================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
Form 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended September 30, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 000-26401
GlobeSpan, Inc.
(Exact name of registrant as specified in its charter)
Delaware 75-2658218
(State of incorporation) (IRS Employer Identification No.)
100 Schulz Drive, Red Bank, New Jersey 07701
(Address of principal executive offices, including ZIP code)
(732) 345-7500
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
The number of shares outstanding of the Registrant's Common Stock as of
October 24, 2000 was 71,633,824.
================================================================================
<PAGE>
GlobeSpan, Inc.
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2000 and
December 31, 1999 ...................................................1
Condensed Consolidated Statements of Operations for the Three Months
and Nine Months Ended September 30, 2000 and
1999.................................................................2
Condensed Consolidated Statements of Cash Flows for Nine Months Ended
September 30, 2000 and 1999 .........................................3
Notes to Condensed Consolidated Financial
Statements...........................................................4
Item 2. Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations ..............................9
Item 3. Quantitative and Qualitative Disclosures About Market
Risk ............................................................13
Part II Other Information
Item 2. Changes in Securities and Use of Proceeds........................14
Item 6. Exhibits and Reports on Form 8-K.................................14
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
GlobeSpan, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 91,629 $ 24,657
Short-term Investments 10,086 12,011
Accounts receivable, less allowance for doubtful
accounts of $1,846 and $337, respectively 62,922 9,160
Accounts receivable from affiliates - 146
Inventories 29,388 10,656
Prepaid expenses and other current assets 3,557 3,101
----------- ----------
Total current assets 197,582 59,731
Property and equipment, net 20,383 5,853
Intangible assets, net 645,217 -
Other Assets 5,058 5,407
----------- ----------
Total assets $ 868,240 $ 70,991
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under line of credit $ 196 $ -
Accounts payable 25,920 4,333
Accounts payable to affiliates 1,744 80
Accrued expenses and other liabilities 23,119 2,049
Payroll and benefit related liabilities 18,966 7,688
Current portion of capital lease obligations 3,821 965
----------- ---------
Total current liabilities 73,766 15,115
Other long-term liabilities 1,577 -
Capital lease obligations, less current portion 3,414 443
----------- ---------
Total liabilities 78,757 15,558
----------- ---------
Commitments and contingencies - -
Stockholders' equity
Preferred stock - -
Common stock 72 58
Stock purchase warrants 1 1
Notes receivable from stock sales (5,302) (7,412)
Additional paid in capital 1,001,426 77,378
Deferred stock compensation (74,623) (1,218)
Accumulated deficit (131,898) (13,352)
Accumulated other comprehensive loss (193) (22)
----------- ---------
Total stockholders' equity 789,483 55,433
----------- ---------
Total liabilities and stockholders' equity $ 868,240 $ 70,991
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
GlobeSpan, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
For The Three Months For The Nine Months
Ended September 30, Ended September 30,
---------------------- ----------------------
2000 1999 2000 1999
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Net revenues $ 110,353 $ 17,032 $ 217,314 $ 35,107
Cost of sales 45,129 6,584 85,962 12,721
Cost of sales related to termination charge - - - 1,119
--------- --------- --------- ---------
Gross profit 65,224 10,448 131,352 21,267
--------- --------- --------- ---------
Operating expenses:
Research & development (exclusive of non-cash 29,135 6,931 63,227 17,805
compensation of $5,570 and $11,010 for the three
and nine months ended September 30, 2000,
respectively
Selling, general & administrative (exclusive of 14,705 4,328 32,080 10,206
non-cash compensation of $640 and $5,181 for the
three and nine months ended September 30, 2000,
respectively
Amortization of intangible assets 47,693 - 86,012 -
Non-cash compensation expense 6,210 - 16,191 -
In process research and development - - 44,854 -
--------- --------- --------- ---------
Total operating expenses 97,743 11,259 242,364 28,011
--------- --------- --------- ---------
Loss from operations (32,519) (811) (111,012) (6,744)
Interest expense - non-cash 10,404 - 43,439 -
Interest (income) expense, net (798) (553) (723) (253)
Foreign exchange loss 22 - 18 -
--------- --------- --------- ---------
Loss before income taxes and extraordinary item (42,147) (258) (153,746) (6,491)
Provision for income tax 8,239 - 8,239 -
--------- --------- --------- ---------
Loss before extraordinary item (50,386) (258) (161,985) (6,491)
Preferred stock deemed dividend and accretion - - - (3,466)
--------- --------- --------- ---------
Net loss attributable to common stockholders before
extraordinary item (50,386) (258) (161,985) (9,957)
Extraordinary item - gain on the redemption of the
beneficial conversion feature 43,439 - 43,439 -
--------- --------- --------- ---------
Net loss attributable to common stockholders (6,947) (258) (118,546) (9,957)
========= ========= ========= =========
Other comprehensive loss:
Foreign currency translation adjustment 189 - 171 -
--------- --------- --------- ---------
Comprehensive loss attributable to common
stockholders $ (7,136) $ (258) $(118,717) $ (9,957)
========= ========= ========= =========
Basic and diluted earnings (loss) per share:
Net loss before extraordinary item $ (0.74) $ (0.01) $ (2.57) $ (0.23)
Extraordinary item 0.64 - 0.69 -
--------- --------- --------- ---------
Net loss $ (0.10) $ (0.01) $ (1.88) $ (0.23)
========= ========= ========= =========
Weighted average shares of common stock outstanding
used in computing basic and diluted earnings (loss)
per share 68,491 55,397 63,185 43,951
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
GlobeSpan, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------------------------
2000 1999
-------------- -------------
<S> <C> <C>
Cash flow provided by (used in) operating activities:
Net loss $ (118,546) $ (6,491)
Adjustments to reconcile net loss to cash provided by (used in)
operating activities:
Provision for bad debts 1,509 50
Deferred income taxes (1,472)
Tax benefits from employee stock option plans 8,662 -
Non-cash interest expense 43,439 -
Non-cash compensation expense 16,191 -
Depreciation and amortization 6,833 2,492
Amortization of intangible assets 86,012 -
Extraordinary gain (43,439) -
In-process research and development 44,854 -
Changes in assets and liabilities:
(Increase) in accounts receivable (54,104) (2,971)
(Increase) in inventory (18,161) (4,272)
(Increase) decrease in prepaids and other assets 489 (2,244)
Increase in accounts payable 17,911 1,731
Increase in accrued expenses and other liabilities 14,798 5,575
-------------- -------------
Net cash provided by (used in) operating activities 4,976 (6,130)
-------------- -------------
Cash flow provided by (used in) investing activities:
Purchases of property and equipment (12,129) (799)
Proceeds from sale of intangible asset 500 -
Net cash received from acquisitions of businesses (See Note 3) 18,975 -
Proceeds from sale/maturity of marketable securities 14,928 -
Purchases of marketable securities (7,365)
-------------- -------------
Net cash provided by (used in) investing activities 14,909 (799)
-------------- -------------
Cash flow provided by (used in) financing activities:
Repayment of subordinated redeemable convertible note (90,000) -
Repayment of borrowings (192) (7,464)
Proceeds received from issuance of common stock 136,813 49,750
Proceeds from issuance of preferred stock - 11,150
Proceeds from repayment of notes receivable 2,110 -
Repayments of capital lease obligations (1,815) (335)
-------------- -------------
Net cash provided by financing activities 46,916 53,101
-------------- -------------
Effect of exchange rates on cash and cash equivalents 171 -
-------------- -------------
Net increase in cash and cash equivalents 66,972 46,172
Cash and cash equivalents at beginning of period 24,657 12
-------------- -------------
Cash and cash equivalents at end of period $ 91,629 $ 46,184
============== =============
Supplemental non-cash financing activities:
Capital lease borrowings $ 3,891 $ 611
Notes receivable for sales of common stock $ - $ 6,695
Forgiveness of subordinated note payable $ - $ 100
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
GlobeSpan, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business and Basis of Presentation
GlobeSpan, Inc. ("GlobeSpan" or the "Company") is a leading worldwide
developer of advanced digital subscriber line (DSL) integrated circuits which
enable high-speed data transmission over the existing network of copper
telephone wires known as the local loop. GlobeSpan sells integrated circuits as
chip sets to manufacturers of DSL equipment for incorporation into products
which are sold to telecommunications service providers and end users.
Unaudited Interim Financial Statements
The accompanying unaudited consolidated financial statements have been
prepared by GlobeSpan and reflect all adjustments, consisting only of normal
recurring adjustments, which in the opinion of management are necessary to
present fairly the financial position and the results of operations for the
interim periods. The balance sheet at December 31, 1999 has been derived from
audited financial statements at that date. The financial statements have been
prepared in accordance with the regulations of the Securities and Exchange
Commission, but omit certain information and footnote disclosure necessary to
present the statements in accordance with generally accepted accounting
principles. Certain reclassifications have been made to conform prior year
financial statements to the current year presentation. For further information,
refer to the financial statements and notes thereto included in GlobeSpan's
Annual Report on Form 10-K, filed with the Securities and Exchange Commission on
March 30, 2000. Results for the interim periods are not necessarily indicative
of results for the entire fiscal year.
Stock Split
On January 21, 2000, the Company's board of directors approved a 3-for-1
stock split applicable to all issued and outstanding shares of our common stock,
par value $0.001. This 3-for-1 stock split was effected in the form of a stock
dividend and became effective on February 25, 2000, when stockholders of record
received two additional shares of common stock for each outstanding share of
common stock held as of the record date.
Earnings Per Share
The Company has adopted Statement of Financial Accounting Standards No.
128, Earnings per Share ("FAS 128"), which requires the presentation of basic
earnings per share ("Basic EPS") and diluted earnings per share ("Diluted EPS")
by all entities that have publicly traded common stock or potential common
stock. Basic EPS is computed by dividing income available to common stockholders
by the weighted average number of common shares outstanding during the period.
Diluted EPS gives effect to all dilutive potential common shares outstanding
during the period.
As of September 30, 2000 and 1999, the Company had outstanding options and
warrants to purchase an aggregate of 16,455,725 and 6,934,152 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.
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.
4
<PAGE>
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 of our revenue is from product sales.
Concentration of Risk and Customer Information
Three customers accounted for 31.0%, 18.0% and 15.7% of net revenues in the
three months ended September 30, 2000. For the three months ended September 30,
1999, three customers accounted for 48.9%, 9.3% and 4.9% of net revenues,
respectively. For the nine months ended September 30, 2000, three customers
accounted for 30.1%, 18.7% and 10.9% of net revenues, respectively. For the nine
months ended September 30, 1999, three customers accounted for 46.1%, 7.7% and
7.2% of net revenues, respectively.
At September 30, 2000 and December 31, 1999, five of the Company's
customers accounted for 76.8% and 67.1% of net accounts receivable,
respectively.
Recent Accounting Pronouncements
In December 1999 the Securities and Exchange Commission 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 during the
fourth quarter of 2000. The adoption will not have a significant effect on our
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.
2. Acquisitions
On January 31, 2000, the Company acquired all of the issued and outstanding
shares of Ficon Technology, Inc. ("Ficon"), a leading provider of solutions in
the areas of IP, ATM and Voice over Packet, which enable service providers to
build next generation communications infrastructure. The acquisition was
accounted for as a purchase transaction. The Company acquired such Ficon shares
for $5 million in cash and the right for Ficon shareholders to receive up to a
maximum of 1,959,999 shares of the company's common stock. A portion of these
shares may be issued in the future based upon the continued employment of
certain Ficon shareholders and the completion of development milestones mutually
agreed to by the parties.
On February 24, 2000, the Company acquired certain technology and employees
of the Microelectronics Group of PairGain Technologies, Inc. ("PairGain"),
designers of integrated circuits and software for DSL applications. The
acquisition was accounted for as a purchase transaction. The Company paid
3,243,591 shares of its common stock and issued to PairGain a $90.0 million
subordinated redeemable convertible note (the "Note"). The terms of the Note
gave the Company the option to redeem the Note, in cash, within the first six
months after its issue, or thereafter, be converted at the option of PairGain,
into 2,919,237 shares of the Company's common stock. The Company redeemed the
Note for a cash payment of $90.0 million during the three month period ended
September 30, 2000, plus interest, which accrued at an annual rate of 5.0%
through the date of redemption. In connection with the repayment of the Note,
the Company recognized the redemption of the beneficial conversion feature,
previously recorded, for $47.3 million and a gain on the associated redemption
of $43.4 million during the third quarter of 2000. The beneficial conversion
feature was recorded upon issuance of the Note and reflected the intrinsic value
of the beneficial conversion feature. Such amount was amortized as interest
expense non-cash over the period the beneficial conversion feature was first
available. For the three and nine month periods ended September 30, 2000 $10.4
million and $43.4 million were recorded as interest expense non-cash,
respectively.
5
<PAGE>
On April 27, 2000, we acquired all the issued and outstanding shares of
T.sqware, Inc. ("T.sqware"), a provider of fully programmable scalable network
processors supporting high speed data communications. The transaction was
accounted for as a purchase transaction. We paid for these shares by issuing
2,022,182 shares of our own 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 of the issued and outstanding shares of
iCompression, Inc., ("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 was
accounted for as a purchase transaction. We paid for these shares by issuing
3,470,152 shares of our common stock and assuming the outstanding iCompression
options for the equivalent of 529,727 options to purchase our common stock.
On September 21, 2000, we acquired all of the issued and outstanding shares
of ATecoM Inc., ("ATecoM"), a provider of technology which allows for the
transmission of video over ATM ("asynchronous transfer mode") networks. The
transaction was accounted for as a purchase transaction. We paid for these
shares by issuing 42,668 shares of our own common stock and assuming the
outstanding ATecoM options for the equivalent of 8,446 options to purchase our
common stock.
The following is a summary of all consideration paid for the acquisitions
of Ficon, PairGain, T.sqware, iCompression, and ATecoM during the nine months
ended September 30, 2000:
Fair value of common stock issued $686,468
Subordinated redeemable convertible note issued 90,000
Cash paid 8,231
Transaction costs 6,687
--------
Total purchase price $791,386
========
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:
Cash and short term investments $ 36,364
Accounts receivable 1,022
Prepaid and other assets 2,297
Property and equipment 4,441
Goodwill and intangibles 733,452
--------
777,576
In process research and development 44,854
Liabilities assumed (31,044)
--------
Total purchase price $791,386
========
All of the acquisitions have been included in the Company's results of
operations from their effective dates. The excess of purchase price over the
fair value of net assets acquired, reflected as intangible assets, is being
amortized on a straight-line basis over periods ranging from two to four years.
The amount allocated to in process research and development ("IPR&D") of
$44.9 million was expensed upon acquisition, as it was determined that the
underlying projects had not reached technical feasibility, had no alternative
future use and successful development was uncertain. In the allocation of the
acquisition purchase price to IPR&D, consideration was given to the following
for the project at the time of the acquisition:
- the present value of the forecasted cash flows and income that were
expected to result from the project;
- the status of the project;
- completion costs;
- project risks;
- the value of core technology; and
- the stage of completion of the project
6
<PAGE>
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 the respective entities were acquired.
Some of the shares of common stock issued to the principals of Ficon are
subject to forfeiture if their employment ceases with the Company, and are
recorded as deferred stock compensation. The deferred stock compensation
recorded was $28.8 million, which reflects the estimated fair value of common
stock issued. This amount is being amortized over the three year vesting period
on a straight line basis.
The Company also granted stock options to employees, including those of
other acquired entities, at various discounts to fair market value as part of
its long-term employee retention strategy and has recorded additional deferred
stock compensation associated with such option grants amounting to $60.8
million, during the nine months ended September 30, 2000. These amounts are
being amortized over vesting periods ranging from six months to four years on a
straight line basis.
The following unaudited pro forma information represents a summary of the
results of operations as if the Ficon, Pairgain, T.sqware, iCompression, and
ATecoM acquisitions occurred on January 1, 1999.
For the nine months ended
September 30, 2000 September 30, 1999
-------------------------------------
Revenue $ 221,162 $ 40,162
========= =========
Net loss $(197,939) $(208,695)
========= =========
Net loss per common share $ (2.95) $ (3.94)
========= =========
The pro forma results are based on various assumptions and are not
necessarily indicative of what would have occurred had these transactions been
consummated on January 1, 1999. The $44.9 million of IPR&D are included in all
periods presented.
3. Supplemental Cash Flow Data:
The Company acquired cash of approximately $31.9 million in connection with
the acquisitions of T.sqware and iCompression completed during the second
quarter of 2000 and used cash of approximately $12.9 million in connection with
the purchases of Ficon, certain technology and employees of PairGain and ATecoM
completed during the first quarter and third quarters of 2000, resulting in net
cash received from acquisitions of approximately $19.0 million during the nine
month period ended September 30, 2000 as follows:
Purchase price $ 791,386
Common stock issued (686,468)
Subordinated redeemable
convertible note payable (90,000)
Accrued transaction costs (2,017)
---------
Cash paid $ 12,901
Less: cash acquired (31,876)
---------
Net cash received from
acquisition of businesses $ (18,975)
=========
7
<PAGE>
4. Related Party Transactions
In March 1999, the Company and Paradyne Corporation agreed to terminate the
Cooperative Development Agreement. In connection with such termination
agreement, the Company agreed to pay Paradyne an aggregate of $1.5 million, less
the amounts previously paid of approximately $0.4 million (or approximately $1.1
million) to terminate the July discount pricing arrangement with Paradyne
Corporation. Such payment was made in July 1999 and was charged to cost of sales
during the three months ended March 31, 1999. In addition, GlobeSpan and
Paradyne Corporation as part of the Termination Agreement affirmed that the
earlier technology license provisions of the Cooperative Development Agreement
were never implemented. In conjunction with the signing of the Termination
Agreement, GlobeSpan and Paradyne Corporation also entered into a four-year
Supply Agreement which gave Paradyne Corporation preferential pricing and other
terms in connection with the sale by GlobeSpan of products to Paradyne
Corporation. In addition, under the terms of the Supply Agreement, GlobeSpan is
required to honor Paradyne Corporation's orders for GlobeSpan's products in
quantities at least consistent with Paradyne Corporation's past ordering
practices and must afford Paradyne Corporation at least the same priority for
Paradyne Corporation's orders as GlobeSpan affords its other similarly situated
customers. GlobeSpan also granted Paradyne Corporation a standard customer
immunity under GlobeSpan's intellectual property rights with respect to any of
Paradyne Corporation's products which incorporate GlobeSpan's products. Net
revenues for the three months ended September 30, 1999 were $1.6 million. Net
revenues for the nine months ended September 30, 2000 and 1999 were $8.9 million
and $2.7 million, respectively.
5. Stockholders' Equity
On August 2, 2000, we completed a follow-on public offering of 8,625,000
million shares of common stock at a price of $100.00 per share (including
1,125,000 shares sold by selling shareholders upon exercise by the underwriters
of their over-allotment option). Of the 8.6 million shares of common stock, 1.4
million shares were sold by the Company, resulting in proceeds from the offering
of $134.0 million, net of related expenses, and 7.2 million shares were sold by
selling shareholders. The Company did not receive any of the proceeds from the
sales of shares by the selling shareholders. The Company used the proceeds from
this offering to repay the subordinated redeemable convertible note issued by us
in connection with our acquisition of the Microelectronics Group of PairGain,
and the balance is intended to be for general corporate purposes, including
working capital, sales and marketing expenditures, development of new products
and services and acquisitions.
6. Income Taxes
The Company recorded a provision for income taxes of $8.2 million for the
three and nine months ended September 30, 2000. This provision is comprised of a
current expense of $9.7 million, net of a deferred benefit of $1.5 million. The
Company had taxable losses in previous years, for which a full valuation
allowance was recorded against the tax benefits. The provision reflects an
effective tax rate of 7.5% for the nine months ended September 30, 2000. The
difference between the effective rate and the statutory rate of 35% relates to
permanent differences resulting from IPR&D and non-deductible goodwill, and
changes in the valuation allowance, net of the utilization of net operating
losses. The provision for income taxes excludes current tax benefits related to
the exercise of stock options credited directly to stockholders' equity of $8.7
million during the three and nine months ended September 30, 2000.
8
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information in this discussion contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934, as amended. Such statements are based
upon current expectations that involve risks and uncertainties. Any statements
contained herein that are not statements of historical fact may be deemed to be
forward-looking statements. For example, the words "believes," "anticipates,"
"plans," "expects," "intends" and similar expressions are intended to identify
forward-looking statements. GlobeSpan's actual results and the timing of certain
events may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such a discrepancy include,
but are not limited to, customer implementation plans, risks of price
competition among DSL chip set suppliers, risks of customer loss, risks of
dependence upon third-party suppliers, risks of integrating acquisitions, risks
due to rapid changes in the market for DSL chip sets, market acceptance of new
products, uncertainties concerning continued the impact of competitive products,
risks due to limited protection of our intellectual property, uncertainties
concerning continued service of our key employees and general market conditions
and other risk factors described herein or included in other reports and filings
made with the Securities and Exchange Commission. All forward-looking statements
in this document are based on information available to GlobeSpan as of the date
hereof and GlobeSpan assumes no obligation to update any such forward-looking
statements.
The following table presents our unaudited results as a percentage of
revenues for the three and nine months ended September 30, 2000 and 1999. Our
results of operations are reported as a single business segment.
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
--------------------------- ----------------------------
2000 1999 2000 1999
--------------------------- ----------------------------
<S> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales 40.9 38.7 39.6 36.2
Cost of sales related to
termination charge - - - 3.2
--------------------------- ----------------------------
Gross profit 59.1 61.3 60.4 60.6
--------------------------- ----------------------------
Operating expenses:
Research and development 26.5 40.7 29.0 50.7
Selling, general and
administrative 13.3 25.4 14.8 29.1
Amortization of intangible
assets 43.2 - 39.5 -
Non-cash compensation expense 5.6 - 7.5 -
In process research and
development - - 20.6 -
--------------------------- ----------------------------
Total operating expenses 88.6 66.1 111.4 79.8
--------------------------- ----------------------------
Loss from operations (29.5) (4.8) (51.0) (19.2)
Foreign exchange gain/(loss) - - - -
Interest (income) expense, net (0.7) (3.2) (0.3) (0.7)
Interest expense non-cash 9.4 - 20.0 -
--------------------------- ----------------------------
Loss before income taxes and
extraordinary item (38.2) (1.6) (70.7) (18.5)
Provision for income taxes (7.5) - (3.8) -
--------------------------- ----------------------------
Loss before extraordinary item (45.7) (1.6) (74.5) (18.5)
Extraordinary gain 39.4 - 20.0 -
--------------------------- ----------------------------
Net Loss (6.3)% (1.6)% (54.5)% (18.5)%
=========================== ============================
</TABLE>
9
<PAGE>
Results of Operations for the three months ended September 30, 2000 and 1999
Net Revenues. Our net revenues were $110.3 million and $17.0 million in the
three months ended September 30, 2000 and 1999, respectively. This amounts
to an increase of 547.9%. This increase in net revenues was primarily due
to the increase in unit volume shipments to existing customers, expansion
of our customer base, introduction of new products and, to a lesser extent,
net revenues from acquired businesses.
Cost of Sales and Gross Profit. Our gross profit was $65.2 million and $10.4
million in the three months ended September 30, 2000 and 1999,
respectively. This amount represents an increase of 524.3%. Our gross
margin was 59.1% and 61.3% in the three months ended September 30, 2000 and
1999, respectively. The decrease in gross margin was related to lower
average selling prices due to increased unit volume shipped. The increase
in gross profit dollars was the result of higher net revenues. We expect
gross margins may decrease in the future due to a number of factors,
including pressures on average selling prices, product mix and customer
mix.
Research and Development. Our research and development expenses were $29.1
million and $6.9 million in the three months ended September 30, 2000 and
1999, respectively. This amount represents an increase of 320.4%. Research
and development expenses represented 26.5% and 40.7% of net revenues for
the three months ended September 30, 2000 and 1999, respectively. The
increase in dollars is the result of the inclusion of acquisitions
completed during the current fiscal year and an increase in development
efforts in advance of anticipated revenues from such efforts. In addition,
we added new personnel and related support from acquisitions and new hiring
and incurred higher amounts of engineering expenses. The decrease in
research and development expense as a percentage of net revenues was due to
higher net revenues. Our research and development expense may increase in
the future due to planned additional increases in personnel and related
support expenses, prototyping costs and depreciation resulting from
increased capital investment.
Selling, General and Administrative. Our selling, general and administrative
expense was $14.7 and $4.3 million for the three months ended September 30,
2000 and 1999, respectively. This amount represents an increase of 239.8%.
Selling, general and administrative expense represented 13.3% and 25.4% of
net revenues for the three months ended September 30, 2000 and 1999,
respectively. The increase in dollars resulted from the increase in sales,
marketing and administrative personnel and related expenses including
expenses from our acquisitions, increased commissions and administrative
costs. This decrease in the percentage of selling, general and
administrative expense as a percentage of net revenues was due to higher
net revenues. Our selling, general and administrative expense may increase
in the future due to increases in personnel, higher commissions and
administrative costs.
Amortization of Intangible Assets. During the nine month period ended September
30, 2000, we completed several acquisitions. The increase in dollar amount
and percentage of amortization expense is the result of our amortizing the
intangible assets acquired.
Non-cash Compensation. During the nine month period ended September 30, 2000, we
granted certain employees stock options at less than fair market value. The
deferred stock recorded is being amortized over the respective vesting
periods ranging from six months to four years. The increase in the dollar
amount and percentage of non-cash compensation is the result of our
amortizing the deferred compensation.
Interest (Income) Expense, Net. Interest expense for the three months ended
September 30, 2000 was $0.9 million, offset by interest income of $1.7
million, resulting in net interest income of $0.8 million. Net interest
income for the three months ended September 30, 1999 was $0.6 million,
which resulted from interest on cash balances. The increase in interest
expense of $.9 million was primarily the result of interest on our
subordinated redeemable convertible note. The increase in interest income
of $1.1 million was the result of investment of excess cash balances.
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Interest Expense Non-cash. We amortized $43.4 million of the beneficial
conversion feature through August 9, 2000, the date we repaid the
subordinated redeemable convertible note. The increase in the dollar amount
and percentage of interest expense non-cash is the result of our
amortization.
Provision for income taxes. The income tax provision of $8.2 million recorded
during the third quarter of 2000 represents a provision of 26.0%, excluding
the tax effect of non-cash interest expense and the extraordinary gain
related to the subordinated redeemable convertible note issued in
connection with the PairGain acquisition. The effective rate is impacted by
permanent differences which resulted from the Company's acquisitions, and
changes in the valuation allowance, net of the utilization of net operating
losses.
Extraordinary Gain. In connection with the repayment of the subordinated
redeemable convertible note issued by us to PairGain, the Company
recognized a gain of $43.4 million on the redemption of the beneficial
conversion feature.
Results of Operations for the nine months ended September 30, 2000 and 1999
Net Revenues. Our net revenues were $217.3 million and $35.1 million in the
nine months ended September 30, 2000 and 1999, respectively. This amounts
to an increase of 519.0%. This increase in net revenues was primarily due
to the increase in unit volume shipments to existing customers, expansion
of our customer base, introduction of new products and, to a lesser extent,
net revenues from acquired businesses.
Cost of Sales and Gross Profit. Our gross profit was $131.4 million and $21.3
million in the nine months ended September 30, 2000 and 1999, respectively.
This amount represents an increase of 517.6%. Our gross margin was 60.4%
and 60.6% in the nine months ended September 30, 2000 and 1999,
respectively. The slight decrease in gross margin was related to lower
average selling prices due to increased unit volume shipped, offset by a
one-time termination charge related to the termination of a royalty
agreement with Paradyne Corporation in the nine months ended September 30,
1999. Without this termination charge, our gross margins would have
decreased from 63.8% to 60.4%. The increase in gross profit dollars was the
result of higher net revenues. We expect gross margins may decrease in the
future due to a number of factors, including pressures on average selling
prices, product mix and customer mix.
Research and Development. Our research and development expenses were $63.2
million and $17.8 million in the nine months ended September 30, 2000 and
1999, respectively. This amount represents an increase of 255.1%. Research
and development expense represented 29.0% and 50.7% of net revenues for the
nine months ended September 30, 2000 and 1999, respectively. The increase
in dollars is the result of the inclusion of acquisitions completed during
the nine months ended September 30, 2000 and an increase in development
efforts in advance of anticipated revenues from such efforts. In addition,
we added new personnel and related support from acquisitions and new hiring
and incurred higher amounts of engineering expenses and one-time licensing
fees related to new products. The decrease in research and development
expense as a percentage of net revenues was due to higher net revenues. Our
research and development expense may increase in the future due to planned
additional increases in personnel and related support expenses, prototyping
costs and depreciation resulting from increased capital investment.
Selling, General and Administrative. Our selling, general and administrative
expense was $32.1 and $10.2 million for the nine months ended September 30,
2000 and 1999, respectively. This amount represents an increase of 214.3%.
Selling, general and administrative expense represented 14.8% and 29.1% of
net revenues for the nine months ended September 30, 2000 and 1999,
respectively. The increase in dollars resulted from the increase in sales,
marketing and administrative personnel and related expenses including
expenses from our acquisitions, increased commissions and administrative
costs. The decrease in the percentage of selling, general and
administrative expense as a percentage of net revenues was due to higher
net revenues. Our selling, general and administrative expense may increase
in the future due to increases in personnel, higher commissions and
administrative costs.
Amortization of Intangible Assets. During the nine month period ended September
30, 2000, we completed several acquisitions. The increase in dollar amount
and percentage of amortization expense is the result of our amortizing the
intangible assets acquired.
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Non-cash Compensation. During the nine months ended September 30, 2000, we
exchanged our common stock with employee principals of an acquired entity
which was considered compensation and we granted certain employees stock
options at less than fair market value. The deferred stock compensation
recorded is being amortized over the respective vesting periods ranging
from six months to four years. The increase in the dollar amount and
percentage in non-cash compensation is the result of our amortizing the
deferred stock compensation.
In-Process Research and Development. During the nine months ended September 30,
2000, our acquisitions of Ficon Technologies, Inc., T.sqware, Inc. and
iCompression, Inc., each had development projects not yet complete. The
amounts allocated to in-process research and development ("IPR&D")of $44.9
million was expensed upon acquisition, as it was determined that the
underlying projects had not reached technological feasibility, had no
future alternative use and successful development was uncertain. In the
allocation of the acquisition purchase price to IPR&D, consideration was
given to the present value of forecasted cash flows and income that were
expected from the projects, the status of the projects, completion costs,
project risks, the value of the core technology, and the stage of
completion of each project. In valuing core technology, the relative
allocations to core technology and IPR&D were consistent with the relative
contributions of the projects. The determination of IPR&D was based on
efforts completed as of the date the respective entities were acquired.
Interest (Income) Expense, Net. Interest expense for the nine months ended
September 30, 2000 was $2.6 million offset by interest income of $3.3
million resulting in net interest income of $0.7 million. Net interest
income for the nine months ended September 30, 1999 was $0.3 million, which
resulted from interest income of $0.7 million, offset by interest expense
of $0.4 million. The increase in interest expense was primarily the result
of interest on our subordinated redeemable convertible note. The increase
in interest income was the result of investment of excess cash balances.
Interest Expense Non-cash. We amortized $43.4 million of the beneficial
conversion feature through August 9, 2000, the date we repaid the
subordinated redeemable convertible note. The increase in the dollar amount
and percentage of interest expense, non-cash is the result of our
amortization.
Provision for income taxes. The income tax provision of $8.2 million recognized
during the third quarter of 2000, represents a provision of 7.5% of the
loss after extraordinary gain, and reflects the Company's anticipated
effective tax rate for the nine months ended September 30, 2000. The
effective rate is impacted by permanent differences which resulted from the
Company's acquisitions, and changes in the valuation allowance, net of the
utilization of net operating losses.
Extraordinary Gain. In connection with the repayment of the subordinated
redeemable convertible note issued by us to PairGain, the Company
recognized a gain of $43.4 million on the redemption of the beneficial
conversion feature.
Liquidity and Capital Resources
As of September 30, 2000, we had working capital of approximately $123.8
million, $91.6 million in cash and cash equivalents and $10.1 million in
short-term marketable securities.
Net cash provided by operating activities was $5.0 million in the nine
months ended September 30, 2000, compared to net cash used in operating
activities of $6.1 million in the nine months ended September 30, 1999. The
increase was primarily due to higher revenues during the nine months ended
September 30, 2000 compared to the nine month period ended September 30, 1999.
Investing activities, which primarily consisted of net cash received from
the acquisition of businesses of $19.0 million, amounted to $14.9 million during
the nine months ended September 30, 2000. Purchases of property and equipment
and marketable securities of $12.1 and $7.4 million, respectively, were
partially offset by proceeds from the maturities of marketable securities and
the sale of an intangible asset of $14.9 million and $.5 million, respectively,
during the nine months ended September 30, 2000.
Cash flows provided by financing activities of $46.9 million during the
nine months ended September 30, 2000 primarily consisted of proceeds from a
follow-on public offering and other proceeds from the issuances of common stock
of $136.8 million, offset by a $90.0 million repayment of a subordinated
redeemable convertible note issued by us in connection with our acquisition of
the Microelectronics Group of PairGain.
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We believe that our sources of capital, including internally generated
funds and the net proceeds from our follow-on public offering, after the
repayment of the subordinated redeemable convertible note, will be adequate to
satisfy our anticipated 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 and products and technologies that are complimentary 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 can not 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 or financial condition.
Although We Experienced No Significant Year 2000 Disruptions We Will Continue to
Monitor Developments
The "Year 2000 Issue" refers generally to the problems that some software
may have in determining the correct century of the year. In late 1999, we
completed our Year 2000 compliance project. As a result of our efforts, we
experienced no significant disruptions related to Year 2000. We are not aware of
any material problems resulting from Year 2000 issues, either with our products,
our internal systems, or the products and services of suppliers. The incremental
costs related to the Year 2000 project were not material to the our results of
operations, financial position or cash flows. We have not experienced any
significant issues and will continue to monitor throughout Year 2000 our
critical computer applications, and those of our suppliers, to ensure that any
Year 2000 matters that may arise are addressed promptly.
Item 3. Quantitative and Qualitative 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 September 30, 2000, substantially all of our
investments were in money market funds, certificates of deposits, or high
quality commercial paper.
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PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
On September 21, 2000, the Company issued 42,668 shares of its Common Stock
in exchange for all of the issued and outstanding shares of ATecoM. The issuance
was effected in reliance on the exemption from registration provided by Section
4(2) of the Securities Act.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit
No. Description
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
The Company filed two reports on Form 8-K during the quarter ended
September 30, 2000. Information regarding the items reported is as follows:
Date Item Reported On
----------------- --------------------------------------------------
July 14, 2000 Financial Statements of iCompression and T.Sqware.
July 31, 2000 Second quarter results.
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GLOBESPAN, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GLOBESPAN, INC.
Date: November 13, 2000 By: /s/ Robert McMullan
----------------------------------
Robert McMullan
Chief Financial Officer
(Principal Financial and Accounting Officer)
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EXHIBIT INDEX
Exhibit
No. Description
27.1 Financial Data Schedule
16
