $14,974,152 15,607,757 $14,812,081.00 $(465,750)
=========== ========= =========== ========== ============== =========
<S> <C> <C> <C>
SHAREHOLDERS' DEFICIT
------------------------------------------
GAIN
(DEFICIT)
ACCUMULATED
DEFERRED DURING
COMPEN- DEVELOPMENT
SATION STAGE TOTAL
------------ ------------ ------------
BALANCES, August 1, 1996 (inception)............ $ $ $
Common stock issued in August 1996 and
contributed capital........................... 101,000
Net income...................................... 7,823 7,823
------------ ------------ ------------
BALANCES, December 31, 1996..................... $ 7,823 $ 108,823
Issuance of Series A preferred shares ($.625 per
share), net of issuance costs of $41,723 in
February 1997................................. --
Issuance of Series B preferred shares ($.625 per
share), and common stock warrants, net of
issuance costs of $270,491 in May 1997........ 270,491
Issuance of options for services................ 2,094
Net loss........................................ (802,179) (802,179)
------------ ------------ ------------
BALANCES, December 31, 1997..................... (794,356) (420,771)
Exercise of stock options....................... 40,620
Sales of common stock ($.06 per share).......... 70,518
Repurchase of common stock...................... (57,600)
Issuance of Series C preferred shares ($.625 per
share), net of issuance costs of $28,784 in
October 1998.................................. --
Conversion of notes payable into Series C
preferred stock............................... --
Issuance of common stock ($.06 per share) in
connection with Series C financing net of
issuance costs of $153........................ 197,847
Issuance of common stock pursuant to
antidilution provisions....................... (90,000) --
Issuance of options for services................ 666
Net loss........................................ (2,216,311) (2,216,311)
------------ ------------ ------------
BALANCES, December 31, 1998..................... (3,100,667) (2,385,031)
Exercise of stock options....................... 126,075
Sales of common stock ($.06 per share).......... 1,920
Repurchase of common stock...................... (276,300)
Common stock issued for services................ 14,597
Issuance of Series D preferred shares (at $1.14
per share), net of issuance costs of $6,722 in
March 1999.................................... --
Issuance of options for services................ 136,578
Deferred compensation........................... (10,725,490)
Amortization of deferred stock compensation..... 864,810 864,810
Net loss........................................ (8,581,773) (8,581,773)
------------ ------------ ------------
BALANCES, December 31, 1999..................... $ (9,860,680) $(11,682,440) $(10,099,124)
------------ ------------ ------------
Exercise of stock options (unaudited)........... 11,210
Sales of common stock ($.06 per share)
(unaudited)...................................
Repurchase of common stock (unaudited).......... (24,275)
Common stock issued for services (unaudited)....
Issuance of Series E preferred shares (at $3.14
per share), net of issuance costs of $ 25,848
in February 2000 (unaudited).................. --
Issuance of options for services (unaudited).... 69,363
Deferred compensation (unaudited)............... (2,832,537) --
Notes receivable repayments (unaudited)......... 13,500
Amortization of deferred stock compensation
(unaudited)................................... 750,333 750,333
Net loss (unaudited)............................ (3,431,516) (3,431,516)
------------ ------------ ------------
BALANCES, March 31, 2000 (unaudited)............ $(11,942,884) $(15,113,956) $(12,710,509)
============ ============ ============
</TABLE>
See notes to financial statements.
F-62
<PAGE>
ICOMPRESSION, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 1,
1996 YEARS ENDED FOR THREE MONTHS
(INCEPTION) DECEMBER 31, ENDED MARCH 31,
TO DECEMBER 31, ------------------------- -------------------------
1999 1998 1999 1999 2000
--------------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................ $(11,592,440) $(2,216,311) $(8,581,773) $(1,374,809) $(3,431,516)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization................. 886,926 169,043 623,541 127,653 205,075
Loss (gain) on disposal of property and
equipment................................... 7,452 (7,079) 14,531 1,100 --
Amortization of deferred stock compensation... 864,810 -- 864,810 -- 750,333
Issuance of common stock options for
services.................................... 139,338 666 136,578 -- 69,363
Issuance of common stock for services......... 14,597 -- 14,597 -- --
Change in assets and liabilities:
Accounts receivable......................... (82,930) (7,227) (74,720) 2,210 (36,631)
Prepaid expenses............................ (305,111) (149,733) (101,433) (92,450) (35,636)
Accounts payable............................ 496,925 914,767 (410,585) (529,030) 71,015
Accrued liabilities......................... 143,262 (7,319) 131,626 20,486 79,989
------------ ----------- ----------- ----------- -----------
Net cash used for operating activities.... (9,427,171) (1,303,193) (7,382,828) (1,844,840) (2,328,008)
------------ ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment purchases................ (2,497,914) (1,043,589) (1,031,688) (275,703) (348,309)
Proceeds from sale of equipment................. 90,420 38,470 51,950 200 --
------------ ----------- ----------- ----------- -----------
Net cash used for investing activities.... (2,407,494) (1,005,119) (979,738) (275,503) (348,309)
------------ ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable..................... 1,716,758 591,400 1,346,058 836,891 2,535,565
Repayment of notes payable...................... (438,364) (90,599) (334,504) (67,918) (157,607)
Proceeds from issuance of preferred stock,
net........................................... 14,516,521 2,214,966 10,093,278 -- 14,974,152
Notes receivable repayments..................... -- -- -- -- 13,500
Capital contributions........................... 100,500 -- -- -- --
Proceeds from issuance of common stock.......... 437,480 308,985 127,995 67,098 11,210
Repurchase of common stock...................... (333,900) (57,600) (276,300) -- (24,275)
Other assets.................................... (53,371) (138,273) 83,984 110,600 (5,958)
------------ ----------- ----------- ----------- -----------
Net cash provided by financing
activities.............................. 15,945,624 2,828,879 11,040,511 946,671 17,346,587
------------ ----------- ----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS..................................... 4,110,959 520,567 2,677,945 (1,173,672) 14,670,270
CASH AND CASH EQUIVALENTS, Beginning of period.... -- 912,447 1,433,014 1,433,014 4,110,959
------------ ----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, End of period.......... $ 4,110,959 $ 1,433,014 $ 4,110,959 $ 259,342 $18,781,229
============ =========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest........................................ $ 219,330 $ 32,359 $ 186,971 $ 21,384 $ 43,667
------------ ----------- ----------- ----------- -----------
Income taxes.................................... $ 2,400 $ 800 $ 800 $ -- $ 2,400
============ =========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS:
Assets acquired under capital leases............ $ 117,381 $ 53,195 $ 28,377 $ -- $ 37,593
============ =========== =========== =========== ===========
Conversion of notes payable into preferred
stock......................................... $ 250,000 $ 250,000 $ -- $ -- $ --
============ =========== =========== =========== ===========
Common stock issued for note receivable......... $ 479,250 $ -- $ 479,250 $ 294,000 $ --
============ =========== =========== =========== ===========
</TABLE>
See notes to financial statements.
F-63
<PAGE>
ICOMPRESSION, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS--iCompression Inc. (the Company), was incorporated in California on
August 1, 1996 to design, develop and market a real time MPEG-2 video/audio
encoder using a single integrated circuit. The Company's primary activities to
date have consisted of raising financing and product development. The Company's
revenues to date have consisted of evaluation kits sold to potential customers
of the Company's products under development. The Company expects to complete its
product development in the year 2000 and exit the development stage.
The Company is subject to the risks associated with a development state
enterprise, including the need to successfully develop, demonstrate and refine
its product, develop its marketing and distribution channels, recruit and retain
key employees, and continue to raise financing sufficient to accomplish its
business objectives.
SIGNIFICANT ESTIMATES--The preparation of financial statements in accordance
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
CASH AND EQUIVALENTS--The Company considers all highly liquid debt
instruments purchased with a remaining maturity of three months or less to be
cash equivalents. The Company's cash equivalents are maintained with high
quality credit institutions and their recorded cost approximates their fair
market value.
CONCENTRATION OF CREDIT RISK--Financial instruments which potentially
subject the Company to concentrations of credit risk consist primarily of cash
equivalents. Substantially all of the Company's cash equivalents consist of
certificates of deposit and are held with two financial institutions.
PROPERTY AND EQUIPMENT--Property and equipment are stated at cost and are
depreciated over their estimated useful lives of three to seven years using the
straight-line method.
INCOME TAXES--The Company accounts for income taxes using an asset and
liability approach. Deferred tax assets are recognized for future deductions and
operating loss carryforwards, net of a valuation allowance to reduce net
deferred tax assets to amounts that are more likely than not to be realized.
REVENUE RECOGNITION--Product revenue consists of revenue from evaluation
kits, and is recognized upon shipment.
RESEARCH AND DEVELOPMENT--Research and development expenses are charged to
operations as incurred.
STOCK-BASED COMPENSATION--The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with APB No. 25,
"Accounting for Stock Issued to Employees." The Company accounts for equity
instruments issued to nonemployees in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation", and Emerging Issues Task Force ("EITF")
Issue No. 96-18, "Accounting for Equity Instruments That Are Issued To Other
Than Employees For Acquiring or in Conjunction with
F-64
<PAGE>
ICOMPRESSION, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Selling, Goods or Services", which require that the fair value of such
instruments be recognized as an expense over the period in which the related
services are received.
COMPREHENSIVE INCOME--The Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income," which requires an
enterprise to report, by major components and as a single total, the change in
net assets during the period from non-owner sources. At December 31, 1999 and
1998, there is no difference between comprehensive income and net income.
RECENTLY ISSUED ACCOUNTING STANDARD--In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This statement requires companies to record derivatives on
the balance sheet as assets or liabilities, measured at fair value. Gains and
losses resulting from changes in the fair market values of those derivative
instruments would be accounted for depending on the use of the instrument and
whether it qualifies for hedge accounting. SFAS 133 will be effective for the
Company's year ending December 31, 2001. Management does not expect this
Statement to have a significant impact on the Company's financial condition or
results of operations.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1998 1999
---------- ----------
<S> <C> <C>
Software............................................ $ 974,505 $1,563,972
Computers and equipment............................. 382,161 765,983
Furniture and fixtures.............................. 55,245 23,594
---------- ----------
Total............................................... 1,411,911 2,353,549
Accumulated depreciation............................ (240,460) (840,433)
---------- ----------
Property and equipment, net......................... $1,171,451 $1,513,116
========== ==========
</TABLE>
3. BORROWING ARRANGEMENTS
During 1998, the Company entered into loan and security agreements under
which the Company could borrow up to $1,200,000. Borrowings under these
arrangements bear interest at 8% and are collateralized by the assets acquired
under the lines. Principal and interest are repayable in 36 monthly installments
from the date of the borrowings. The Company issued warrants to purchase common
stock in connection with this financing (Note 5).
Prior to 1998, the Company had entered into similar agreements with the
lender under similar terms. The Company issued warrants to purchase common stock
on the date of the agreement and agreed to issue additional warrants to purchase
common stock at the date of the next round of venture financing, which took
place in fiscal 1998 (see Note 5).
F-65
<PAGE>
ICOMPRESSION, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000)
3. BORROWING ARRANGEMENTS (CONTINUED)
Future maturities on the principal of the notes payable at December 31, 1999
are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
2000........................................................ $ 427,785
2001........................................................ 447,575
2002........................................................ 386,035
----------
$1,261,395
==========
</TABLE>
4. LEASE COMMITMENTS
The Company leases its office facilities under various noncancellable
operating leases which expire through March 2001. The Company also leases
certain property and equipment under equipment leases.
Future minimum lease payments under these leases are as follows:
<TABLE>
<CAPTION>
FACILITIES CAPITAL
LEASE LEASES
---------- --------
<S> <C> <C>
2000..................................................... $594,000 $17,746
2001..................................................... 148,500 --
-------- -------
$742,500 17,746
========
Less amount representing interest........................ 747
-------
Present value of capital lease obligations............... 16,999
Current portion.......................................... 16,999
-------
Long-term portion of capital lease obligations........... $ --
=======
</TABLE>
Rent expense was approximately $342,000, $89,000, $462,405, $69,484 and
$148,500 in 1999, 1998, the period from August 1, 1996 (inception) through
December 31, 1999, the three months ended March 31, 1999 and 2000, respectively.
5. MANDATORY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' DEFICIT
MANDATORY REDEEMABLE CONVERTIBLE PREFERRED STOCK
Significant terms of the Series A, B, C and D convertible preferred stock
are as follows:
- Each share of Series A preferred stock, Series B preferred stock,
Series C preferred stock and Series D preferred stock shall be
convertible, at the option of the holder, into such number of shares of
common stock as is determined by dividing the original Series A issue
price, Series B issue price, Series C issue price or Series D issue price,
respectively, by the conversion price (subject to adjustment for
antidilution) applicable to such share on the date the certificate is
F-66
<PAGE>
ICOMPRESSION, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000)
5. MANDATORY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' DEFICIT
(CONTINUED)
surrendered for conversion. In fiscal 1998, the Company issued 1,500,000
shares of common stock to Series A preferred stockholders pursuant to their
antidilution rights.
- Each share will automatically convert into shares of common stock at the
conversion price in effect for such shares upon the earlier of (i) the
sale of common stock in a firm commitment underwritten public offering
pursuant to a registration statement under the Securities Act of 1933, as
amended, the offering price of which is not less than $5.00 per share and
$7,500,000 in the aggregate or (ii) the date specified by written consent
or agreement of the holders of not less than two-thirds of the then
outstanding shares of preferred stock.
- Each share of Series A, Series B, Series C and Series D preferred stock
have voting rights equivalent to the number of shares of common stock into
which it is convertible.
- Each share of Series A, Series B, Series C preferred stock is entitled to
a dividend of $0.03125 per share, and each share of Series D preferred
stock is entitled to a dividend of $0.057 per share, when and if declared
by the Board of Directors of the Company. Such dividends are not
cumulative.
- In the event of liquidation, dissolution or winding up of the Company, the
holders of Series A, Series B and Series C preferred stock shall receive
an amount equal to $0.625 per share and holders of Series D preferred
stock shall receive an amount equal to $1.14 per share plus an amount
equal to declared but unpaid dividends on each share. If the available
amount is insufficient to permit the payment to the holders of Series A,
Series B, Series C and Series D preferred stock of their full preferential
amounts, then all remaining available funds and assets shall be
distributed among the holders of the then outstanding Series A preferred
stock, Series B preferred stock, Series C preferred stock and Series D
preferred stock pro rata, on an equal priority according to their
respective liquidation preferences. If there are any available funds and
assets remaining after the payment or distribution to the holders of
Series A, Series B, Series C and Series D preferred stock, then all
remaining available funds and assets shall be distributed among the
holders of the then outstanding common stock and the preferred stock pro
rata according to the number of shares of common stock or the number of
shares of common stock into which the preferred share held are
convertible. A sale of substantially all of the Company's assets or a
change in control is treated as a deemed liquidation.
STOCK SPLITS
During 1997, the Company effected a stock split whereby forty shares of
common stock were issued for every one share of common stock. All numbers in
these financial statements have been adjusted to give effect to this stock
split.
STOCK WARRANTS
In connection with the 1998 borrowing arrangement, the Company issued a
warrant to purchase 84,211 shares of common stock at an exercise price of $0.855
per share. The warrant is exercisable through 2005. The estimated fair value of
these warrants is immaterial.
F-67
<PAGE>
ICOMPRESSION, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000)
5. MANDATORY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' DEFICIT
(CONTINUED)
In connection with a previous borrowing arrangement prior to 1998 (see
Note 3), the Company issued a warrant to acquire 114,028 shares of common stock
at an exercise price of $0.06 per share. The estimated fair value of these
warrants is immaterial.
STOCK OPTION PLAN
Under the 1997 and 1998 Stock Options Plans (the "Plans"), the Company may
grant options to purchase up to 12,924,796 shares of common stock to employees,
directors and service providers at prices not less than the fair market value at
date of grant for incentive stock options and not less than 85% of fair market
value for nonstatutory options. These options generally vest over four years and
expire ten years from the date of grant and are exercisable at any time after
the date of grants. Options exercised prior to vesting are subject to the
Company's repurchase right. At December 31, 1999, 5,301,078 shares of common
stock are subject to repurchase.
Option activity under the Plans is as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF EXERCISE
SHARES PRICE
---------- --------
<S> <C> <C>
Balance, January 1, 1997............................... -- $ --
Granted (weighted average fair value of $0.02)......... 757,000 0.06
---------- -----
Outstanding, December 31, 1997......................... 757,000 0.06
Granted (weighted average fair value of $0.02 per
share)............................................... 6,615,000 0.06
Exercised.............................................. (677,000) 0.06
---------- -----
Outstanding, December 31, 1998......................... 6,695,000 0.06
Granted (weighted average fair value of $2.06)......... 5,245,714 0.15
Exercised.............................................. (7,510,500) 0.08
Canceled............................................... (230,000) 0.09
---------- -----
Outstanding, December 31, 1999......................... 4,200,214 $0.13
========== =====
</TABLE>
F-68
<PAGE>
ICOMPRESSION, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000)
5. MANDATORY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' DEFICIT
(CONTINUED)
Additional information regarding options outstanding as of December 31, 1999
is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------- OPTIONS EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
--------------------- ----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.060 817,000 7.67 $0.060 246,052 $0.060
0.120 165,000 9.17 0.120 65,000 0.120
0.150 3,218,214 9.69 0.150 46,214 0.150
-- -- --
--------- -------
4,200,214 9.31 $0.130 357,266 $0.130
========= =======
</TABLE>
During fiscal year 1999, the Company repurchased 438,333 unvested shares of
common stock that were subject to a right of repurchase and these shares are
available for grants under the Company's option plans. At December 31, 1999,
975,415 shares were available for future grants under the option plans.
STOCK COMPENSATION
During 1999, the Company issued options to purchase 5,178,000 shares of
common stock to employees at a weighted average exercise price of $0.15 per
share. The exercise prices were less than the estimated fair value of the common
stock at the date of grant. The estimated fair value of the common stock ranged
from $1.14 to $2.50 at the respective grant dates. Accordingly, the Company
recorded deferred stock compensation of $10,725,490 for the value of such
options in 1999. Stock compensation of $864,810 was amortized to expense in 1999
and at December 31, 1999, the Company had $9,860,680 in deferred stock
compensation related to such options.
During 1999, the Company also issued nonstatutory common stock options to
consultants to purchase 67,714 shares of common stock at exercise prices ranging
from $0.12 to $0.15 for services rendered. Accordingly the Company recognized
the fair value of $136,578 as stock compensation expense in 1999.
ADDITIONAL STOCK PLAN INFORMATION
As discussed in Note 1, the Company accounts for its stock-based awards
using the intrinsic value method in accordance with Accounting Principles Board
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES and its related
interpretations.
Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION (SFAS 123) requires the disclosure of pro forma net
loss had the Company adopted the fair value method. Under SFAS 123, the fair
value of stock-based awards to employees is calculated through the use of option
pricing models, even though such models were developed to estimate the fair
value of
F-69
<PAGE>
ICOMPRESSION, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000)
5. MANDATORY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' DEFICIT
(CONTINUED)
freely tradable, fully transferable options without vesting restrictions, which
significantly differ from the Company's stock option awards. These models also
require subjective assumptions, including future stock price volatility and
expected time to exercise, which greatly affect the calculated values. The
Company's calculations were made using the minimum value method with the
following weighted average assumptions: expected life, 60 months; risk free
interest rate, 6%; and no dividends during the expected term. The Company's
calculations are based on a multiple option valuation approach and forfeitures
are recognized as they occur. If the computed fair values of the 1999 and 1998
awards had been amortized to expense over the vesting period of the awards, pro
forma net loss would not have been materially different from the amounts
reported.
COMMON STOCK
At December 31, 1998, the Company has reserved shares of common stock for
issuance as follows:
<TABLE>
<S> <C>
Conversion of preferred stock............................... 16,585,484
Issued and outstanding stock options........................ 4,200,214
Options available for future grant under the stock option
plan...................................................... 975,415
Warrants issued and outstanding............................. 198,239
----------
Total....................................................... 21,959,352
==========
</TABLE>
6. INCOME TAXES
The Company has net operating loss carryforwards of approximately
$10.3 million for federal and California income tax purposes, which will begin
to expire in 2017 and 2002, respectively.
The Company has a deferred tax asset of approximately $4.7 million and
$1.5 million as of December 31, 1999 and 1998, respectively, which primarily
represents the estimated future benefits of its net operating loss carryforwards
and research and development credits. However, because realization of these
benefits depends on the generation of future taxable income, which is subject to
substantial uncertainty, the Company has placed a full valuation allowance
against the deferred tax asset.
When a change in ownership of the Company exceeds specified limits, existing
loss and credit carryforwards may become restricted from use. Such restrictions
then lapse over a period of time determined by the relationship between the
amount of the loss carryforwards and the valuation of the Company at the time of
the change. Any such ownership change could significantly limit the Company's
ability to utilize its tax carryforwards.
7. EMPLOYEE BENEFIT PLAN
The Company has established a 401(k) tax-deferred savings plan (the Plan)
which permits participants to make contributions by salary deduction pursuant to
Section 401(k) of the Internal Revenue Code. The Company may, at its discretion,
make matching contributions to the Plan.
F-70
<PAGE>
ICOMPRESSION, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000)
7. EMPLOYEE BENEFIT PLAN (CONTINUED)
Furthermore, the Company is responsible for administrative costs of the Plan.
The Company has made no contributions to the Plan since its inception.
8. SUBSEQUENT EVENTS
On February 17, 2000, the Company completed a private equity offering of
Series E convertible preferred stock, issuing 4,777,070 shares of Series E
convertible preferred stock at a price of $3.14 per share for aggregate proceeds
of $15,000,000.
On May 16, 2000, the Company entered into a definitive agreement for the
aquisition of all the Company's outstanding common and preferred shares by
GlobeSpan, Inc., a provider of integrated circuit software and systems and
digital subscriber line (DSL) applications, for approximately 4,000,000 shares
of GlobeSpan, Inc. common shares.
* * * * *
F-71
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