<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 14, 1998
REGISTRATION NO. 333-65117
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
BROADCOM CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
CALIFORNIA 3674 33-0480482
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION NUMBER) IDENTIFICATION NO.)
</TABLE>
16251 LAGUNA CANYON ROAD
IRVINE, CALIFORNIA 92618
(949) 450-8700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
HENRY T. NICHOLAS, III, PH.D.
CO-CHAIRMAN AND CHIEF EXECUTIVE OFFICER
BROADCOM CORPORATION
16251 LAGUNA CANYON ROAD
IRVINE, CALIFORNIA 92618
(949) 450-8700
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
BRUCE R. HALLETT, ESQ. LARRY W. SONSINI, ESQ.
ELLEN S. BANCROFT, ESQ. JAMES N. STRAWBRIDGE, ESQ.
SUE L. COLLINS, ESQ. JOSE F. MACIAS, ESQ.
BROBECK, PHLEGER & HARRISON LLP WILSON SONSINI GOODRICH & ROSATI
38 TECHNOLOGY DRIVE PROFESSIONAL CORPORATION
IRVINE, CALIFORNIA 92618 650 PAGE MILL ROAD
(949) 790-6300 PALO ALTO, CALIFORNIA 94304-1050
(650) 493-9300
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL
PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
JURISDICTION.
PROSPECTUS (Subject to Completion)
Issued October 14, 1998
3,000,000 Shares
BROADCOM LOGO
CLASS A COMMON STOCK
------------------------
OF THE 3,000,000 SHARES OF CLASS A COMMON STOCK OFFERED HEREBY, 392,500 SHARES
ARE BEING SOLD BY THE COMPANY AND 2,607,500 SHARES ARE BEING SOLD BY THE SELLING
SHAREHOLDERS. SEE "PRINCIPAL AND SELLING SHAREHOLDERS." THE COMPANY WILL NOT
RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF SHARES BY THE SELLING SHAREHOLDERS.
THE COMPANY HAS TWO CLASSES OF COMMON STOCK: CLASS A COMMON STOCK AND CLASS B
COMMON STOCK (COLLECTIVELY, THE "COMMON STOCK"). THE SHARES OF COMMON STOCK ARE
SUBSTANTIALLY IDENTICAL EXCEPT THAT THE HOLDERS OF CLASS A COMMON STOCK ARE
ENTITLED TO ONE VOTE PER SHARE, AND THE HOLDERS OF CLASS B COMMON STOCK ARE
ENTITLED TO TEN VOTES PER SHARE, ON MATTERS SUBMITTED TO A VOTE OF THE
SHAREHOLDERS. EACH SHARE OF CLASS B COMMON STOCK IS CONVERTIBLE AT THE OPTION OF
THE HOLDER INTO ONE SHARE OF CLASS A COMMON STOCK, AND GENERALLY WILL
AUTOMATICALLY CONVERT INTO ONE SHARE OF CLASS A COMMON STOCK UPON TRANSFER OF
THE CLASS B COMMON STOCK FROM ITS ORIGINAL HOLDER. SEE "DESCRIPTION OF CAPITAL
STOCK." THE COMPANY'S CLASS A COMMON STOCK IS LISTED ON THE NASDAQ NATIONAL
MARKET UNDER THE SYMBOL "BRCM." ON OCTOBER 9, 1998, THE LAST SALE PRICE OF THE
CLASS A COMMON STOCK AS REPORTED ON THE NASDAQ NATIONAL MARKET WAS $62 1/8 PER
SHARE. SEE "PRICE RANGE OF THE CLASS A COMMON STOCK."
------------------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
COMMENCING ON PAGE 5 HEREOF.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS
-------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Per Share................. $ $ $ $
Total(3).................. $ $ $ $
</TABLE>
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(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriters."
(2) Before deducting expenses payable by the Company estimated at $500,000.
(3) The Company and certain Selling Shareholders have granted the Underwriters
an option, exercisable within 30 days from the date hereof, to purchase up
to an aggregate of 450,000 additional Shares at the price to public less
underwriting discounts and commissions for the purpose of covering
over-allotments, if any. If the Underwriters exercise such option in full,
the total price to public, underwriting discounts and commissions, proceeds
to Company and proceeds to Selling Shareholders will be $ , $
, $ , and $ , respectively. See "Underwriters."
------------------------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Wilson Sonsini Goodrich & Rosati, counsel for the Underwriters. It is
expected that delivery of the Shares will be made on or about , 1998
at the office of Morgan Stanley & Co. Incorporated, New York, N.Y., against
payment therefor in immediately available funds.
------------------------
MORGAN STANLEY DEAN WITTER
BT ALEX. BROWN
CREDIT SUISSE FIRST BOSTON
HAMBRECHT & QUIST
MERRILL LYNCH & CO.
, 1998
<PAGE> 3
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON
STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE
OFFERING AND MAY BID FOR, AND PURCHASE, SHARES OF THE CLASS A COMMON STOCK IN
THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS."
------------------------
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE CLASS A COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITERS."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Financial Statements and Notes thereto appearing elsewhere in
this Prospectus.
THE COMPANY
Broadcom Corporation (the "Company" or "Broadcom") is a leading developer
of highly integrated silicon solutions that enable broadband digital data
transmission to the home and within the business enterprise. The Company's
products enable the high-speed transmission of data over existing communications
infrastructures, most of which were not originally intended for digital data
transmission. Using proprietary technologies and advanced design methodologies,
the Company has designed and developed integrated circuits for some of the most
significant broadband communications markets, including the markets for cable
set-top boxes, cable modems, high-speed networking, direct broadcast satellite
and terrestrial digital broadcast, and xDSL. Although the communications
infrastructures of these markets are very different, the Company has leveraged
its core technologies and introduced silicon solutions for each market that
deliver the cost and performance levels necessary to enable the widespread
deployment of broadband transmission services. The Company's broadband
transmission products consist primarily of high-performance digital signal
processing circuits that implement complex communications algorithms, surrounded
by precision high-speed analog-to-digital and digital-to-analog converter
circuits. The Company's products integrate comprehensive systems solutions into
single chips or chip-sets, thereby eliminating costly external components,
reducing board space, simplifying the customer's manufacturing process, lowering
the customer's system costs and enabling higher performance. Customers currently
shipping broadband communications equipment incorporating the Company's products
include 3Com, Bay Networks (a division of Northern Telecom), Cisco Systems,
General Instrument, Motorola and Scientific-Atlanta.
The Company was incorporated in California in August 1991. The Company's
executive offices are located at 16251 Laguna Canyon Road, Irvine, California
92618, and its telephone number is (949) 450-8700.
THE OFFERING
<TABLE>
<S> <C>
Class A Common Stock offered............................... 3,000,000 shares, including 392,500 shares by the Company
and 2,607,500 shares by the Selling Shareholders
Common Stock to be outstanding after this offering
Class A Common Stock (one vote per share)................ 7,839,750 shares(1)
Class B Common Stock (ten votes per share)............... 36,270,699 shares(1)
Total.............................................. 44,110,449 shares(1)
Use of proceeds............................................ General corporate purposes, including working capital and
acquisition of capital equipment. See "Use of Proceeds."
Nasdaq National Market symbol.............................. BRCM
</TABLE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------------------ ------------------
1993 1994 1995 1996 1997 1997 1998
------ ------ ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue............................................ $1,138 $3,636 $6,107 $21,370 $36,955 $10,426 $80,512
Gross profit............................................. 1,138 2,929 4,709 13,510 22,029 5,616 46,300
Total operating expense.................................. 1,127 2,690 4,822 9,208 24,267 8,746 23,941
Income (loss) from operations............................ 11 239 (113) 4,302 (2,238) (3,130) 22,359
Net income (loss)........................................ 12 237 4 3,016 (1,173) (1,841) 15,379
Diluted earnings (loss) per share(2)..................... $ .00 $ .01 $ .00 $ .09 $ (.04) $ (.07) $ .35
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998
--------------------------
ACTUAL AS ADJUSTED(3)
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<S> <C> <C>
BALANCE SHEET:
Cash and cash equivalents................................... $ 64,711 $ 87,620
Total assets................................................ 148,101 171,010
Total debt.................................................. 134 134
Total shareholders' equity.................................. 128,682 151,591
</TABLE>
- ---------------
(1) Based on the number of shares outstanding as of June 30, 1998. Excludes (i)
714,550 shares of Class A Common Stock and 7,970,103 shares of Class B
Common Stock issuable upon the exercise of options outstanding as of June
30, 1998 and (ii) 8,038,660 shares of Common Stock available for issuance
under the Company's employee benefit plans. See Notes 9 and 10 of Notes to
Financial Statements.
(2) See Note 1 of Notes to Financial Statements for an explanation of the
calculation of diluted earnings (loss) per share.
(3) Adjusted to reflect the sale of 392,500 shares of Class A Common Stock
offered by the Company hereby at the assumed public offering price of
$62 1/8 per share and the application of the net proceeds therefrom. See "Use
of Proceeds."
3
<PAGE> 5
NO PERSON IS AUTHORIZED IN CONNECTION WITH THIS OFFERING TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, BY ANY SELLING
SHAREHOLDER OR BY ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY BY ANY PERSON IN ANY JURISDICTION
IN WHICH IT IS UNLAWFUL FOR SUCH PERSON TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, IMPLY THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................... 3
Risk Factors............................. 5
Use of Proceeds.......................... 16
Dividend Policy.......................... 16
Price Range of Class A Common Stock...... 16
Capitalization........................... 17
Selected Financial Data.................. 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 19
Business................................. 28
</TABLE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Management............................... 47
Certain Transactions..................... 57
Principal and Selling Shareholders....... 59
Description of Capital Stock............. 61
Shares Eligible for Future Sale.......... 63
Underwriters............................. 65
Legal Matters............................ 67
Experts.................................. 67
Available Information.................... 67
Glossary of Technical Terms.............. 68
Index to Financial Statements............ F-1
</TABLE>
------------------------
Broadcom(R) and QAMLink(TM) are trademarks of the Company. This Prospectus
also includes trademarks of companies other than the Company.
------------------------
Except as otherwise noted herein, information in this Prospectus assumes
(i) no exercise of outstanding options, of which options to purchase an
aggregate of 714,550 shares of Class A Common Stock and 7,970,103 shares of
Class B Common Stock were outstanding as of June 30, 1998, and (ii) no exercise
of the Underwriters' over-allotment option.
4
<PAGE> 6
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the Class
A Common Stock offered hereby. This Prospectus contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ materially from the results discussed in the forward-looking
statements. The factors that may cause such a difference include, but are not
limited to, those discussed below in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business."
Fluctuations in Results of Operations. The Company's quarterly results of
operations have fluctuated significantly in the past and may continue to
fluctuate in the future based on a number of factors, many of which are not in
the Company's control. Such factors include, but are not limited to, the volume
of product sales and pricing concessions on volume sales; the timing,
rescheduling or cancellation of significant customer orders; the gain or loss of
a significant customer; the timing of customer qualification and industry
interoperability certification of new products; the rate of adoption by
customers and end users of new and emerging technologies in the high-speed data
networking, cable set-top box, cable modem, direct broadcast satellite ("DBS")
and terrestrial digital broadcast, and digital subscriber line ("xDSL") markets;
the rate of adoption and acceptance of new industry standards in the foregoing
markets; the Company's ability to specify, develop, introduce and market new
products and technologies on a timely basis; the qualification, availability and
pricing of competing products and technologies from other vendors; fluctuations
in manufacturing yields and other problems or delays in the fabrication,
assembly, testing or delivery of products; uncertainties associated with
international operations; the Company's ability to retain and hire key
executives, technical personnel and other employees in the numbers and with the
capabilities needed to implement its business and product plans; problems or
delays in migrating product designs to smaller geometry processes and achieving
higher levels of design integration; intellectual property disputes; changes in
product and customer mix; the amount and timing of recognition of development
revenue; general business conditions in the semiconductor industry and the
broadband communications markets; availability of foundry capacity and raw
materials; the quality of the Company's products; the timing of investments in,
and the results of, research and development; the Company's ability to expand
and implement its sales and marketing programs; the level of orders received
that can be shipped in a quarter; the effects on operations and management of
facility relocations; currency fluctuations; and general economic conditions.
The Company intends to continue to increase its operating expenses in 1998 and
1999. Because a large portion of the Company's operating expense, including
rent, salaries and capital lease expenses, is fixed and difficult to reduce or
modify, if total revenue does not meet the Company's expectations, the effect of
any revenue shortfall will be magnified by the fixed nature of these operating
expenses. Based on the foregoing or other factors, it is possible that in some
future periods the Company's reported or anticipated operating results will fail
to meet or exceed the expectations of analysts or investors. In such event, the
price of the Company's Class A Common Stock would likely be materially and
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Customer Concentration. A relatively small number of customers have
accounted for a significant portion of the Company's total revenue to date, and
the Company expects that this trend will continue for the foreseeable future. In
particular, sales to General Instrument and 3Com (including sales to their
respective manufacturing subcontractors) accounted for approximately 31.9% and
35.9%, respectively, of total revenue in the six months ended June 30, 1998 and
31.9% and 14.6%, respectively, of total revenue in 1997. Moreover, sales to the
Company's five largest customers (including sales to their respective
manufacturing subcontractors) represented approximately 81.1% and 61.7% of the
Company's total revenue in the six months ended June 30, 1998 and in fiscal
1997, respectively. Accordingly, the Company's future results of operations will
continue to be substantially dependent on the success of its largest customers
and on the Company's success in selling its existing and future products to
those customers in significant quantities. Any reduction or delay in sales of
the Company's products to one or more of these key customers could have a
material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that the Company will retain
its largest customers or that it will be able to obtain additional key
customers. The loss of one or more of the Company's largest customers or the
inability of the Company to successfully develop
5
<PAGE> 7
relationships with additional key customers could have a material adverse effect
on the Company's business, financial condition and results of operations.
Most of the Company's customers can cease incorporating the Company's
products in their own products with limited notice to the Company and with
little or no penalty. The Company's agreements with its customers typically do
not require minimum purchases. In addition, certain of the Company's customers
offer or may offer products (designed by themselves or third parties) that
compete with those offered by the Company. Many of the Company's customers have
pre-existing relationships with current or potential competitors of the Company,
which may affect such customers' purchasing decisions. In addition, the
Company's longstanding relationship with certain of its larger customers may
affect the purchasing decisions of other potential customers who compete with
these customers. The Company's customers face intense competition from other
manufacturers that do not use the Company's products. Further, some of the
Company's customers have "most favored nation" pricing arrangements which could
materially and adversely affect the Company's average selling prices and gross
margins in the event of product pricing decisions that trigger such
arrangements. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business -- Customers and Strategic
Relationships."
Rapid Technological Change; Dependence on Emerging Markets and Evolving
Standards. The semiconductor industry and the broadband communications markets
are characterized by rapidly changing technology, frequent new product
introductions and evolving industry standards. Substantially all of the
Company's current product revenue is derived from sales of products for the
high-speed networking, cable set-top box and cable modem markets. These markets
are characterized by intense competition, rapid technological change and short
product life cycles. In particular, the high-speed networking, cable set-top box
and cable modem markets continue to undergo a period of rapid growth and
consolidation. The Company's business, financial condition and results of
operations would be materially and adversely affected in the event of a
significant slowdown in any of these or other broadband communications markets.
The Company's success will depend on the ability of its customers to develop new
products and enhance existing products for the broadband communications markets
and to successfully introduce and promote such products. There can be no
assurance that the broadband communications markets will develop to the extent
or in the timeframes anticipated by the Company. The failure of new markets to
develop as anticipated or the failure of the Company's products in these markets
to gain widespread acceptance could have a material adverse effect on the
Company's business, financial condition and results of operations. Products for
broadband communications applications are generally based on industry standards,
which are continually evolving. The emergence of new industry standards could
render products of the Company or its customers unmarketable or obsolete and may
require the Company to incur substantial unanticipated costs to comply with any
such new standards. Moreover, the Company's past sales and profitability have
resulted, to a significant extent, from its ability to anticipate changes in
technology and industry standards and to develop and introduce new and enhanced
products. The Company's continued ability to adapt to such changes and to
anticipate future standards, and the rate of adoption and acceptance of those
standards, will be a significant factor in maintaining or improving the
Company's competitive position and its prospects for growth. The Company has in
the past invested substantial resources in emerging technologies, such as
100Base-T4 for high-speed networking, for which the market did not ultimately
meet the Company's expectations. There can be no assurance that the Company will
be able to anticipate the evolving standards in the semiconductor industry and,
in particular, the broadband communications markets, or that the Company will be
able to successfully develop and introduce new products into such markets. The
failure of the Company to anticipate technological change and introduce new
products that achieve market acceptance could materially and adversely affect
the Company's business, financial condition and results of operations. See
"Business -- Markets" and "-- Core Technologies."
Dependence on Development of New Products. The Company's future success
will depend upon its ability to develop new silicon solutions for existing and
new markets, introduce such products in a timely and cost-effective manner and
have such products selected for design into new products of leading equipment
manufacturers ("design wins"). The development of these new devices is highly
complex, and from time to time the Company has experienced delays in completing
the development and introduction of new products. Successful product development
and introduction depends on a number of factors, including, among other
6
<PAGE> 8
things, accurate prediction of market requirements and evolving standards;
accurate new product definition; timely completion and introduction of new
product designs; timely qualification and industry interoperability
certification of the Company's products and the products into which the
Company's products will be incorporated; availability of foundry capacity;
achievement of high manufacturing yields; and market acceptance of the Company's
and its customers' products. Furthermore, there can be no assurance that the
Company will be able to introduce new products in a timely and cost-effective
manner or in sufficient quantities to meet customer demand or that such products
will satisfy customer requirements or achieve market acceptance. The Company's
quarterly results have in the past been, and are expected in the future to
continue to be, dependent upon the introduction of a relatively small number of
new products and the timely completion and delivery of those products to
customers. The Company's or its customers' failure to develop and introduce new
products successfully and in a timely manner would materially and adversely
affect the Company's business, financial condition and results of operations.
The Company's new products are generally incorporated into customers' products
or systems at the design stage. Achieving a design win often requires
significant expenditures by the Company without any assurance of success.
Moreover, design wins frequently precede the generation of volume sales, if any,
by six to nine months or more. The value of any design win largely depends upon
the commercial success of the customer's product and on the extent to which the
design of the customer's electronic system accommodates components manufactured
by the Company's competitors. There can be no assurance that the Company will
continue to achieve design wins or that the products for which the Company
achieves design wins will be commercially successful. See
"Business -- Strategy," "-- Products" and "-- Research and Development."
Dependence on Key Personnel. The Company's success depends to a significant
extent upon the continued service of its executive officers and other key
management and technical personnel and on its ability to continue to attract,
retain and motivate qualified personnel, particularly experienced mixed-signal
circuit designers and systems applications engineers. The competition for such
employees is intense, and the Company may not be able to attract as many
qualified new personnel as it was able to employ prior to its initial public
offering. The loss of the services of one or more of the Company's key employees
or the Company's failure to attract, retain and motivate qualified personnel
could have a material adverse effect on the Company's business, financial
condition and results of operations. In particular, the loss of the services of
Dr. Henry T. Nicholas, III, the co-founder, President and Chief Executive
Officer of the Company, or Dr. Henry Samueli, the co-founder, Vice President of
Research and Development and Chief Technical Officer of the Company, could
materially and adversely affect the Company. The Company does not have any
employment contracts with its employees that govern the length of their service.
See "Business -- Employees" and "Management -- Executive Officers, Key Employees
and Directors."
Competition. The broadband communications markets and semiconductor
industry are intensely competitive and are characterized by rapid technological
change, evolving standards, short product life cycles and price erosion. The
Company competes with a number of major domestic and international suppliers of
equipment in the markets for cable set-top boxes, cable modems, high-speed
networking, DBS and terrestrial digital broadcast, and xDSL. This competition
has resulted and may continue to result in declining average selling prices for
the Company's products. The Company currently competes in the cable television
set-top box market with Fujitsu, LSI Logic, Philips Electronics, Rockwell
International and VLSI Technology for communication devices and with ATI
Technologies, C-Cube, LSI Logic, Motorola and STMicroelectronics (formerly
SGS-THOMSON) in the MPEG/graphics segment. The Company expects other major
semiconductor manufacturers to enter the market as the digital broadcast
television and other digital cable television markets become more established. A
number of companies, including Hitachi, Libit Signal Processing, LSI Logic,
Rockwell International, Stanford Telecommunications, Inc. ("STI") and Toshiba
have announced that they are developing and plan to introduce MCNS/DOCSIS
compliant products in 1998, which could result in significant competition in the
cable modem market. In the high-speed networking market, the Company principally
competes with established suppliers including Level One Communications, Lucent
Technologies, National Semiconductor and Texas Instruments. The Company's
principal competitors in the DBS/terrestrial broadcast market include LSI Logic,
Lucent Technologies, Philips Electronics, Rockwell International, Sony,
STMicroelectronics and VLSI Technology. The Company's principal competitors in
the xDSL market include Alcatel, Analog Devices, Globespan, Motorola, Rockwell
International and Texas
7
<PAGE> 9
Instruments. The Company also may face competition from suppliers of products
based on new or emerging technologies. Many of the Company's competitors operate
their own fabrication facilities and have longer operating histories and
presence in key markets, greater name recognition, access to larger customer
bases and significantly greater financial, sales and marketing, manufacturing,
distribution, technical and other resources than the Company. As a result, such
competitors may be able to adapt more quickly to new or emerging technologies
and changes in customer requirements or devote greater resources to the
promotion and sale of their products than the Company. Current and potential
competitors have established or may establish financial or strategic
relationships among themselves or with existing or potential customers,
resellers or other third parties. Accordingly, it is possible that new
competitors or alliances among competitors could emerge and rapidly acquire
significant market share. In addition, existing or new competitors may in the
future develop technologies that more effectively address the transmission of
digital information through existing analog infrastructures at a lower cost.
There can be no assurance that the Company will be able to compete successfully
against current or potential competitors, or that competition will not have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Competition."
Management of Growth. The Company has experienced a period of rapid growth,
expanding from 164 employees in June 1997 to 376 employees (including temporary
and contract employees) in June 1998. This expansion has placed, and continues
to place, significant strain on the Company's resources. To accommodate this
growth, the Company will be required to implement a variety of new and upgraded
operational and financial systems, procedures and controls, including the
improvement of its accounting and other internal management systems, all of
which may require substantial management effort. There can be no assurance that
such efforts can be accomplished successfully. The Company's rapid growth and
expansion, as well as its product development and selling, general and
administrative activities, have necessitated the increase in the number of
employees as well as increased responsibilities for the Company's management. To
support its growth, the Company recently entered into a new lease for larger
facilities and is in the process of improving these facilities. These new
facilities will allow all of the Company's Irvine employees and operations to be
centralized on one campus. This relocation of the Company's headquarters and
Irvine operations could result in a temporary disruption of the Company's
operations or a temporary diversion of management attention and resources. From
time to time, the Company engages in other relocations of employees or
operations. If the Company sustains its growth in the future, it will need to
continue to implement and improve its operational, financial and management
information systems and to hire, train, motivate and manage its expanding
employee base. There can be no assurance that the Company's systems, procedures
and controls will be adequate to support the Company's operations. Any
difficulties resulting from relocation of employees or operations or any failure
to improve the Company's operational, financial and management information
systems, or to hire, train, motivate or manage its employees could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Dependence on Independent Foundries. The Company does not own or operate a
fabrication facility, and substantially all of its semiconductor device
requirements are currently supplied by two outside foundries, Taiwan
Semiconductor Manufacturing Corporation ("TSMC") in Taiwan and Chartered
Semiconductor Manufacturing ("Chartered") in Singapore. There are significant
risks associated with the Company's reliance on outside foundries, including the
lack of ensured wafer supply; limited control over delivery schedules, quality
assurance and control, manufacturing yields and production costs; and the
unavailability of or delays in obtaining access to key process technologies. In
addition, the manufacture of integrated circuits ("ICs") is a highly complex and
technologically demanding process. Although the Company works closely with its
foundries to minimize the likelihood of reduced manufacturing yields, the
Company's foundries have from time to time experienced lower than anticipated
manufacturing yields, particularly in connection with the introduction of new
products and the installation and start-up of new process technologies.
The Company provides its foundries with rolling forecasts of its production
requirements; however, the ability of each foundry to provide semiconductor
devices to the Company is limited by the foundry's available capacity. Although
the Company has entered into contractual commitments to supply specified levels
of products to certain of its customers, the Company does not have a long-term
volume purchase agreement or a guaranteed level of
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<PAGE> 10
production capacity with TSMC or Chartered because the Company believes excess
foundry capacity is currently available. The Company places its orders on a
purchase order basis, and these foundries may allocate capacity to the
production of other companies' products while reducing deliveries to the Company
on short notice. In particular, foundry customers that are larger and better
financed than the Company or that have long-term agreements with the Company's
foundries may cause such foundries to reallocate capacity in a manner adverse to
the Company. In addition, if the Company chooses to use a new foundry, several
months are typically required to complete the qualification process before the
Company can begin shipping products from the new foundry. Although the Company
primarily utilizes two independent foundries, most of the Company's components
are not manufactured at both foundries at any given time. Any inability of one
of the foundries to provide the necessary components could result in significant
delays and could have a material adverse effect on the Company's business,
financial condition and results of operations. In the event either foundry
experiences financial difficulties (whether as a result of the Asian economic
crisis or otherwise) or suffers any damage or destruction to its respective
facilities, or in the event of any other disruption of foundry capacity, the
Company may not be able to qualify alternative manufacturing sources for
existing or new products in a timely manner. Even the Company's current outside
foundries would need to have certain manufacturing processes qualified in the
event of disruption at another foundry, which the Company may not be able to
accomplish in a timely enough manner to prevent an interruption in supply of the
affected products. There can be no assurance that any existing or new foundries
would be able to produce ICs with acceptable manufacturing yields. Furthermore,
there can be no assurance that the Company's foundries will continue to deliver
sufficient quantities of semiconductor devices on a timely basis, will not
experience lower than expected manufacturing yields in the future, or will
continue to have excess capacity, any of which events could materially and
adversely affect the Company's business, financial condition and results of
operations. See "Business -- Manufacturing."
Dependence on Third-Party Subcontractors for Assembly and
Test. Substantially all of the Company's products are assembled and tested by
one of two third-party subcontractors, ASAT Ltd. ("ASAT") in Hong Kong and ST
Assembly Test Services ("STATS") in Singapore. The Company does not have
long-term agreements with either of these suppliers and typically procures
services from such suppliers on a per order basis. The availability of assembly
and testing services from these subcontractors could be adversely affected in
the event either subcontractor experiences financial difficulties (whether as a
result of the Asian economic crisis or otherwise) or suffers any damage or
destruction to its respective facilities, or in the event of any other
disruption of assembly and testing capacity. As a result of this reliance on
third-party subcontractors for assembly and testing of its products, the Company
cannot directly control product delivery schedules, which has in the past, and
could in the future, result in product shortages or quality assurance problems
that could increase the costs of manufacture, assembly or testing of the
Company's products. Due to the amount of time normally required to qualify
assemblers and testers, if the Company is required to find alternative
manufacturing assemblers or testers of its components, shipments could be
delayed. Any problems associated with the delivery, quality or cost of the
Company's products could have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business -- Manufacturing."
Risks Associated with Potential Acquisitions. As part of its business
strategy, the Company expects to review acquisition prospects that would
complement its existing product offerings, augment its market coverage or
enhance its technological capabilities. Although the Company has no current
understandings or agreements with respect to any material acquisitions, the
Company may make acquisitions of businesses, products or technologies in the
future. However, there can be no assurance that the Company will be able to
locate suitable acquisition opportunities or to consummate any such acquisitions
on terms and conditions acceptable to the Company. Future acquisitions by the
Company could result in potentially dilutive issuances of equity securities,
large one-time write-offs, the incurrence of debt and contingent liabilities or
amortization expenses related to goodwill and other intangible assets, any of
which could materially adversely affect the Company's results of operations or
the price of the Company's Class A Common Stock. Furthermore, acquisitions
entail numerous risks, including difficulties in the assimilation and
integration of operations, personnel, technologies, products and the information
systems of the acquired companies, diversion of management's attention from
other business concerns, risks of entering geographic or business markets in
which the Company has no or limited prior experience and the potential loss of
key employees. Since the Company has not made any material acquisitions in the
past, no assurance can be given as to the ability of the
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<PAGE> 11
Company to successfully integrate any businesses, products, technologies or
personnel that might be acquired in the future, and the failure of the Company
to do so could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Strategy."
Risks Associated with Expansion of International Business Activities. The
Company currently procures substantially all of its manufacturing, assembly and
test services from suppliers located outside the United States and may expand
its manufacturing activities abroad. Approximately 13.1% of the Company's total
revenue in the six months ended June 30, 1998 was derived from sales to
independent customers based outside the United States. In 1997, approximately
15.4% of the Company's total revenue was derived from sales to independent
customers based outside of the United States. In addition, the Company often
ships products to its domestic customers' international manufacturing divisions
and subcontractors. Accordingly, the Company is subject to risks inherent in
international operations, which include, but are not limited to, political,
social and economic instability, trade restrictions, the imposition of
governmental controls, exposure to different legal standards (particularly with
respect to intellectual property), burdens of complying with a variety of
foreign laws, import and export license requirements, future import and export
restrictions, unexpected changes in regulatory requirements, foreign technical
standards, changes in tariffs, difficulties in staffing and managing operations,
difficulties in collecting receivables and potentially adverse tax consequences.
In particular, certain Asian countries have recently experienced significant
economic difficulties, including currency devaluation and instability, business
failures and a generally depressed business climate, particularly in the
semiconductor industry. In view of the Company's reliance on Asian foundries and
assemblers, and the Company's expanded international operations, the Asian
economic crisis may have a material adverse effect on the Company's business,
financial condition and results of operations.
In addition, certain of the Company's products contain encryption or other
features that are subject to various government export regulations, pursuant to
which the Company has applied for export licenses. If such licenses are not
granted, the Company may be unable to manufacture such products at its foreign
foundries or to ship such products to certain customers located outside the
United States. There can be no assurance that the Company will obtain such
licenses or any licenses applied for in the future or that the failure to obtain
such licenses will not have a material adverse effect on the Company's business,
financial condition and results of operations. Moreover, demand for the
Company's products could be adversely affected by seasonality of international
sales and economic conditions in the Company's primary overseas markets. All of
the Company's international sales to date have been denominated in U.S. dollars.
As a result, an increase in the value of the U.S. dollar relative to foreign
currencies could make the Company's products less competitive in international
markets. There can be no assurance that the risks associated with the Company's
international operations will not materially adversely affect the Company's
business, financial condition and results of operations in the future or require
the Company to modify significantly its current business practices. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Reliance on Strategic Relationships. The Company has relied on in the past,
and intends to continue to form in the future, strategic relationships with
certain of its customers who are technology leaders in the Company's target
markets. These relationships often involve the proposed development by the
Company of new products involving significant technological challenges. Since
the proposed product under development may offer potential competitive
advantages to the strategic partner, considerable pressure is frequently placed
on the limited resources of the Company to meet development schedules. While an
essential element of the Company's strategy involves establishing such
relationships, these projects utilize substantial amounts of the Company's
limited resources, and could materially detract from or delay the completion of
other important development projects. Delays in development could impair the
relationship between the Company and its strategic partners. Moreover, there can
be no assurance that customers of the Company will not develop their own
solutions for products currently supplied by the Company, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Customers and Strategic Relationships."
Transition to Smaller Geometry Process Technologies. The Company
continuously evaluates the benefits, on a product-by-product basis, of migrating
to smaller geometry process technologies in order to reduce costs and has
commenced migration of certain products to smaller geometry processes. The
Company believes that the transition of its products to increasingly smaller
geometries will be important for the
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<PAGE> 12
Company to remain competitive. The Company has in the past experienced
difficulty in migrating to new manufacturing processes, which has resulted and
could continue to result in reduced yields, delays in product deliveries and
increased expense levels. Moreover, the Company is dependent on its
relationships with its foundries to migrate to smaller geometry processes
successfully. No assurance can be given that the Company's future process
migrations will be achieved without difficulties, delays or increased expenses.
The Company's business, financial condition and results of operations could be
materially and adversely affected if any such transition is substantially
delayed or inefficiently implemented. As smaller geometry processes become more
prevalent, the Company expects to integrate higher levels of customer and
third-party intellectual property into its products. No assurance can be given
that higher levels of integration will not adversely affect the Company's
ability to deliver new integrated products on a timely basis, or at all. See
"Business -- Manufacturing."
Risks Associated with Intellectual Property Protection. The Company's
success and future revenue growth will depend, in part, on its ability to
protect its intellectual property. The Company relies primarily on patent,
copyright, trademark and trade secret laws, as well as nondisclosure agreements
and other methods to protect its proprietary technologies and processes. There
can be no assurance that such measures will provide meaningful protection for
the Company's proprietary technologies and processes. The Company has been
issued three United States patents and has filed 14 United States patent
applications. There can be no assurance that any patent will issue as a result
of these applications or future applications or, if issued, that any claims
allowed will be sufficiently broad to protect the Company's technology. In
addition, there can be no assurance that any existing or future patents will not
be challenged, invalidated or circumvented, or that any right granted thereunder
would provide meaningful protection to the Company. The failure of any patents
to provide protection to the Company's technology would make it easier for the
Company's competitors to offer similar products. In connection with its
participation in the development of various industry standards, the Company may
be required to agree to license certain of its patents to other parties,
including its competitors, that develop products based upon the adopted
standards. The Company also generally enters into confidentiality agreements
with its employees and strategic partners, and generally controls access to and
distribution of its documentation and other proprietary information. Despite
these precautions, it may be possible for a third party to copy or otherwise
obtain and use the Company's products, services or technology without
authorization, develop similar technology independently or design around the
Company's patents. In addition, effective copyright, trademark and trade secret
protection may be unavailable or limited in certain foreign countries. Certain
of the Company's customers have entered into agreements with the Company
pursuant to which such customers have the right to use the Company's proprietary
technology in the event the Company defaults in its contractual obligations,
including product supply obligations, and fails to cure the default within a
specified period of time. Moreover, the Company often incorporates the
intellectual property of its strategic customers into its designs, and the
Company has certain obligations with respect to the non-use and non-disclosure
of such intellectual property. There can be no assurance that the steps taken by
the Company to prevent misappropriation or infringement of the intellectual
property of the Company or its customers will be successful. Moreover,
litigation may be necessary in the future to enforce the Company's intellectual
property rights, to protect the Company's trade secrets or to determine the
validity and scope of proprietary rights of others, including its customers.
Such litigation could result in substantial costs and diversion of management's
efforts and other Company resources and could have a material adverse effect on
the Company's business, financial condition and results of operations.
The semiconductor industry is characterized by vigorous protection of and
pursuit of intellectual property rights. From time to time, the Company has
received, and may continue to receive in the future, notices of claims of
infringement, misappropriation or misuse of other parties' proprietary rights.
The Company has received a letter from counsel for BroadCom, Inc. asserting
rights in the "Broadcom" trademark and demanding that the Company cease and
desist from any further use of the Broadcom name. The Company and BroadCom, Inc.
have exchanged correspondence outlining their respective positions on the
matter. In addition, the Company is currently involved in litigation with STI
concerning the alleged infringement of one of STI's patents by several of the
Company's modem products and with Sarnoff Corporation and Sarnoff Digital
Communications, Inc. (collectively, "Sarnoff") concerning the alleged
misappropriation and misuse of certain Sarnoff trade secrets by the Company.
There can be no assurance that the Company will prevail in these actions, or
that other actions alleging infringement by the Company of third-party patents,
misappropriation or misuse by the Company of third-party trade secrets or the
invalidity of one or more patents held by the
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<PAGE> 13
Company will not be asserted or prosecuted against the Company, or that any
assertions of infringement, misappropriation or misuse or prosecutions seeking
to establish the invalidity of Company-held patents will not materially and
adversely affect the Company's business, financial condition and results of
operations. For example, in a patent or trade secret action, an injunction could
be issued against the Company requiring that the Company withdraw certain
products from the market or necessitating that certain products offered for sale
or under development be redesigned. The Company has also entered into certain
indemnification obligations in favor of its customers and strategic partners
that could be triggered upon an allegation or finding of the Company's
infringement, misappropriation or misuse of other parties' proprietary rights.
Irrespective of the validity or successful assertion of such claims, the Company
would likely incur significant costs and diversion of its management and
personnel resources with respect to the defense of such claims, which could also
have a material adverse effect on the Company's business, financial condition
and results of operations. If any claims or actions are asserted against the
Company, the Company may seek to obtain a license under a third party's
intellectual property rights. There can be no assurance that under such
circumstances a license would be available on commercially reasonable terms, if
at all. See "Business -- Intellectual Property" and "-- Legal Proceedings."
Lengthy Sales Cycle. The Company's sales cycle involves test and evaluation
of its products by the potential customer and design of the customer's equipment
to incorporate the Company's products. The sales cycle for the test and
evaluation of the Company's products can range from three to six months or more,
and it can take an additional six to nine months or more before a customer
commences volume production of equipment that incorporates the Company's
products. Because of this lengthy sales cycle, the Company may experience a
delay between increasing expenses for research and development, sales and
marketing, and general and administrative efforts, as well as increasing
investments in inventory, and the generation of revenues, if any, from such
expenditures. In addition, the delays inherent in such lengthy sales cycle raise
additional risks of customer decisions to cancel or change product plans, which
could result in the loss of anticipated sales by the Company. Achieving a design
win provides no assurance that such customer will ultimately ship products
incorporating the Company's products. The Company's business, financial
condition and results of operations could be materially adversely affected if a
significant customer curtails, reduces or delays orders during the Company's
sales cycle or chooses not to release products employing the Company's products.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Sales and Marketing."
Order and Shipment Uncertainties. The Company's sales are generally made
pursuant to individual purchase orders that may be canceled or deferred by
customers on short notice without significant penalty. Cancellation or deferral
of product orders could result in the Company holding excess inventory, which
could have a material adverse effect on the Company's profit margins and
restrict its ability to fund its operations. The Company recognizes revenue upon
shipment of products to the customer. Refusal of customers to accept shipped
products or delays or difficulties in collecting accounts receivable could
result in significant charges against income, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Product Complexity. Products as complex as those offered by the Company
frequently contain errors, defects and bugs when first introduced or as new
versions are released. The Company has in the past experienced such errors,
defects and bugs. Delivery of products with production defects or reliability,
quality or compatibility problems could significantly delay or hinder market
acceptance of such products, which could damage the Company's reputation and
adversely affect the Company's ability to retain its existing customers and to
attract new customers. Moreover, such errors, defects or bugs could cause
problems, interruptions, delays or a cessation of sales to the Company's
customers. Alleviating such problems may require significant expenditures of
capital and resources by the Company. There can be no assurance that, despite
testing by the Company, its suppliers or its customers, errors, defects or bugs
will not be found in new products after commencement of commercial production,
resulting in additional development costs, loss of, or delays in, market
acceptance, diversion of technical and other resources from the Company's other
development efforts, product repair or replacement costs, claims by the
Company's customers or others against the Company, or the loss of credibility
with the Company's current and prospective customers. Any such event could have
a material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Core Technologies" and
"-- Manufacturing."
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<PAGE> 14
Cyclicality of the Semiconductor Industry. The Company provides
semiconductor devices to the broadband communications markets. The semiconductor
industry is highly cyclical and subject to rapid technological change and has
been subject to significant economic downturns at various times, characterized
by diminished product demand, accelerated erosion of average selling prices and
production overcapacity. The semiconductor industry also periodically
experiences increased demand and production capacity constraints. As a result,
the Company may experience substantial period-to-period fluctuations in future
results of operations due to general semiconductor industry conditions, overall
economic conditions or other factors. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Limited Operating History. The Company was incorporated in August 1991 but
did not begin shipping products until 1994. Accordingly, the Company has a
limited operating history upon which investors may evaluate the Company and its
prospects. The Company's recent revenue growth may not be sustainable and should
not be considered indicative of future revenue growth, if any. There can be no
assurance that the Company will be profitable in any future period. The
Company's prospects must be considered in light of the risks, challenges and
difficulties frequently encountered by companies in their early stage of
development, particularly companies in intensely competitive and rapidly
evolving markets such as the semiconductor industry and the broadband
communications markets. To address these risks, the Company must, among other
things, successfully increase the scope of its operations, respond to
competitive and technological developments, continue to attract, retain and
motivate qualified personnel and continue to commercialize products
incorporating innovative technologies. There can be no assurance that the
Company will be successful in addressing these risks and challenges. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Risks Associated with Government Regulation. The Federal Communications
Commission (the "FCC") has broad jurisdiction over each of the Company's target
markets. Although the Company's products are not directly subject to current
regulations of the FCC or any other federal or state communications regulatory
agency, much of the equipment into which the Company's products are incorporated
is subject to direct government regulation. Accordingly, the effects of
regulation on the Company's customers or the industries in which they operate
may, in turn, adversely impact the Company's business, financial condition and
results of operations. FCC regulatory policies affecting the ability of cable
operators or telephone companies to offer certain services and other terms on
which these companies conduct their businesses may impede sales of the Company's
products. For example, the Company has in the past experienced delays when
products incorporating its chips failed to comply with FCC emissions
specifications. In addition, the Company's business, financial condition and
results of operations may also be adversely affected by the imposition of
certain tariffs, duties and other import restrictions on components that the
Company obtains from non-domestic suppliers or by the imposition of export
restrictions on products that the Company sells internationally. The Company may
also be subject to regulation by countries other than the United States. Changes
in current laws or regulations or the imposition of new laws and regulations in
the United States or elsewhere, could materially and adversely affect the
Company's business, financial condition and results of operations.
Control by Directors, Executive Officers and Their Affiliates. As of June
30, 1998, the Company's directors and executive officers beneficially owned
approximately 53.9% of the outstanding Common Stock and 59.6% of the total
voting control of the Company. In particular, as of June 30, 1998, the two
founders of the Company, Dr. Henry T. Nicholas, III and Dr. Henry Samueli,
beneficially owned an aggregate of approximately 49.5% of the outstanding Common
Stock and 54.8% of the total voting control of the Company. Accordingly, such
persons will have sufficient voting power to control the outcome of matters
(including the election of a majority of the Board of Directors, and any merger,
consolidation or sale of all or substantially all of the Company's assets)
submitted to the Company's shareholders for approval and will also have control
over the management and affairs of the Company. As a result of such control,
certain transactions may not be possible without the approval of such
shareholders. These transactions include proxy contests, mergers involving the
Company, tender offers, open market purchase programs or other purchases of
Class A Common Stock that could give shareholders of the Company the opportunity
to realize a premium over the then prevailing market price for their shares of
Class A Common Stock. See "Principal and Selling Shareholders."
Shares Eligible for Future Sale. Sales of substantial amounts of Class A
Common Stock in the public market after this offering could adversely affect the
market price of the Class A Common Stock. Upon completion of this offering, the
Company will have outstanding 44,265,656 shares of Common Stock (based
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<PAGE> 15
upon shares outstanding at September 30, 1998), of which 2,318,516 unvested
shares are subject to the Company's repurchase right, and an aggregate of
961,830 shares are issuable upon exercise of options vested as of October 14,
1998. Of the 41,947,140 shares not subject to repurchase, 8,787,649 shares
(including the 3,000,000 shares registered in this offering, the 4,025,000
shares sold in the Company's initial public offering, 289,734 shares that were
subject to lock-up agreements that expire on October 14, 1998 and the 1,472,915
shares that were sold in connection with partial early releases from lock-up
agreements entered into in connection with the Company's initial public
offering) will be freely tradeable without restriction or further registration
under the Securities Act of 1933, as amended (the "Securities Act"), unless such
shares are held by "Affiliates" of the Company, as defined in the regulations
promulgated under the Securities Act. The remaining 34,121,321 shares of Common
Stock (including shares issuable upon exercise of options vested as of October
14, 1998) are subject to lock-up agreements or are "restricted securities" as
that term is defined in Rule 144 under the Securities Act. Of such shares, (i)
4,609,365 shares will become eligible for sale on November 13, 1998, (ii)
26,201,956 shares will become eligible for sale 90 days following the date of
this Prospectus; and (iii) 3,250,000 shares will become eligible for sale
pursuant to Rule 701 or Rule 144 on various dates after 90 days following the
date of this Prospectus. Of such shares, 500,000 shares of Class A Common Stock
sold to Cisco Systems in April 1998 will be eligible for sale upon expiration of
a one-year holding period subject to certain contractual restrictions on
transfer. Furthermore, in connection with a partial release from an existing
lock-up agreement of 600,000 shares of the Company's Class B Common Stock owned
by Scientific-Atlanta commencing October 2, 1998, Scientific-Atlanta has agreed
to lock-up an additional 500,000 shares until April 13, 1999 and an additional
60,000 shares until 30 days following the date of this Prospectus to the extent
such shares are not sold in the Underwriters' over-allotment option. The holders
of 27,571,087 shares of Class B Common Stock are entitled to certain rights with
respect to registration of such shares for sale in the public market. In
addition, in August 1998, the Company filed a Registration Statement on Form S-8
under the Securities Act covering shares of Common Stock reserved for issuance
under the Company's employee benefit plans. See "Principal and Selling
Shareholders," "Shares Eligible for Future Sale" and "Underwriters."
Year 2000 Compliance. Many existing computer systems and applications, and
other control devices, use only two digits to identify a year in the date field,
without considering the impact of the upcoming change in the century. Others do
not correctly process "leap year" dates. As a result, such systems and
applications could fail or create erroneous results unless corrected so that
they can correctly process data related to the year 2000 and beyond, but there
can be no assurance that such upgrades will be completed on a timely basis or
without incurring substantial costs. While the Company has evaluated its
products for year 2000 compliance and believes that each is substantially year
2000 compliant, there can be no assurance that the Company's products are or
will ultimately be year 2000 compliant. In addition, the Company believes that
it is not possible to determine whether all of its customers' products into
which the Company's products are incorporated will be year 2000 compliant
because the Company has little or no control over the design, production and
testing of its customers' products. The Company relies on its systems,
applications and devices in operating and monitoring all major aspects of its
business, including financial systems (such as general ledger, accounts payable
and payroll modules), customer services, infrastructure, embedded computer
chips, networks and telecommunications equipment and end products. Although the
Company is in the process of upgrading its software to address the year 2000
issue, there can be no assurance that such upgrades will be completed on a
timely basis at reasonable costs, or that such upgrades will be able to
anticipate all of the problems triggered by the actual impact of the year 2000.
The Company also relies, directly and indirectly, on external systems of
suppliers for the management and control of fabrication, assembly and testing of
substantially all of the Company's products and of business enterprises such as
customers, suppliers, creditors, financial organizations, and of governmental
entities, both domestic and international, for accurate exchange of data. The
Company could be affected through disruptions in the operation of the
enterprises with which the Company interacts or from general widespread problems
or an economic crisis resulting from noncompliant year 2000 systems. Despite the
Company's efforts to address the year 2000 impact on its internal systems and
business operations, there can be no assurance that such impact will not result
in a material disruption of its business or have a material adverse effect on
the Company's business, financial condition or results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000."
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Future Capital Needs; Uncertainty of Additional Funding. The Company
believes that the aggregate net proceeds from this offering, together with the
net proceeds of the Company's initial public offering and cash generated from
its operations will be sufficient to meet its capital requirements for at least
the next twelve months. Nonetheless, the Company may elect to sell additional
equity securities or obtain credit facilities. The Company's future capital
requirements will depend on many factors, including, but not limited to, the
levels at which the Company maintains inventory, the market acceptance of the
Company's products, the levels of promotion and advertising required to launch
such products and attain a competitive position in the marketplace, the extent
to which the Company invests in new technology and improvements to its existing
technology, potential acquisitions, the response of competitors to products
based on the Company's technology and other factors. To the extent the Company's
existing resources and any future earnings are insufficient to fund the
Company's activities, the Company may need to raise additional funds through
public or private financing. No assurance can be given that additional financing
will be available or that if available, any such financing can be obtained on
terms favorable to the Company and its shareholders. If adequate funds are not
available, the Company may be required to curtail its operations significantly
or to obtain funds through arrangements with strategic partners or others that
may require the Company to relinquish rights to certain of its technologies or
potential markets. If additional funds are raised through the issuance of equity
securities, the percentage ownership of the then existing shareholders of the
Company would be reduced. Such equity securities may have rights, preferences or
privileges senior to those of the holders of the Company's Common Stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Stock Price Volatility. The trading price of the Company's Class A Common
Stock has been and will likely continue to be subject to wide fluctuations in
response to quarter to quarter variations in results of operations,
announcements of technological innovations or new products by the Company, its
competitors or its customers, general conditions in the semiconductor,
telecommunications and data communications equipment markets, changes in
earnings estimates or investment recommendations by analysts, investor
perceptions and expectations regarding the products, plans and strategic
position of the Company, its competitors and its customers, or other events or
factors. For example, since the Company's initial public offering, the Company's
Class A Common Stock has traded as low as $47.00 and as high as $89.75 per
share. In addition, the public stock markets have experienced extreme price and
trading volume volatility, particularly in high technology sectors of the
market. This volatility has significantly affected the market prices of
securities of many technology companies for reasons frequently unrelated to the
operating performance of the specific companies. These broad market fluctuations
may adversely affect the market price of the Company's Class A Common Stock.
There can be no assurance that the market price of the Company's Class A Common
Stock will not decline below the offering price.
Potential Effect of Anti-Takeover Provisions. The Company's Articles of
Incorporation and Bylaws contain provisions that may discourage or prevent
certain types of transactions involving an actual or potential change in control
of the Company, including transactions in which the shareholders might otherwise
receive a premium for their shares over then current market prices, and may
limit the ability of the shareholders to approve transactions that they may deem
to be in their best interests. In addition, the Company has outstanding Class B
Common Stock, which entitles each holder thereof to ten votes per share on all
matters presented for a shareholder vote. The Board of Directors also has the
authority to fix the rights and preferences of shares of the Company's Preferred
Stock and to issue such shares without a shareholder vote. It is possible that
the provisions in the Company's Articles of Incorporation and Bylaws, the
existence of super voting rights held by insiders and the ability of the Board
of Directors to issue Preferred Stock may have the effect of delaying, deferring
or preventing a change of control of the Company without further action by the
shareholders, may discourage bids for the Company's Class A Common Stock at a
premium over the market price of the Class A Common Stock and may adversely
affect the market price of the Class A Common Stock and the voting and other
rights of the holders of Class A Common Stock.
Broad Management Discretion in Use of Proceeds. While the Company expects
to use the net proceeds of this offering for general corporate purposes, the
Company has not yet identified specific uses for such net proceeds. Accordingly,
the Company's management will retain broad discretion as to the allocation of
the net proceeds of this offering. There can be no assurance that the proceeds
will be utilized in a manner that the shareholders deem optimal, or that the
proceeds can or will be invested to yield a significant return. See "Use of
Proceeds."
15
<PAGE> 17
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 392,500 shares of
Class A Common Stock offered by the Company hereby, at the assumed public
offering price of $62 1/8 per share and after deducting estimated underwriting
discounts and commissions and offering expenses payable by the Company are
estimated to be $22.9 million ($27.5 million if the Company sells an additional
77,500 shares as a result of the Underwriters' over-allotment option being
exercised in full). The balance of the net proceeds will be used for general
corporate purposes, including working capital and capital purchases such as test
equipment, design tools and leasehold improvements associated with the Company's
planned facilities expansion. Pending such uses, the Company intends to invest
its net proceeds of this offering in investment-grade, interest-bearing
securities. Management of the Company will have broad discretion concerning the
allocation and use of all of the net proceeds of this offering to be received by
the Company. The Company may use a portion of the net proceeds of this offering
for the acquisition of businesses, products and technologies. As of the date of
this Prospectus, the Company has no current understandings or agreements
regarding any material acquisition.
The Company will not receive any proceeds from the sale of Class A Common
Stock by the Selling Shareholders.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on shares of its
capital stock. The Company currently intends to retain future earnings, if any,
for use in its business, and does not anticipate paying any cash dividends in
the foreseeable future.
PRICE RANGE OF CLASS A COMMON STOCK
The Company's Class A Common Stock is quoted on the Nasdaq National Market
under the symbol "BRCM." The following table sets forth, for the periods
indicated, the high and low sales prices of the Class A Common Stock as reported
by the Nasdaq National Market since the Company's initial public offering in
April 1998. The Company's Class A Common Stock was initially sold to the public
at a price of $24 per share.
<TABLE>
<CAPTION>
HIGH LOW
Year Ending December 31, 1998 ---- ---
<S> <C> <C>
Second Quarter (beginning April 17, 1998)............ $76 5/8 $47
Third Quarter........................................ 89 3/4 47
Fourth Quarter (through October 9, 1998)............. 70 1/2 58
</TABLE>
The last sale price of the Class A Common Stock on October 9, 1998, as
reported by the Nasdaq National Market, was $62 1/8 per share. As of October 9,
1998, there were approximately 53 and 350 holders of record of the Company's
Class A Common Stock and Class B Common Stock, respectively.
16
<PAGE> 18
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1998 on an actual basis, and as adjusted basis to give effect to the sale of
392,500 shares of Class A Common Stock by the Company in this offering at an
assumed public offering price of $62 1/8 per share and after deducting estimated
underwriting discounts and commissions and offering expenses payable by the
Company. This table should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the Company's
Financial Statements included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1998
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt, less current portion(1)..................... $ 45 $ 45
-------- --------
Shareholders' equity:
Preferred Stock, $.0001 par value; 10,000,000 shares
authorized; no shares issued and outstanding, actual and
as adjusted............................................... -- --
Class A Common Stock, $.0001 par value; 200,000,000 shares
authorized; 4,839,750 shares issued and outstanding,
actual; 7,839,750 shares issued and outstanding, as
adjusted(2)............................................... -- 1
Class B Common Stock, $.0001 par value; 100,000,000 shares
authorized; 38,878,199 shares issued and outstanding,
actual; 36,270,699 shares issued and outstanding, as
adjusted(2)............................................... 4 4
Additional paid-in capital.................................. 120,621 143,529
Notes receivable from employees............................. (3,464) (3,464)
Deferred compensation....................................... (5,956) (5,956)
Retained earnings........................................... 17,477 17,477
-------- --------
Total shareholders' equity.................................. 128,682 151,591
-------- --------
Total capitalization.............................. $128,727 $151,636
======== ========
</TABLE>
- ---------------
(1) See Note 3 of Notes to Financial Statements.
(2) Based on the number of shares outstanding as of June 30, 1998. Excludes (i)
714,550 shares of Class A Common Stock and 7,970,103 shares of Class B
Common Stock issuable upon the exercise of options outstanding as of June
30, 1998 and (ii) 8,038,660 shares of Common Stock available for issuance
under the Company's employee benefit plans.
17
<PAGE> 19
SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and Notes thereto included elsewhere in
this Prospectus. The balance sheet data as of December 31, 1996 and 1997 and the
statement of operations data for the years ended December 31, 1995, 1996 and
1997 have been derived from the audited financial statements of the Company
included elsewhere in this Prospectus. The balance sheet data as of December 31,
1994 and 1995 and the statement of operations data for the year ended December
31, 1994 have been derived from audited financial statements of the Company not
included herein. The balance sheet data as of June 30, 1998 and the statement of
operations data for the six months ended June 30, 1997 and 1998 have been
derived from unaudited financial statements included elsewhere in this
Prospectus. The balance sheet data as of December 31, 1993 and the statement of
operations data for the year ended December 31, 1993 have been derived from
unaudited financial statements not included herein. The unaudited financial
statements of the Company were prepared by management of the Company on the same
basis as the audited financial statements included elsewhere herein and, in the
opinion of the Company, include all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the information set forth
below. Results for the six month period ended June 30, 1998 are not necessarily
indicative of results that may be expected for the year ended December 31, 1998.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------------- ------------------
1993 1994 1995 1996 1997 1997 1998
------ ------ ------ ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Product revenue..................... $ -- $1,554 $4,317 $18,981 $31,668 $ 8,169 $78,493
Development revenue................. 1,138 2,082 1,790 2,389 5,287 2,257 2,019
------ ------ ------ ------- ------- ------- -------
Total revenue......................... 1,138 3,636 6,107 21,370 36,955 10,426 80,512
Cost of revenue....................... -- 707 1,398 7,860 14,926 4,810 34,212
------ ------ ------ ------- ------- ------- -------
Gross profit.......................... 1,138 2,929 4,709 13,510 22,029 5,616 46,300
Operating expense:
Research and development............ 875 1,746 2,687 5,662 16,204 6,205 14,619
Selling, general and
administrative.................... 252 944 2,135 3,546 8,063 2,541 9,322
------ ------ ------ ------- ------- ------- -------
Total operating expense............... 1,127 2,690 4,822 9,208 24,267 8,746 23,941
------ ------ ------ ------- ------- ------- -------
Income (loss) from operations......... 11 239 (113) 4,302 (2,238) (3,130) 22,359
Interest and other income, net........ 12 41 120 213 290 63 1,301
Net loss on sale of investments....... (8) (42) -- -- -- -- --
------ ------ ------ ------- ------- ------- -------
Income (loss) before income taxes..... 15 238 7 4,515 (1,948) (3,067) 23,660
Provision (benefit) for income
taxes............................... 3 1 3 1,499 (775) (1,226) 8,281
------ ------ ------ ------- ------- ------- -------
Net income (loss)..................... $ 12 $ 237 $ 4 $ 3,016 $(1,173) $(1,841) $15,379
====== ====== ====== ======= ======= ======= =======
Basic earnings (loss) per share(1).... $ .00 $ .01 $ .00 $ .12 $ (.04) $ (.07) $ .45
====== ====== ====== ======= ======= ======= =======
Diluted earnings (loss) per share
(1)................................. $ .00 $ .01 $ .00 $ .09 $ (.04) $ (.07) $ .35
====== ====== ====== ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------- JUNE 30,
1993 1994 1995 1996 1997 1998
----- ------ ------ ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...................... $ 49 $ 100 $1,990 $ 4,657 $22,116 $ 64,711
Working capital................................ (223) 1,958 2,247 5,529 26,262 86,409
Total assets................................... 473 3,144 4,509 14,367 45,244 148,101
Long-term debt, including current portion...... 61 85 49 216 2,693 134
Convertible preferred stock.................... -- 2,161 3,150 6,084 28,617 --
Total shareholders' equity..................... 24 2,474 3,475 9,770 33,392 128,682
</TABLE>
- ---------------
(1) See Note 1 of Notes to Financial Statements for an explanation of the
calculation of earnings (loss) per share.
18
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Financial
Statements and Notes thereto included elsewhere in this Prospectus. This
Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ significantly from
those projected in the forward-looking statements as a result of certain
factors, including those discussed in "Risk Factors," "Business" and elsewhere
in this Prospectus. The Company assumes no obligation to update the
forward-looking statements or such factors.
OVERVIEW
The Company is a leading developer of highly integrated silicon solutions
that enable broadband digital data transmission to the home and within the
business enterprise. The Company's products enable the high-speed transmission
of data over existing communications infrastructures, most of which were not
originally intended for digital data transmission. Using proprietary
technologies and advanced design methodologies, the Company has designed and
developed ICs for some of the most significant broadband communications markets
including cable set-top boxes, cable modems, high-speed networking, DBS and
terrestrial digital broadcast, and xDSL. From the Company's inception in 1991
through 1994, it was primarily engaged in product development and the
establishment of strategic customer and foundry relationships. During this
period, the Company generated the majority of its total revenue from development
work performed for key customers. The Company began shipping its products in
1994, and subsequently the Company's total revenue has grown predominately
through sales of its semiconductor products. The Company intends to continue to
enter into development contracts with key customers, but expects development
revenue will constitute a decreasing percentage of its total revenue. The
Company also generates a small percentage of its product revenue from sales of
its system level reference designs.
The Company recognizes product revenue at the time of shipment. Provision
is concurrently made for estimated product returns, which have been immaterial
prior to the fourth quarter of 1997. The Company's products typically carry a
one year warranty. In the fourth quarter of 1997, the Company experienced
product returns in excess of $500,000 due to packaging defects. Such defects
were caused by one of the Company's assemblers, which reimbursed the Company for
such expenses.
Development revenue is recognized when earned. Approximately 15.4% and
13.1% of the Company's total revenue in 1997 and in the six months ended June
30, 1998, respectively, were derived from independent customers located outside
of the United States. All of the Company's revenue to date has been denominated
in U.S. dollars. See Note 8 of Notes to Financial Statements.
From time to time, the Company's key customers have placed large orders
causing quarterly revenue to fluctuate significantly, which fluctuations are
likely to continue in the future. For example, in the fourth quarter of 1997,
sales of the Company's networking products increased to approximately $7.6
million from $759,000 in the previous quarter. More than half of this increase
was attributable to sales to a single customer. Sales to the Company's largest
five customers (including sales to their respective manufacturing
subcontractors) accounted for 61.7%, 67.7% and 81.1% of the Company's total
revenue for 1997, 1996 and the six months ended June 30, 1998, respectively. The
Company expects that these five customers will continue to account for a
significant portion of the Company's total revenue for 1998. See "Risk
Factors -- Customer Concentration" and "Business -- Customers and Strategic
Relationships."
Various factors have in the past affected and may continue in the future to
affect the Company's gross margin, including, but not limited to, the Company's
product mix, the position of the Company's products in their respective life
cycles and the mix of the Company's product revenue and development revenue. For
example, newly-introduced products generally have higher average selling prices
and gross margins, both of which typically decline over product life cycles due
to competitive pressures and volume pricing agreements. The Company's gross
margin and operating results in the future may continue to fluctuate as a result
of these and other factors. See "-- Quarterly Results of Operations" and "Risk
Factors -- Fluctuations in Results of Operations."
19
<PAGE> 21
The sales cycle for the test and evaluation of the Company's products can
range from three to six months or more, with an additional three to six months
or more before a customer commences volume production of equipment incorporating
the Company's products. Due to such lengthy sales cycles, the Company may
experience a delay between increasing expenses for research and development and
selling, general and administrative efforts, and the generation of corresponding
revenue, if any. Furthermore, in 1998 and 1999, the Company intends to increase
its investment in research and development, selling, general and administrative
functions and inventory as it expands its operations. The Company anticipates
that the rate of new orders may vary significantly from month to month.
Consequently, if anticipated sales and shipments in any quarter do not occur
when expected, expenses and inventory levels could be disproportionately high,
and the Company's operating results for that quarter and, potentially, future
quarters would be materially and adversely affected. "See Risk
Factors -- Fluctuations in Results of Operations" and "-- Lengthy Sales Cycle."
RECENT OPERATING RESULTS
The following table presents selected quarterly financial information for
the quarter ended September 30, 1998. This information is unaudited but, in the
opinion of the Company's management, reflects all adjustments (consisting only
of normal recurring adjustments) that the Company considers necessary for a fair
presentation of this information in accordance with generally accepted
accounting principles. Such quarterly results are not necessarily indicative of
future results of operations.
<TABLE>
<CAPTION>
QUARTER ENDED
SEPTEMBER 30, 1998
------------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C>
Total revenue............................................. $52,485
Net income................................................ $ 8,177
Diluted earnings per share................................ $ .17
Number of shares used in per share calculation............ 48,425
</TABLE>
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data
expressed as a percentage of total revenue for the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------- --------------
1995 1996 1997 1997 1998
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenue:
Product revenue.................................. 70.7% 88.8% 85.7% 78.4% 97.5%
Development revenue.............................. 29.3 11.2 14.3 21.6 2.5
----- ----- ----- ----- -----
Total revenue...................................... 100.0 100.0 100.0 100.0 100.0
Cost of revenue.................................... 22.9 36.8 40.4 46.1 42.5
----- ----- ----- ----- -----
Gross profit....................................... 77.1 63.2 59.6 53.9 57.5
Operating expense:
Research and development......................... 44.0 26.5 43.9 59.5 18.1
Selling, general and administrative.............. 35.0 16.6 21.8 24.4 11.6
----- ----- ----- ----- -----
Total operating expense............................ 79.0 43.1 65.7 83.9 29.7
----- ----- ----- ----- -----
Income (loss) from operations...................... (1.9) 20.1 (6.1) (30.0) 27.8
Interest and other income, net..................... 2.0 1.0 .8 .6 1.6
----- ----- ----- ----- -----
Income (loss) before income taxes.................. .1 21.1 (5.3) (29.4) 29.4
Provision (benefit) for income taxes............... -- 7.0 (2.1) (11.7) 10.3
----- ----- ----- ----- -----
Net income (loss).................................. .1% 14.1% (3.2)% (17.7)% 19.1%
===== ===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Total Revenue. Total revenue consists of product revenue generated
principally by sales of the Company's semiconductor products and development
revenue generated under development contracts with the Company's customers.
Total revenue for the six months ended June 30, 1998 was $80.5 million, an
increase of $70.1 million or 672.2% from total revenue of $10.4 million in the
six months ended June 30, 1997. The increase in total revenue was derived mainly
from an increase in volume of shipments of ICs for digital cable set-top boxes
and for the high-speed networking market and, to a lesser extent, for the cable
modem market.
20
<PAGE> 22
Gross Profit. Gross profit represents total revenue less the cost of
revenue. Cost of revenue includes the cost of purchasing the finished silicon
wafers processed by independent foundries, and costs associated with assembly,
test and quality assurance for those products, as well as costs of personnel and
equipment associated with manufacturing support and contracted development work.
Gross profit for the six months ended June 30, 1998 was $46.3 million or 57.5%
of total revenue, an increase of $40.7 million or 724.4% from gross profit of
$5.6 million or 53.9% of total revenue in the six months ended June 30, 1997.
The increase in gross profit was mainly attributable to the significant increase
in the volume of product shipments. It is expected that gross profit as a
percentage of total revenue will decline in future periods as volume-pricing
agreements and competitive pricing strategies continue to take effect. In
addition, the Company's gross margin may be affected by the introduction in the
future of certain lower margin products.
Research and Development Expense. Research and development expense consists
primarily of salaries and related costs of employees engaged in research, design
and development activities, as well as related subcontracting costs. Research
and development expense for the six months ended June 30, 1998 was $14.6 million
or 18.1% of total revenue, an increase of $8.4 million or 135.6% from research
and development expense of $6.2 million or 59.5% of total revenue for the six
months ended June 30, 1997. The increase in absolute dollars was primarily due
to the addition of personnel for the development of new products and the
enhancement of existing products. The decline in research and development
expense as a percentage of total revenue reflected a significant increase in
total revenue during the six months ended June 30, 1998. The Company expects
that research and development expense in absolute dollars will continue to
increase for the foreseeable future.
Selling, General and Administrative Expense. Selling, general and
administrative expense consists primarily of personnel-related expenses,
professional fees, trade show expenses and facilities expenses. Selling, general
and administrative expense for the six months ended June 30, 1998 was $9.3
million or 11.6% of total revenue, an increase of $6.8 million or 266.9% from
$2.5 million or 24.4% of total revenue for the six months ended June 30, 1997.
The increase in absolute dollars reflected higher personnel related costs
resulting from the hiring of sales and marketing personnel, senior management
and administrative personnel, and increased occupancy, legal and other
professional fees, including increased expenses for litigation. The decline in
selling, general and administrative expense as a percentage of total revenue
reflected a significant increase in total revenue during the six months ended
June 30, 1998. The Company expects that selling, general and administrative
expense in absolute dollars will continue to increase in the near term to
support the planned expansion of the Company's operations.
Deferred Compensation. In the six months ended June 30, 1998, the Company
recorded approximately $5.4 million of net deferred compensation in connection
with the grant of employee stock options to purchase an aggregate of 1,298,050
shares of Class B Common Stock in late March 1998 (in addition to approximately
$1.1 million of deferred compensation recorded in 1997). The deferred
compensation represents the difference between the deemed value of the Class B
Common Stock for accounting purposes and the option exercise price of such
options at the date of grant. Such amount has been presented as a reduction of
shareholders' equity and is being amortized ratably over the vesting period of
the applicable options. The Company amortized an aggregate of $503,000 of
deferred compensation in the six months ended June 30, 1998. The remaining
balance of total deferred compensation will be amortized at a rate of
approximately $406,000 (pre-tax) per quarter through September 2001 and
approximately $338,000 (pre-tax) for the quarters ending December 31, 2001 and
March 31, 2002.
Interest and Other Income, Net. Interest and other income, net reflects
interest earned on average cash and cash equivalents and investment balances,
less interest on the Company's long-term debt and capital lease obligations.
Interest and other income, net for the six months ended June 30, 1998 was $1.3
million, compared to $63,000 in the six months ended June 30, 1997. This
increase was principally due to increased cash balances available to invest
resulting from the consummation of the Company's initial public offering and
sale of shares to Cisco Systems in April 1998.
Provision (Benefit) for Income Taxes. The Company accrues a provision for
federal and state income tax at applicable statutory rates. The Company's
effective tax rates were approximately 35% and 40% for the
21
<PAGE> 23
six months ended June 30, 1998 and 1997, respectively. The difference between
the Company's effective tax rates and the federal statutory tax rate of 34% was
primarily related to the effect of state income taxes and research and
development tax credits.
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Total Revenue. Total revenue for 1997 was $37.0 million, an increase of
$15.6 million or 72.9% from 1996. Total revenue for 1996 was $21.4 million, an
increase of $15.3 million or 249.9% from $6.1 million in 1995. In each year, the
increase was primarily due to the introduction of new products and to a higher
volume of shipments of existing products to manufacturers of cable set-top boxes
and networking customers selling Fast Ethernet hubs and switches. In particular,
the majority of the increase in total revenue in 1997 was derived from sales of
new products, including the Company's Fast Ethernet Quad transceivers for the
high-speed networking market and its QAM receivers for digital cable set-top
boxes.
Gross Profit. Gross profit for 1997 was $22.0 million or 59.6% of total
revenue, an increase of $8.5 million or 63.1% from 1996. Gross profit in 1996
was $13.5 million or 63.2% of total revenue, an increase of $8.8 million or
186.9% from $4.7 million or 77.1% of total revenue in 1995. In each year, the
increase in absolute dollars was largely due to higher total revenue. Gross
margin declined in 1997 from 1996 primarily due to volume pricing concessions
made in 1997 for cable set-top box products. Gross margin declined in 1996 from
1995 largely due to a decline in higher margin development revenue as a
percentage of total revenue in 1996.
Research and Development Expense. Research and development expense for 1997
was $16.2 million or 43.9% of total revenue, an increase of $10.5 million or
186.2% from 1996. Research and development expense for 1996 was $5.7 million or
26.5% of total revenue, an increase of $3.0 million or 110.7% from 1995 expense
of $2.7 million or 44.0% of total revenue in 1995. In each year, the increase in
absolute dollars was primarily due to the addition of personnel for the
development of new products and the enhancement of existing products, as well as
payments to outside consultants where specific resources were needed in the
development process. Research and development expense in absolute dollars
increased at a fairly steady rate for each quarter between 1995 and 1997 after
taking into consideration the $1.2 million or non-recurring engineering expense
paid to General Instrument in the third quarter of 1997 for development support
services with respect to the Company's MPEG development program. Such services
included the engagement of several engineers from General Instrument on a
contract basis and the development of high level descriptions and related
documentation. The decline in research and development expense as a percentage
of total revenue reflects a significant increase in total revenue during that
period.
Selling, General and Administrative Expense. Selling, general and
administrative expense for 1997 was $8.1 million or 21.8% of total revenue, an
increase of $4.5 million or 127.4% from 1996. Selling, general and
administrative expense for 1996 was $3.5 million or 16.6% of total revenue, an
increase of $1.4 million or 66.1% from $2.1 million or 35.0% of total revenue in
1995. In each year, the increase in absolute dollars principally reflected
higher personnel related costs resulting from a net increase in sales and
marketing personnel to address each of the Company's target markets. These
increases were also due in part to the hiring of senior level management and
administrative personnel and increased occupancy, legal and other professional
fees. The decline in selling, general and administrative expense as a percentage
of total revenue reflects a significant increase in total revenue during that
period. As the Company's infrastructure expanded in 1997, selling, general and
administrative expense as a percentage of total revenue increased at a more
rapid rate than total revenue.
Deferred Compensation. In connection with the grant of certain stock
options to employees during 1997, the Company recorded aggregate deferred
compensation of approximately $1.1 million, representing the difference between
the deemed value of the Class B Common Stock for accounting purposes and the
option exercise price of such options at the date of grant. Such amount is
presented as a reduction of shareholders' equity and amortized ratably over the
vesting period of the applicable options. Amortization of deferred compensation
recorded in 1997 was $66,000 (pre-tax).
22
<PAGE> 24
Interest and Other Income, Net. Interest and other income, net reflects
interest earned on average cash, cash equivalents and short-term investment
balances, less interest on the Company's term loan. Interest and other income,
net for 1997 was $290,000, an increase of $77,000 or 36.2% from 1996. Interest
and other income, net for 1996 was $213,000, an increase of $93,000 or 77.5%
from $120,000 in 1995. In each year, the increase was primarily due to interest
earned on higher levels of short-term investments and cash balances, partially
offset by interest expense incurred on higher average debt balances.
Provision (Benefit) for Income Taxes. The Company accrues a provision for
federal and state income tax at applicable statutory rates. The Company's
effective tax rates were approximately 40%, 33% and 43% for 1997, 1996 and 1995,
respectively. In each year, the difference between the Company's effective tax
rate and the federal statutory tax rate of 34% was primarily related to state
income taxes and research and development tax credits. The Company utilizes the
liability method of accounting for income taxes as set forth in Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes. See Note 2
of Notes to Financial Statements.
QUARTERLY RESULTS OF OPERATIONS
The following table presents selected quarterly financial information for
each of the eight quarters through June 30, 1998. This information is unaudited
but, in the opinion of the Company's management, reflects all adjustments
(consisting only of normal recurring adjustments) that the Company considers
necessary for a fair presentation of this information in accordance with
generally accepted accounting principles. Such quarterly results are not
necessarily indicative of future results of operations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1996 1996 1997 1997 1997 1997 1998 1998
--------- -------- -------- -------- --------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Product revenue.................... $4,590 $6,134 $ 3,959 $ 4,210 $ 8,096 $15,403 $35,225 $43,268
Development revenue................ 1,000 600 1,072 1,185 1,159 1,871 119 1,900
------ ------ ------- ------- ------- ------- ------- -------
Total revenue........................ 5,590 6,734 5,031 5,395 9,255 17,274 35,344 45,168
Cost of revenue...................... 2,215 1,916 2,534 2,276 4,047 6,069 13,832 20,380
------ ------ ------- ------- ------- ------- ------- -------
Gross profit......................... 3,375 4,818 2,497 3,119 5,208 11,205 21,512 24,788
Operating expense:
Research and development........... 1,449 2,309 2,686 3,519 5,503 4,496 5,952 8,667
Selling, general and
administrative................... 1,041 1,110 1,142 1,399 2,670 2,852 3,989 5,333
------ ------ ------- ------- ------- ------- ------- -------
Total operating expense.............. 2,490 3,419 3,828 4,918 8,173 7,348 9,941 14,000
------ ------ ------- ------- ------- ------- ------- -------
Income (loss) from operations........ 885 1,399 (1,331) (1,799) (2,965) 3,857 11,571 10,788
Interest and other income (expense),
net................................ 45 97 60 3 (41) 268 218 1,083
------ ------ ------- ------- ------- ------- ------- -------
Income (loss) before income taxes.... 930 1,496 (1,271) (1,796) (3,006) 4,125 11,789 11,871
Provision (benefit) for income
taxes.............................. 309 497 (508) (718) (1,202) 1,653 4,126 4,155
------ ------ ------- ------- ------- ------- ------- -------
Net income (loss).................... $ 621 $ 999 $ (763) $(1,078) $(1,804) $ 2,472 $ 7,663 $ 7,716
====== ====== ======= ======= ======= ======= ======= =======
Basic earnings (loss) per share
(1)................................ $ .02 $ .04 $ (.03) $ (.04) $ (.07) $ .09 $ .27 $ .19
====== ====== ======= ======= ======= ======= ======= =======
Diluted earnings (loss) per share
(1)................................ $ .02 $ .03 $ (.03) $ (.04) $ (.07) $ .06 $ .19 $ .16
====== ====== ======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
(1) See Note 1 of Notes to Financial Statements for an explanation of the
calculation of earnings (loss) per share.
23
<PAGE> 25
The following table sets forth, for the periods indicated, the percentage
of total revenue represented by each item in the Company's statement of
operations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1996 1996 1997 1997 1997 1997 1998 1998
--------- -------- -------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Product revenue...................... 82.1% 91.1% 78.7% 78.0% 87.5% 89.2% 99.7% 95.8%
Development revenue.................. 17.9 8.9 21.3 22.0 12.5 10.8 .3 4.2
----- ----- ----- ----- ----- ----- ----- -----
Total revenue.......................... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenue........................ 39.6 28.5 50.4 42.2 43.7 35.1 39.1 45.1
----- ----- ----- ----- ----- ----- ----- -----
Gross profit........................... 60.4 71.5 49.6 57.8 56.3 64.9 60.9 54.9
Operating expense:
Research and development............. 26.0 34.3 53.4 65.2 59.5 26.0 16.8 19.2
Selling, general and
administrative..................... 18.6 16.4 22.7 25.9 28.8 16.6 11.3 11.8
----- ----- ----- ----- ----- ----- ----- -----
Total operating expense................ 44.6 50.7 76.1 91.1 88.3 42.6 28.1 31.0
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from operations.......... 15.8 20.8 (26.5) (33.3) (32.0) 22.3 32.8 23.9
Interest and other income expense,
net.................................. .8 1.4 1.2 -- (.5) 1.6 .6 2.4
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before income taxes...... 16.6 22.2 (25.3) (33.3) (32.5) 23.9 33.4 26.3
Provision (benefit) for income taxes... 5.5 7.4 (10.1) (13.3) (13.0) 9.6 11.7 9.2
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss)...................... 11.1% 14.8% (15.2)% (20.0)% (19.5)% 14.3% 21.7% 17.1%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
Total Revenue. Quarterly revenue increased throughout the second half of
1996 as a result of the introduction of new products and higher unit shipments
of the Company's existing products in the cable set-top box, cable modem and
high-speed networking markets and generally reflected higher revenue from
development programs. The Company anticipates that development revenue will
continue to vary from quarter to quarter as contract milestones are met. The
decrease in total revenue from $6.7 million in the fourth quarter of 1996 to
$5.0 million in the first quarter of 1997 was primarily due to a reduction of
unit shipments of 100Base-T4 high-speed networking products and pricing
concessions to a major customer for cable set-top boxes. The increase in total
revenue to $9.3 million in the third quarter of 1997 largely resulted from the
introduction of new products and increased unit shipments of existing cable
set-top box and cable modem products. The increase in total revenue to $17.3
million in the fourth quarter of 1997 was primarily due to the first significant
volume shipments of the Company's 100Base-TX high-speed networking products, as
well as $2.5 million of revenue from a take or pay contract with a significant
customer. The increase in total revenue to $35.3 million in the first quarter of
1998 was primarily the result of the continuation of significant volume
shipments of the Company's networking products. The increase in total revenue to
$45.2 million in the second quarter of 1998 was attributed to increased unit
shipments of existing cable set-top box and cable modem products, offset by a
reduction in unit shipments of networking products.
Gross Profit. As a percentage of total revenue, gross profit increased to
71.5% in fourth quarter 1996 as a result of a favorable product mix and a
significant increase in the volume of product shipments over the previous
quarters, which allowed fixed manufacturing costs to be spread over a larger
product base. In the first quarter of 1997, gross profit decreased to 49.6% of
total revenue as a result of an unfavorable product mix and pricing concessions
to a major customer for cable set-top boxes. Gross profit increased to 64.9% of
total revenue in the fourth quarter of 1997 as a result of volume shipments of
high-speed networking products and a significant increase in the volume of
product shipments generally. During the first and second quarters of 1998, gross
profit decreased to 60.9% and 54.9%, respectively, of total revenue due to
volume-pricing agreements and competitive pricing strategies.
Operating Expense. Research and development expense increased in absolute
dollars through the third quarter of 1997 to facilitate the expansion of
introduction of new products by the Company. Research and development expense in
the third quarter of 1997 included a substantial non-recurring engineering
expense, which consisted of approximately $1.2 million paid to General
Instrument for engineering support related to the development of the Company's
MPEG technology and, as a result, research and development expense in the fourth
quarter of 1997 was lower than in the prior quarter. The increase in research
and development
24
<PAGE> 26
expense in the first and second quarter of 1998 was primarily due to the
addition of personnel for the development of new products and the enhancement of
existing products. Selling, general and administrative expense has also
increased in absolute dollars as the Company has expanded its infrastructure to
accommodate the Company's expanding operations. In the third and fourth quarters
of 1997, the Company also incurred significant legal expenses in conjunction
with pending litigation and the negotiation of large customer contracts. The
increase in selling, general and administrative expense during the first and
second quarter of 1998 reflected higher personnel related costs resulting from
the hiring of sales and marketing personnel, senior management and
administrative personnel, and increased occupancy, legal and other professional
fees, including increased expenses for litigation. See "Business -- Legal
Proceedings."
The Company's quarterly results of operations have fluctuated significantly
in the past and may continue to fluctuate in the future based on a number of
factors, not all of which are in the Company's control. Such factors include,
but are not limited to, the volume of product sales and pricing concessions on
volume sales; the timing, rescheduling or cancellation of significant customer
orders; the gain or loss of a significant customer; the timing of customer
qualification and industry interoperability certification of new products; the
rate of adoption by customers and end users of new and emerging technologies in
the high-speed data networking, cable set-top box, cable modem, DBS and
terrestrial digital broadcast, and xDSL markets; the rate of adoption and
acceptance of new industry standards in the foregoing markets; the Company's
ability to specify, develop, introduce and market new products and technologies
on a timely basis; the qualification, availability and pricing of competing
products and technologies from other vendors; fluctuations in manufacturing
yields and other problems or delays in the fabrication, assembly, testing or
delivery of products; uncertainties associated with international operations;
the Company's ability to retain and hire key executives, technical personnel and
other employees in the numbers and with the capabilities needed to implement its
business and product plans; problems or delays in migrating product designs to
smaller geometry processes and achieving higher levels of design integration;
intellectual property disputes; changes in product and customer mix; the amount
and timing of recognition of development revenue; general business conditions in
the semiconductor industry and the broadband communications markets;
availability of foundry capacity and raw materials; the quality of the Company's
products; the timing of investments in, and the results of, research and
development; the Company's ability to expand and implement its sales and
marketing programs; the level of orders received that can be shipped in a
quarter; the effects on operations and management of facility relocations;
currency fluctuations; and general economic conditions. As a result of the
foregoing factors, the Company believes period to period comparisons are not
necessarily meaningful and should not be relied upon as indicative of future
results. See "Risk Factors -- Fluctuations in Results of Operations."
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations through a
combination of sales of equity securities and cash generated by operations. At
June 30, 1998, the Company had $86.4 million in working capital, $67.3 million
in cash and cash equivalents and short-term investments, and $25.1 million in
long-term investments.
The Company's operating activities provided cash of $4.2 million in the six
months ended June 30, 1998, primarily as a result of net income and a growth in
accounts payable, partially offset by increases in accounts receivable and
inventory. The Company's operating activities used cash in the amount of $2.6
million in fiscal 1997, and generated cash in the amount of $3.2 million and
$1.1 million in fiscal 1996 and fiscal 1995, respectively.
Cash used in operating activities in 1997 was primarily attributable to a
net loss, growth in accounts receivable and inventory and a decrease in income
taxes payable, which more than offset growth in accounts payable and the
non-cash impact of depreciation and amortization. Cash provided by operating
activities in 1996 was primarily attributable to net income and growth in
accounts payable and income taxes payable, partially offset by growth in
accounts receivable. Cash provided by operating activities in 1995 was primarily
attributable to a decrease in accounts receivable, growth in accounts payable
and the non-cash impact of depreciation and amortization.
The Company's investing activities used cash in the amount of $27.7 million
in the six months ended June 30, 1998 for the purchase of held-to-maturity
investments and $10.7 million for the purchase of capital
25
<PAGE> 27
equipment to support its expanding operations. The Company's investing
activities used cash of $7.1 million in 1997, $3.7 million in 1996 and $116,000
in 1995, primarily for the purchase of capital equipment.
Cash provided by financing activities was $76.8 million for the six months
ended June 30, 1998, primarily from the aggregate net proceeds of $79.2 million
from the Company's initial public offering and the Company's sale of Class A
Common Stock to Cisco Systems described below, partially offset by the repayment
of $2.5 million outstanding under a bank term loan. Cash provided by financing
activities was $27.1 million in 1997, $3.2 million in 1996 and $949,000 in 1995,
primarily from the sale of convertible preferred stock and, in 1997, from the
establishment of a revolving credit facility and term loan.
In April 1998, the Company completed its initial public offering of Class A
Common Stock. Of the 4,025,000 shares of Class A Common Stock offered, the
Company sold 3,120,000 shares, and selling shareholders sold 905,000 shares, at
a price of $24.00 per share. In addition, the Company sold 500,000 shares to
Cisco Systems in a concurrent, non-underwritten registered offering at a price
of $22.32 per share. The Company received net aggregate proceeds from the
initial public offering and the sale of shares to Cisco Systems of approximately
$79.2 million in cash (net of underwriting discounts and commissions and
estimated offering costs). Approximately $2.3 million of the Company's net
proceeds were used to retire all outstanding indebtedness under a term loan in
April 1998.
The Company believes that the net proceeds from this offering, its initial
public offering and sale of shares to Cisco Systems, together with cash
generated from its operations will be sufficient to meet the Company's capital
requirements for at least the next twelve months. Nonetheless, the Company may
elect to sell additional equity securities or to obtain credit facilities. The
Company's future capital requirements may vary materially from those now planned
and will depend on many factors, including, but not limited to, the levels at
which the Company maintains inventory and accounts receivable; the market
acceptance of the Company's products; the levels of promotion and advertising
required to launch such products and attain a competitive position in the
marketplace; volume pricing concessions; the Company's business, product,
capital expenditure and research and development plans and technology roadmap;
capital improvements to new and existing facilities; technological advances; the
response of competitors to the Company's products; and the Company's
relationships with suppliers and customers. In addition, the Company may require
an increase in the level of working capital to accommodate planned growth,
hiring, infrastructure and facility needs, including the Company's recently
executed lease of new facilities to centralize all Irvine employees and
operations on one campus. Additional capital may be required for consummation of
any acquisitions of businesses, products or technologies. To the extent that the
funds generated by this offering, together with existing resources and cash
generated from operations, are insufficient to fund the Company's future
activities, the Company may need to raise additional funds through public or
private financings or borrowings. No assurance can be given that additional
financing will be available or that, if available, such financing can be
obtained on terms favorable to the Company and its shareholders.
During the nine months ended September 30, 1998, the Company spent
approximately $21.4 million to purchase additional capital equipment to support
its expanding operations. The Company also plans to spend approximately $9.5
million through the end of 1998 for additional workstation software and
hardware, test equipment, design tools and leasehold improvements. The Company
may finance these purchases from the proceeds of this offering, the proceeds of
its initial public offering, cash generated from its operations, or a
combination thereof. See Notes 3, 4 and 10 of Notes to Financial Statements.
YEAR 2000
The Company is aware of problems associated with computer systems as the
year 2000 approaches. Many existing computer systems and applications, and other
control devices use only two digits to identify a year in the date field,
without considering the impact of the upcoming change in the century. Others do
not correctly process "leap year" dates. As a result, such systems and
applications could fail or create erroneous results unless corrected so that
they can correctly process data related to the year 2000 and beyond. These
problems are expected to increase in frequency and severity as the year 2000
approaches, and are commonly referred to as the "Year 2000 Problem."
26
<PAGE> 28
The Company is continuing to assess the impact that the Year 2000 Problem
may have on its operations and has identified the following four key areas of
its business that may be affected:
Products. The Company has evaluated each of its products and believes that
each is substantially year 2000 compliant. However, the Company believes that it
is not possible to determine whether all of its customers' products into which
the Company's products are incorporated will be year 2000 compliant because the
Company has little or no control over the design, production and testing of its
customers' products.
Internal Infrastructure. The Year 2000 Problem could affect the systems,
transaction processing computer applications and devices used by the Company to
operate and monitor all major aspects of its business, including financial
systems (such as general ledger, accounts payable and payroll), customer
services, infrastructure, materials requirement planning, master production
scheduling, networks and telecommunications systems. The Company believes that
it has identified substantially all of the major systems, software applications
and related equipment used in connection with its internal operations that must
be modified or upgraded in order to minimize the possibility of a material
disruption to its business. The Company is currently in the process of modifying
and upgrading all affected systems and expects to complete this process by early
1999. Because most of the software applications used by the Company are recent
versions of vendor supported, commercially available products, the Company has
not incurred, and does not expect in the future to incur, significant costs to
upgrade these applications as year 2000 compliant versions are released by the
respective vendors.
Third-Party Suppliers. The Company relies, directly and indirectly, on
external systems utilized by its suppliers for the management and control of
fabrication, assembly and testing of substantially all of the Company's
products. The Company has sent questionnaires to the two independent foundries,
TSMC and Chartered, that fabricate substantially all of its semiconductor
devices, and to the two subcontractors, ASAT and STATS, that assemble and test
substantially all of its products to identify and, to the extent possible,
resolve issues involving the Year 2000 Problem. In addition, certain of the
Company's key employees have scheduled on-site visits at the facilities of each
of these suppliers in late 1998 to evaluate the systems and remediation efforts
employed by each of them. The Company expects to resolve any significant Year
2000 Problems with its suppliers; however, there can be no assurance that these
suppliers will resolve any or all Year 2000 Problems with their systems in a
timely manner. Any failure of these third parties to resolve their Year 2000
Problems in a timely manner could result in the material disruption to the
business of the Company. Any such disruption could have a material adverse
effect on the Company's business, financial condition and results of operations.
Facility and Laboratory Related Systems. Systems such as heating,
sprinklers, elevators, test equipment and security systems at the Company's
facilities and labs may also be affected by the Year 2000 Problem. The Company
is currently assessing the potential effect of and costs of remediating the Year
2000 Problem on its facility and lab related systems. The Company estimates that
the total cost to the Company of completing any required modifications, upgrades
or replacements of these systems will not have a material adverse effect on the
Company's business or results of operations.
The Company presently estimates that the total cost of addressing its year
2000 issues will be approximately $500,000. This estimate was derived utilizing
numerous assumptions, including the assumption that the Company has already
identified its most significant year 2000 issues and that the plans of its third
party suppliers will be fulfilled in a timely manner without cost to the
Company. However, there can be no guarantee that these assumptions are accurate,
and actual results could differ materially from those anticipated.
The Company is currently developing contingency plans to address the year
2000 issues that may pose a significant risk to its on-going operations. Such
plans could include accelerated replacement of affected equipment or software,
temporary use of back-up equipment or software or the implementation of manual
procedures to compensate for system deficiencies. However, there can be no
assurance that any contingency plans implemented by the Company would be
adequate to meet the Company's needs without materially impacting its
operations, that any such plan would be successful or that the Company's results
of operations would not be materially and adversely affected by the delays and
inefficiencies inherent in conducting operations in an alternative manner.
27
<PAGE> 29
BUSINESS
Broadcom is a leading developer of highly integrated silicon solutions that
enable broadband digital data transmission to the home and within the business
enterprise. The Company's products enable the high-speed transmission of data
over existing communications infrastructures, most of which were not originally
intended for digital data transmission. Using proprietary technologies and
advanced design methodologies, the Company has designed and developed ICs for
some of the most significant broadband communications markets, including the
markets for cable set-top boxes, cable modems, high-speed networking, DBS and
terrestrial digital broadcast, and xDSL. Although the communications
infrastructures of these markets are very different, the Company has leveraged
its core technologies and introduced silicon solutions for each market that
deliver the cost and performance levels necessary to enable the widespread
deployment of broadband transmission services. The Company's broadband
transmission products consist primarily of high-performance digital signal
processing ("DSP") circuits that implement complex communications algorithms,
surrounded by precision high-speed analog-to-digital and digital-to-analog
converter circuits. The Company's products integrate comprehensive systems
solutions into single chips or chip-sets, thereby eliminating costly external
components, reducing board space, simplifying the customer's manufacturing
process, lowering the customer's system costs and enabling higher performance.
Customers currently shipping broadband communications equipment incorporating
the Company's products include 3Com, Bay Networks, Cisco Systems, General
Instrument, Motorola and Scientific-Atlanta.
INDUSTRY BACKGROUND
In recent years, there has been a dramatic increase in business and
consumer demand for high-speed access to multimedia information and
entertainment content, consisting of data, voice and video. This demand is being
driven by the growth of desirable information and entertainment content
accessible via the Internet and cable and data networks. Demand has also been
stimulated by the improved availability and affordability of access devices such
as set-top boxes, PCs and other consumer appliances. Computer processor speeds
over the last decade have increased dramatically and, as a result, significantly
improved the rate at which multimedia data can be processed. However, the rate
at which such data can be transmitted has not kept pace. This disparity has
become known as the "bandwidth gap" and has frustrated users and challenged
solutions providers in a number of markets.
The bandwidth gap has emerged in a variety of commercial and consumer
applications. Businesses are constantly seeking new ways to access and analyze
larger amounts of information to improve the quality of management decisions and
enhance customer and employee communications. Many businesses have deployed
local area networks ("LANs") which are principally based upon 10Base-T Ethernet
technology. The proliferation of LAN usage within corporate networks has
resulted in volumes of electronic traffic that are rapidly outgrowing the
ability of legacy LAN technologies and infrastructures to readily transmit the
traffic and has exacerbated the bandwidth gap for businesses. As such, much of
the installed base of Ethernet ports will require upgrading to higher speeds as
the infrastructure continues to grow.
Individuals are also increasingly using their home PCs to access the
Internet and to telecommute. Consumer online usage is expected to increase
rapidly with the availability and market acceptance of low cost PCs (sub $1,000)
and the increased availability and improving quality of content. In addition,
the increasing number of next generation television set-top boxes, PCs and other
devices that feature integrated Internet access will contribute to the surging
demand for rapid access to information. International Data Corporation ("IDC")
estimates that between 1995 and 1997 the number of devices that had access to
the Internet grew from approximately 15.4 million to 64.4 million and
anticipates that the number of such devices will grow to over 331.3 million by
2001. Similarly, the available content on the Internet is also increasing
rapidly. IDC estimates that the number of web pages for Internet devices to
access grew from approximately 18.1 million in 1995 to approximately 250.5
million in 1997, and is expected to increase to 4.4 billion by 2001. As the
volume of traffic continues to grow, consumers are becoming increasingly
frustrated with the low performance of "last mile" remote access connections
that are typically limited to data rates of only 28.8 kbps to 56 kbps and
require several minutes or hours to download large multimedia intensive files.
28
<PAGE> 30
Business and residential PC users have not been the only ones affected by
the bandwidth gap. Cable television subscribers seeking more entertainment
options including Internet access, and cable service providers seeking higher
revenue services beyond basic cable, have generally been frustrated by the
limited amount of programming that can be provided over the existing cable
infrastructure, as well as the inability of that infrastructure to deliver
interactive multimedia content. With the advent of digital television and
digital compression technologies such as MPEG, the conversion from analog
transmission to digital transmission enables a dramatic increase in the number
of channels available to the subscriber. In late 1996, cable television service
providers began offering expanded services, including digital programming
through new digital set-top boxes as well as high-speed Internet access and
telecommuting through cable modems. Dataquest estimates that approximately 1.4
million digital cable set-top boxes were shipped worldwide in 1997 and that
approximately 12.5 million will be shipped in 2001. In order to satisfy customer
demand for increased programming and other entertainment options, and to
capitalize on the revenue growth opportunities associated with these expanded
services, service providers will have to deploy a new generation of digital set-
top boxes and headend equipment.
Much of the bandwidth gap is a result of the existing last mile
communications infrastructure, which was originally designed for lower speed
analog transmission rather than high-speed digital transmission. This
infrastructure consists primarily of copper twisted pair wiring, coaxial cable
and wireless communication connections. Copper twisted pair wiring was
originally intended for the transmission of narrowband analog voice while
coaxial cable was intended for delivery of one-way analog video signals. These
analog infrastructures have numerous impairments, including limited spectrum,
noise, dispersion and multipath reflections, which make broadband transmission
(greater than 1.5 Mbps) of digital data very difficult.
Because it is impractical to replace these communications infrastructures
with entirely new infrastructures that are optimized for digital data
transmission, the fundamental challenge for service and equipment providers is
to enable broadband communications over existing infrastructures. These
providers are in a race to introduce new cost-effective technologies and
products into the broadband communications marketplace. The principal segments
that define this marketplace include:
Cable Set-Top Boxes. Cable operators are deploying digital cable set-top
boxes to facilitate high-speed digital communications between a
subscriber's television and the cable network. Cable set-top boxes are
currently able to support downstream (to the subscriber) transmission
speeds of up to 43 Mbps (North American standard) or 56 Mbps (international
standard), and several hundred MPEG-2 compressed digital television
channels to be delivered to the consumer. Additional applications for
digital cable set-top boxes are expected to include Internet access,
interactive television, high definition television ("HDTV") and cable
telephony.
Cable Modems. Cable modems connect PCs to the cable network and have been
designed to achieve downstream transmission speeds of up to 43 Mbps (North
American standard) or 56 Mbps (international standard), and upstream (to
the network) transmission speeds of up to 10 Mbps. These transmission rates
are almost 1,000 times faster than the fastest analog telephone modems (56
kbps downstream and 28.8 kbps upstream) currently available. The high
speeds of cable modems should enable an entirely new generation of
multimedia-rich content over the Internet, make telecommuting a productive
and effective means for work at home and allow cable operators to offer
expanded services such as cable telephony.
High-Speed Networking. As communications bottlenecks have appeared in
corporate LANs, technologies such as Fast Ethernet (100 Mbps) and Gigabit
Ethernet (1,000 Mbps) are being employed to replace older technologies such
as 10Base-T Ethernet (10 Mbps) and Token Ring (16 Mbps). As desktop
connections continue to migrate to Fast Ethernet, the Company believes that
Gigabit Ethernet will emerge as the predominant backbone and server
communications technology, and will eventually migrate to the desktop.
Direct Broadcast Satellite and Terrestrial Digital Broadcast. DBS is the
primary alternative to cable for providing digital television programming
and can be used to transmit information at speeds of up to 90 Mbps. DBS
broadcasts video and audio data from satellites directly to set-top boxes
in the home via
29
<PAGE> 31
dish antennas. Other broadband wireless technologies include (i)
terrestrial digital broadcast television, the upgrade of analog broadcast
television to digital, which enables the delivery of HDTV, (ii)
Multichannel Multipoint Distribution Systems ("MMDS"), which use microwave
frequencies (2.5 GHz) to transmit digital video signals over terrestrial
digital broadcast channels to digital set-top boxes, and (iii) Local
Multipoint Distribution Systems ("LMDS"), which use even higher microwave
frequencies (28 to 38 GHz) to transmit video and data to digital set-top
boxes over a shorter distance via a cellular-like network.
Digital Subscriber Lines (xDSL). xDSL represents a family of newer
broadband technologies which use the copper twisted pair wiring in the
existing telephone local loops to deliver transmission speeds ranging from
128 kbps to 52 Mbps depending on the distance between the central office
and the subscriber. These data rates are expected to enable a wide range of
new services including high-speed Internet access and digital television.
The desire by equipment manufacturers and service providers to develop
these markets has created the need for new generations of semiconductor
solutions. Broadband transmission of digital information over existing
infrastructures requires highly integrated mixed-signal semiconductor solutions
to perform critical systems functions such as complex signal processing and
converting digital data to and from analog signals. Broadband communications
equipment requires substantially higher levels of system performance in terms of
both speed and precision that typically cannot be adequately addressed by
traditional IC solutions developed for low speed transmission applications.
Moreover, solutions that are based on multiple discrete analog and digital ICs
generally cannot achieve the cost-effectiveness, performance and reliability
required by the broadband communications markets. These requirements are best
addressed by new generations of highly integrated mixed-signal devices that
combine complex analog and digital functions with high performance DSP circuitry
that can be manufactured in high volumes using cost-effective semiconductor
technologies.
THE BROADCOM SOLUTION
The Company is a leading developer of highly integrated silicon solutions
that enable broadband digital data transmission to the home and within the
business enterprise. Using its proprietary communications algorithms and
protocols, unique DSP architectures, silicon compiler design methodologies and
full-custom, mixed-signal circuit design techniques, the Company has designed
and developed ICs for some of the most significant broadband communications
markets, which include cable set-top boxes, cable modems, high-speed networking,
DBS and terrestrial digital broadcast, and xDSL. The Company's expertise in
communications algorithms and its detailed understanding of transmission media
enable the implementation of complex systems incorporating signal processing
functions such as digital demodulation, adaptive equalization and error
correction in a single device. In addition, the Company's comprehensive
knowledge of advanced communications protocols enables the Company to design
protocol processing ICs that seamlessly interface its mixed-signal transceiver
ICs with higher-level networking layers for communications applications.
Finally, the Company's systems level communications expertise has enabled it to
establish a viable long-term product roadmap that permits its customers to
achieve rapid time-to-market over multiple generations of equipment.
All of the Company's products are implemented in low-cost,
highly-manufacturable CMOS technologies that enable the integration of
comprehensive systems solutions into single-chip ICs, thereby eliminating costly
external components, reducing board space, simplifying the customer's equipment
manufacturing process, lowering customer system costs and enabling higher
performance. The Company's proprietary technology and advanced design
methodologies result in a high likelihood of first pass silicon success,
accelerated time-to-market, and ease of porting to multiple foundries. The
Company's design methodologies also allow it to rapidly and cost-effectively
incorporate proprietary features or intellectual property from its key strategic
customers into products that are exclusive to those customers, thereby enabling
them to differentiate their products. Customers currently shipping broadband
communications equipment that incorporates the Company's products include 3Com,
Bay Networks, Cisco Systems, General Instrument, Motorola and
Scientific-Atlanta.
30
<PAGE> 32
STRATEGY
The Company's objective is to be the leading provider of highly integrated
silicon solutions to the worldwide broadband communications markets. Key
elements of the Company's strategy include the following:
Target Multiple High-Growth Broadband Communications Markets. The Company's
strategy is to identify rapidly growing broadband digital communications
markets and to develop highly integrated silicon solutions for applications
in those markets. The Company's initial products were designed for the
cable set-top box, cable modem and high-speed networking markets, which
require high-performance, feature-rich and highly integrated semiconductor
solutions. The Company has recently leveraged the core technologies it
developed for these markets to design and develop semiconductor solutions
for the DBS and terrestrial digital broadcast, and xDSL markets, which it
believes have significant growth potential.
Strengthen and Expand Strategic Relationships with Industry Leaders. The
Company has established strategic relationships with key equipment
manufacturers, including 3Com, Bay Networks, Cisco Systems, General
Instrument, Motorola and Scientific-Atlanta, which are market and
technology leaders within the broadband communications markets. While the
Company designs products that can be used by multiple customers, the
Company's proprietary design methodologies allow it to rapidly design
custom features based on either the Company's or its customers'
intellectual property. This capability enables the Company's customers to
improve their time-to-market, differentiate their products and address new
market opportunities. The Company believes that these strategic
relationships are essential to its continued growth and to further
development and acceptance of its technologies.
Extend Technology Leadership and Achieve Rapid Time-to-Market. The Company
is aggressively building on its technology leadership by investing
substantial development resources in all of its key technology areas. The
Company works closely with leading communications systems companies to
develop new and enhanced algorithms that address next generation broadband
market opportunities. The Company's strategy is to continue to implement
these algorithms in highly integrated, full-custom ICs using DSP
architectures that optimize performance, efficiency and cost. During
product development, the Company leverages its silicon compiler
technologies and proprietary circuit libraries and layouts of high-
performance analog and digital IC building blocks, thereby accelerating
time-to-market for new products. The silicon solutions for each of these
markets benefit from the same underlying core technologies, providing the
Company significant leverage in its ability to address a diverse set of end
user markets with a relatively focused investment in research and
development.
Drive Industry Standards. The Company participates actively in the
formulation of critical standards for the broadband communications markets.
The Company believes such participation provides it with several
significant benefits, including (i) accelerating and expanding the
development of markets for the Company's products by encouraging all market
participants to focus their efforts on developing products compliant with
the standards, and (ii) providing valuable insight and relationships, which
assist the Company in being early to market with products incorporating the
standards. The Company has established strategic relationships with major
networking equipment and cable modem vendors and was a principal
participant in formulating and writing the Multimedia Cable Network Systems
Data Over Cable Services Interface Specifications ("MCNS/DOCSIS") for the
end-to-end delivery of high-speed data services over hybrid fiber coax
("HFC") networks, which facilitate the development of interoperable
networking products, including cable modems. The Company's active
participation in this process enabled it to be the first provider of
transmission and protocol ICs to equipment manufacturers developing
MCNS/DOCSIS compliant products. The Company is also currently participating
in the formulation and evolution of standards for Fast Ethernet, Gigabit
Ethernet and xDSL systems.
Focus on Highly Integrated Solutions. The Company believes its analog
mixed-signal technology and advanced design methodologies enable it to
offer silicon solutions that are more highly integrated than competitive
alternatives. High levels of integration and aggressive product development
roadmaps allow the Company to enhance the value-added benefits of its
products in its customers' systems. Integration, which reduces the total
component count in the system, provides many fundamental benefits for the
31
<PAGE> 33
Company's customers, including streamlining their production flow,
improving yields, saving board space, shortening time-to-market, reducing
production costs and improving performance and reliability. These benefits
have often enabled the Company's customers to achieve faster and broader
penetration within their respective markets.
MARKETS
The increased demand for the high-speed delivery of data and video services
is forcing equipment vendors and service providers to race to provide solutions
to close the bandwidth gap. The Company's silicon solutions address the
bandwidth gap in multiple communications markets. While the communication
infrastructures of these markets are very different, the Company has been able
to leverage many of its core technologies across multiple markets in various
product implementations. Many industry analysts project high growth rates for
the markets served by the Company's products even though such markets are at
different phases in their evolution. High-speed networking is an established
market that is currently going through an upgrade; cable and DBS set-top boxes
are, on a global basis, in an early growth phase, and the cable modem and xDSL
markets are emerging.
Cable Set-Top Boxes
The last decade has seen rapid growth in the quantity and diversity in
television programming. Despite ongoing efforts to upgrade the existing cable
infrastructure, an inadequate number of channels exist to provide the content
demanded by consumers. In an effort to increase the number of channels and to
provide picture quality that is comparable to DBS, cable service providers began
offering digital programming in 1996 through new digital cable set-top boxes.
Paul Kagan Associates, Inc. ("Kagan") estimates that in 1998 only 1.1 million of
the 65 million cable subscribing homes in the United States will install digital
cable set-top boxes. Dataquest estimates that approximately 1.4 million digital
cable set-top boxes were shipped worldwide in 1997, and that approximately 12.5
million will be shipped in 2001. General Instrument, in particular, recently
announced its agreement to provide leading multiple cable system operators with
an aggregate of 15 million digital cable set-top boxes over the next three to
five years. The Company believes a new generation of digital cable set-top boxes
will be introduced in the near future to facilitate television Internet access
and to support HDTV.
Cable Modems
Cable television operators are upgrading their coaxial cable trunk systems
(backbones) to fiber to create HFC networks. These upgraded networks are able to
support two-way communications, high-speed Internet access and telecommuting
through the use of a cable modem. High-speed Internet access services, including
@Home, RoadRunner and HighwayOne (the predecessor to MediaOne), were introduced
in 1996 in conjunction with several cable system operators. Kagan estimates that
high-speed Internet service was available to 9.5 million homes in 1997 and
predicts that this service will be extended to 51.8 million homes in the United
States by 2002. Forrester Research, Inc. estimates that the number of cable
modems subscribers in the United States will increase from 100,000 in 1997 to
13.6 million by 2001. The cable industry's adoption of the MCNS/DOCSIS
specifications in 1997 for the end-to-end delivery of high-speed data services
is anticipated to enable interoperability between different manufacturers' cable
modems and headend equipment across different cable networks. This
interoperability should facilitate the creation of a retail market for cable
modems.
High-Speed Networking
The high-speed networking equipment market is undergoing a rapid transition
from 10Base-T Ethernet to Fast Ethernet (100Base-T) transceivers, with Gigabit
Ethernet (1000Base-T) anticipated to be introduced in 1998. Dell'Oro Group
estimates that the number of 100Base-T repeater/hub ports sold worldwide is
expected to grow from 5.0 million in 1997 to 43.0 million by 2001, and the
number of switch ports is expected to grow from 5.3 million to 105.2 million
during the same period. Dataquest predicts the number of 100Base-T network
interface cards ("NIC") sold worldwide will grow from 20.0 million units in 1997
to 48.4 million units by 2001. As the networking market transitions to Fast
Ethernet and Gigabit Ethernet, it is anticipated
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<PAGE> 34
that a significant portion of the installed base of 10Base-T repeater/hub ports,
switches and NICs will be upgraded to the faster technologies.
Direct Broadcast Satellite and Terrestrial Digital Broadcast
Due to the ability of DBS to provide television programming where no cable
infrastructure is in place, it is expected that the U.S. market for DBS may
eventually be surpassed by the international market where the cable
infrastructure is generally less extensive. Dataquest estimates that
approximately 6.7 million digital satellite set-top boxes were shipped worldwide
in 1997 and that approximately 17.4 million will be shipped in 2001. Other
wireless offerings such as MMDS and LMDS are currently being tested in limited
deployments. These new networks, which are able to provide programming in areas
that do not have cable, will also require a digital set-top box. Beginning in
1999, the FCC has mandated that the top four affiliated television stations
begin digital broadcasting and has required that all current television
broadcasters and their affiliates return the old analog spectrum by the year
2006 for FCC auction. ABC, CBS and NBC have announced that they will begin
transmitting HDTV before the end of 1998. This conversion to digital
broadcasting will also require new set-top boxes and television receivers.
Digital Subscriber Lines (xDSL)
xDSL is a family of technologies for high-speed data transmission over
existing copper twisted pair wiring in the telephone local loops. Several
Regional Bell Operating Companies ("RBOCs"), including Southwestern Bell, Bell
Atlantic, Bell South and U S West, and several international telephone
companies, including Bell Canada, British Telecom and Deutsche Telekom, have
conducted field trials, deployed or announced plans to conduct trials or deploy
xDSL services in select markets for high-speed Internet access and
telecommuting. Certain Internet service providers are also embracing xDSL
technologies. In January 1998, Compaq, Intel, Microsoft and several RBOCs
announced they would coordinate their efforts to create an interoperable xDSL
standard for 1.5 Mbps transmission. Dataquest estimates that the number of xDSL
lines in North America will increase from 2,000 in 1997 to 1.8 million in 2001.
Asymmetric DSL ("ADSL"), which can provide transmission at speeds of up to 8
Mbps, and Very-high-bit-rate DSL ("VDSL"), which can provide transmission at
speeds of up to 52 Mbps, represent the xDSL technologies that have recently
attracted the most interest from the service providers.
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<PAGE> 35
CUSTOMERS AND STRATEGIC RELATIONSHIPS
The Company sells its products to leading manufacturers of data
communications equipment in each of the Company's target markets. Because the
Company leverages its technology across different markets, certain of the
Company's ICs may be incorporated into equipment used in several different
markets. Equipment manufacturers from which the Company recognized aggregate
revenue of at least $100,000 in 1998 included, among others:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
MARKETS CUSTOMERS
<S> <C>
- ----------------------------------------------------------------------------------------------
Cable Set-Top Boxes General Instrument
Italtel
Scientific-Atlanta
- ----------------------------------------------------------------------------------------------
Cable Modems 3Com
Bay Networks
Cisco Systems
Com21
General Instrument
Hybrid Networks
Intel
Motorola
Samsung
- ----------------------------------------------------------------------------------------------
High-Speed Networking 3Com
Accton Technology
Adaptec
Bay Networks
Cabletron
Cisco Systems
Digital Equipment Corporation
D-Link
Hewlett-Packard
Run Top
Samsung
- ----------------------------------------------------------------------------------------------
DBS and Terrestrial Digital Broadcast Access Media
DIRECTV
Italtel
Samsung
- ----------------------------------------------------------------------------------------------
xDSL Next Level Communications
Nortel
- ----------------------------------------------------------------------------------------------
</TABLE>
As part of its business strategy, the Company periodically establishes
strategic relationships with certain key customers. In September 1997, the
Company entered into a Development, Supply and License Agreement with General
Instrument, pursuant to which the Company agreed to develop ICs for General
Instrument's digital cable set-top boxes and supply such ICs to General
Instrument for four years. Pursuant to this agreement, General Instrument agreed
to purchase from the Company 100% of its requirements for components containing
transmission, communications or video decompression (MPEG) functions for its
digital cable set-top box subscriber products in the first year of this
agreement, subject to the Company's good faith efforts to maintain its
competitive position with respect to such components. The percentage of its
product requirements that General Instrument must purchase from the Company
declines each year over the term of the agreement to 45% of General Instrument's
requirements in 2001. General Instrument also granted the Company a
royalty-bearing, perpetual, nonexclusive, worldwide license to use its MPEG and
related technology.
34
<PAGE> 36
From time to time, the Company has also entered into development agreements
with 3Com, Cisco Systems, Nortel, Sony, Bay Networks and DIRECTV, pursuant to
which the Company has worked closely with these customers to co-develop products
for these customers.
A small number of customers have historically accounted for a substantial
portion of the Company's total revenue. Sales to General Instrument and 3Com
(including sales to their respective manufacturing subcontractors) accounted for
approximately 31.9% and 14.6%, respectively, of the Company's total revenue in
1997. Sales to General Instrument and 3Com (including sales to their respective
manufacturing subcontractors) represented approximately 31.9% and 35.9%,
respectively, of the Company's total revenue in the six months ended June 30,
1998. Sales to the Company's five largest customers represented approximately
61.7% and 81.1% of the Company's total revenue in 1997 and in the six months
ended June 30, 1998, respectively. The loss of any key customer could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Risk Factors -- Customer Concentration."
PRODUCTS
The Company's five primary product lines encompass: (i) high-speed
communications and MPEG video/audio/graphics devices for the cable television
set-top box market, (ii) high-speed data transmission and media access control
devices for the cable modem market, (iii) 10/100/1000Base-T Ethernet
transceivers and repeater controllers for the high-speed networking market, (iv)
receivers and MPEG video/audio/graphics devices for the DBS and terrestrial
digital broadcast markets, and (v) broadband twisted pair transceivers for the
xDSL market. The Company also develops and sells reference platforms designed
around its IC products that represent application examples for incorporation
into its customers' equipment. By providing these reference platforms, the
Company can assist its customers in achieving easier and faster transitions from
initial prototype designs through final production releases. These reference
platforms enhance the customer's confidence that the Company's products will
meet their market requirements and product introduction schedules.
Cable Set-Top Boxes
The Company offers a suite of silicon solutions for digital cable set-top
boxes and cable headends which encompass the high-speed transmission, reception
and decompression of digital audio and video multimedia signals. These products
are also applicable to the terrestrial digital broadcast markets. The Company's
QAMLink transmission products integrate the core functionality required of
advanced communications transceiver devices including modulators and
demodulators for quadrature amplitude modulation ("QAM") and quadrature phase
shift keying ("QPSK"), adaptive equalization, forward error correction and
high-speed analog-to-digital and digital-to-analog conversion. These products
have been designed to meet both international and North American communications
standards for cable networks. Several of these products also incorporate
additional set-top box functionality such as cable network protocol processing
for entitlement and tiered programming access and input/output device control.
In the second quarter of 1998, the Company introduced its first single-chip
MPEG multimedia device that incorporates all of the processing capabilities
necessary to decode and decompress an MPEG-2 digital television data stream and
subsequently reconstruct an analog studio quality television signal that can be
displayed on a standard television receiver. This IC integrates MPEG-2 video
decompression, Dolby AC3 audio decompression, MPEG-2 transport processing,
on-screen display, analog video reconstruction and other necessary MPEG related
functions required to deliver video and audio to a television. The Company
believes this combination of the Company's transmission and MPEG silicon
solutions and licensed MIPS microprocessor cores will provide all of the
significant silicon functionality of most existing digital cable set-top boxes
with the exception of the security functions and memory.
Cable Modems
The Company has leveraged its core transmission technologies that were
developed for the cable set-top box market and adapted them to the development
of a family of products that enable digital data to be
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<PAGE> 37
delivered over an HFC cable network at downstream speeds of up to 56 Mbps and
upstream speeds of up to 10 Mbps. These products incorporate similar modulation,
adaptive equalization and error correction technologies as the set-top box
products and thereby achieve robust and reliable transmission, especially in the
noisy and interference prone upstream direction. The cable modem product family
also includes both a headend and a subscriber media access controller ("MAC")
device that controls the upstream and downstream data flow over the HFC network.
In September 1998, the Company introduced the BCM3300, which integrates the
upstream and downstream physical layers with the MCNS/DOCSIS MAC functions. This
device allows cable modems to provide telephony over the cable network using the
Internet Protocol ("IP"). The Company's cable modem products have been designed
to conform to the MCNS/DOCSIS specifications. The combination of the
transmission and MAC ICs provides a complete end-to-end silicon platform for the
Company's customers to build headend systems and subscriber modems. With the
integration of the MIPS microprocessor cores, the Company believes it has all of
the silicon functionality necessary to eventually reduce the cable data modem
into a single chip with the exception of the memory.
The Company's principal products for cable set-top boxes and cable modems
include the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
PRODUCT FUNCTION INTRODUCTION DATE
<S> <C> <C>
- -------------------------------------------------------------------------------------------
BCM3033 Universal headend QAM modulator First Quarter 1997
- -------------------------------------------------------------------------------------------
BCM3036 Universal QPSK/QAM burst modulator. Fourth Quarter 1996
- -------------------------------------------------------------------------------------------
BCM3037 Universal QPSK/QAM burst modulator for MCNS/DOCSIS Fourth Quarter 1997
applications
- -------------------------------------------------------------------------------------------
BCM3115 Downstream QAM receiver for North American set-top box Fourth Quarter 1995
applications. Includes QPSK control channel receiver.
- -------------------------------------------------------------------------------------------
BCM3116 Downstream QAM receiver for North American set-top box Fourth Quarter 1997
and MCNS/DOCSIS applications.
- -------------------------------------------------------------------------------------------
BCM3118 Downstream QAM receiver for international applications. Fourth Quarter 1996
- -------------------------------------------------------------------------------------------
BCM3120 Universal set-top box transceiver for both North Second Quarter 1998
American and international applications. Includes QAM
receiver, QPSK control channel receiver, peripheral
device interfaces and QPSK/QAM transmitter.
- -------------------------------------------------------------------------------------------
BCM3137 Headend QPSK/QAM burst receiver for MCNS/DOCSIS Second Quarter 1998
applications.
- -------------------------------------------------------------------------------------------
BCM3210 Headend MCNS/DOCSIS MAC for downstream and upstream Second Quarter 1998
traffic flow. Includes data encryption and decryption.
- -------------------------------------------------------------------------------------------
BCM3220 Subscriber MCNS/DOCSIS cable modem MAC for downstream Fourth Quarter 1997
and upstream traffic flow. Includes data encryption and
decryption.
- -------------------------------------------------------------------------------------------
BCM3300 Single chip MCNS/DOCSIS cable modem. Includes receiver, Third Quarter 1998
transmitter and MAC.
- -------------------------------------------------------------------------------------------
BCM3900 Downstream QAM receiver for North American set-top box First Quarter 1997
applications. Includes QPSK control channel receiver and
peripheral device interfaces.
- -------------------------------------------------------------------------------------------
BCM7010 MPEG system on a chip. Integrates MPEG-2 video Second Quarter 1998
decompression, Dolby AC3 audio decompression, MPEG
transport, on-screen display, analog video
reconstruction and other MPEG related functions for
delivering video and audio to a television.
- -------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 38
High-Speed Networking
The Company's networking products provide the core functionality required
for building Fast Ethernet adapter cards, repeater/hubs and switches which
support both the Ethernet (10Base-T) and Fast Ethernet (100Base-T) standards.
The Company's transceivers, which are the basic elements required for
implementing a high-speed Ethernet port, incorporate the Company's embedded DSP
algorithms combined with high-speed analog-to-digital and digital-to-analog
converters to create highly-integrated mixed-signal solutions. In addition to
the DSP-based architecture, features of the 10/100Base-T transceiver products
include low power and low voltage operation (3.3 Volts) making them suitable for
high port density switches and hubs, as well as PCI2.2 compliant adapter cards
and computer motherboards. The Company also offers a variety of repeater and
switch controller devices, thereby providing a broad suite of Fast Ethernet
products to meet the demands of the adapter card, repeater/hub, switch, network
peripheral and router markets.
The Company's principal networking products include the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
PRODUCT FUNCTION INTRODUCTION DATE
<S> <C> <C>
- -------------------------------------------------------------------------------------------
BCM5012 100Base-T managed repeater controller. Incorporates Fourth Quarter 1995
13 repeater ports, MAC port, microprocessor port,
and a port for stacking hubs. Interfaces to
external transceivers.
- -------------------------------------------------------------------------------------------
BCM5020 100Base-T network management processor. Second Quarter 1997
Incorporates statistical analysis of network
traffic to enable control of repeating hubs by
network management software.
- -------------------------------------------------------------------------------------------
BCM5100 Single-channel 10/100Base-T4 transceiver. Fourth Quarter 1996
Incorporates a 10Base-T and 100Base-T4 transceiver
for Category 3, 4 and 5 twisted pair cabling.
- -------------------------------------------------------------------------------------------
BCM5201/5202 Single-channel 3.3/5 Volt 10/100Base-TX First Quarter 1998
transceiver. Incorporates a 10Base-T and 100Base-TX
transceiver for Category 5 twisted pair cabling.
- -------------------------------------------------------------------------------------------
BCM5203 Quad 100Base-TX transceiver. Contains four Second Quarter 1997
100Base-TX Fast Ethernet transceivers.
- -------------------------------------------------------------------------------------------
BCM5205 Quad 100Base-TX integrated repeater. Incorporates Second Quarter 1997
four 100Base-TX transceivers, MII port, repeater
controller and repeater management functions.
- -------------------------------------------------------------------------------------------
BCM5208 Quad 10/100Base-T transceiver. Integrates four Third Quarter 1997
10Base-T/ 100Base-TX transceivers. 100Base-FX is
also supported at each port through an external
fiber optic transceiver.
- -------------------------------------------------------------------------------------------
BCM5216 Hex 10/100Base-T transceiver. Integrates six 10 Third Quarter 1998
Base-T/ 100Base-TX transceivers.
- -------------------------------------------------------------------------------------------
BCM5308 Nine port 10/100Base-T switch. Integrates eight Fourth Quarter 1998*
10/100 Base-TX transceivers, nine MACs and
switching fabric.
- -------------------------------------------------------------------------------------------
BCM5903 Single chip 10/100Base-T transceiver with Second Quarter 1998
integrated MAC
- -------------------------------------------------------------------------------------------
</TABLE>
- ---------------
* Estimated date of initial commercial sampling.
Direct Broadcast Satellite and Terrestrial Digital Broadcast
The Company's products for the DBS market are designed to meet the needs of
satellite set-top box providers and incorporate the functionality necessary to
receive, demodulate and decode a broadband QPSK signal, including advanced
forward error correction. These products can be programmed to accommodate
satellite standards such as DSS (DIRECTV), DVB (international) and Primestar,
and can operate at any
37
<PAGE> 39
data rate from 2 to 90 Mbps. The Company's MPEG system on a chip (BCM7010)
employs the MPEG-2 standard, which enables it to be used in either cable set-top
boxes or DBS set-top boxes.
The Company's principal DBS and terrestrial digital broadcast products
include the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
PRODUCT FUNCTION INTRODUCTION DATE
<S> <C> <C>
- -------------------------------------------------------------------------------------------
BCM4200 QPSK receiver for DSS (DIRECTV) and DVB (international) First Quarter 1997
digital satellite reception. Accommodates data rates from
2 to 90 Mbps.
- -------------------------------------------------------------------------------------------
BCM4201 Universal QPSK receiver for DSS, DVB and Primestar Third Quarter 1998
digital satellite reception. Accommodates data rates from
2 to 90 Mbps.
- -------------------------------------------------------------------------------------------
BCM7010 MPEG system on a chip. Integrates MPEG-2 video Second Quarter 1998
decompression, Dolby AC3 audio decompression, MPEG
transport, on-screen display, analog video reconstruction
and other MPEG related functions for delivering video and
audio to a television.
- -------------------------------------------------------------------------------------------
</TABLE>
Digital Subscriber Lines (xDSL)
The Company's product for xDSL transmission incorporates the functionality
to enable data to be transmitted and received at high speed over the existing
copper twisted pair wiring in the telephone local loops. The Company believes it
currently offers the industry's only single-chip silicon solution that can be
configured to operate at data rates spanning ISDN (128 kbps) to VDSL (52 Mbps),
thereby accommodating the needs of a wide variety of xDSL market segments in a
single IC. This solution offers network operators the ability to initially
install high-speed ADSL data services on the existing local loop plant and
subsequently offer higher data rates for video related services on an upgraded
plant. The Company has leveraged its mixed-signal and digital signal processing
design expertise developed for cable television and wireless products to develop
the following QAM transceiver product for the xDSL market.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
PRODUCT FUNCTION INTRODUCTION DATE
<S> <C> <C>
- -------------------------------------------------------------------------------------------
BCM6010 Scalable xDSL QAM transceiver for twisted-pair Third Quarter 1997
applications. Incorporates ATM Utopia interface and
programmable rate transmitter and receiver. Can
accommodate data rates from 128 kbps to 52 Mbps in either
a symmetric or asymmetric configuration.
- -------------------------------------------------------------------------------------------
</TABLE>
The Company's future success will depend upon its ability to develop new
silicon solutions for existing and new markets, introduce such products in a
timely and cost-effective manner, and achieve design wins. There can be no
assurance that the Company will be able to develop or introduce new products in
a timely and cost-effective manner or in sufficient quantities to meet customer
demand or that such products will satisfy customer requirements or achieve
market acceptance. See "Risk Factors -- Dependence on Development of New
Products."
CORE TECHNOLOGIES
The Company believes that one of its key competitive advantages is its
broad base of core technologies encompassing the complete design space from
systems to silicon. The Company has developed and continues to build on four
primary technology foundations: (i) proprietary communications systems
algorithms and protocols, (ii) advanced DSP hardware architectures, (iii)
silicon compiler design methodologies and advanced cell library development for
both standard cell and full-custom IC design, and (iv) high performance analog
and mixed-signal circuit design using industry standard CMOS processes.
38
<PAGE> 40
Communications Algorithms and Protocols
The Company was an innovator in integrating a high-speed QAM digital
demodulator with adaptive equalization and forward error correction into a
single IC. In addition, the Company has continued to make system advances in the
areas of FEC, QAM and QPSK modulation and demodulation, variable rate
transmitters and receivers, digital clock and carrier recovery techniques and
adaptive equalization algorithms. The Company has also designed and deployed
fully integrated, DSP-based transceiver chips for Fast Ethernet LAN
applications. The Company has developed a compact core transceiver module that
employs high performance 125 MBaud digital equalizers and high-speed
analog-to-digital converters and clock recovery circuits. This core module has
been used in a number of the Company's single channel and quad transceiver
products for Fast Ethernet (100Base-TX) applications including NICs, switches
and repeaters. This DSP transceiver expertise is now being extended and applied
to the development of a Gigabit copper twisted pair transceiver. In addition to
data transmission algorithms, the Company has developed significant expertise in
networking protocols which it has applied to the development of MAC devices for
cable modems and interactive set-top box applications as well as repeaters/hub,
switch and MAC controllers for Fast Ethernet applications. The Company has
introduced the industry's first MCNS/DOCSIS physical layer and MAC ICs for cable
modems.
Digital Signal Processing Hardware Architectures
The Company has developed cost-effective, single-chip broadband
transceivers by mapping complex communications algorithms into low-complexity
DSP hardware architectures. The Company is a technology leader in the area of
low-complexity, high-performance "silicon embedded algorithms" whereby the
communications algorithms are individually implemented in full-custom logic
rather than the conventional approach of running all of the algorithms in
firmware on a single general purpose programmable DSP architecture. This design
approach is combined with silicon compiler based design methodologies which
generate the custom logic functions. This results in ICs that are less complex
and less expensive to manufacture than conventional implementations. One
particular area where the Company has developed leading DSP technology is in
digital adaptive equalization. Equalizers are key components in all of the
Company's transceiver products. The Company believes that the speed and density
of its equalizers help to distinguish its products in the marketplace. The
Company is currently developing a single-chip, mixed-signal adaptive DSP
transceiver for Gigabit Ethernet.
Silicon Compiler Design Methodologies
The Company has developed proprietary silicon compiler technologies that
enable designers to implement ICs using a high level of abstraction yet produce
area-efficient IC layouts and achieve short design cycles. The cells that are
synthesized from this process can be individually optimized for functionality,
performance, topology, electrical characteristics and manufacturing process
portability. The Company has designed compilers for standard cells, arithmetic
processing, memories and analog building blocks. In addition, the Company has
created compilers to manage the implementation of higher level functions such as
digital filters, adaptive equalizers, modulators, demodulators and numerically
controlled oscillators/direct digital frequency synthesizers. The Company
believes that these silicon compiler capabilities accelerate time-to-market by
improving designer productivity and by providing functional blocks that can be
reused in multiple products. In addition, these compiler techniques
significantly reduce errors, thereby frequently resulting in first pass silicon
success. The Company has also developed, and continues to improve and expand its
own proprietary set of circuit and layout libraries for both standard-cell and
full-custom ICs.
Full-Custom Analog and Mixed-Signal Circuit Design
The Company has developed significant analog and mixed-signal circuit
expertise. The Company has achieved a level of circuit performance in standard
CMOS process technologies that is normally associated with more expensive
special purpose silicon fabrication technologies. All of the Company's
high-performance analog building blocks are implemented in the same low-cost
CMOS technologies as the digital IC circuitry. In addition to achieving high
performance, the Company's analog-to-digital and digital-to-analog converters
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are among the lowest die area devices in the industry, which makes them well
suited for integration into high volume mixed-signal products. The Company's
10-bit, 50 Msample/sec analog-to-digital converter received the Best Paper Award
of the 1997 International Solid State Circuits Conference, a prestigious
semiconductor conference. This converter was integrated onto the same die as the
Company's broadband QAM receiver, which the Company believes was the first such
mixed-signal QAM receiver product ever demonstrated (BCM3118). The Company has
also developed very high-speed 125 MHz analog-to-digital converters for Fast
Ethernet transceivers and 200 MHz digital-to-analog converters for cable
modulator applications. All of these data converters were designed for
integration with high-speed digital circuits in conventional CMOS technologies.
The Company has also evaluated experimental IC designs and is in the development
phase of producing other analog functions such as low noise RF amplifiers,
linear high-gain RF amplifiers, RF mixers, frequency synthesizers, RF
phase-locked loops and other building blocks to enable higher levels of system
integration.
RESEARCH AND DEVELOPMENT
The Company has assembled a core team of experienced engineers and
technologists, many of whom are leaders in their particular field or discipline.
As of June 30, 1998, approximately 68.5% of the Company's 241 research and
development employees had advanced degrees, including 41 with Ph.D.s. These
employees are involved in advancing the Company's core technologies, as well as
applying these core technologies to the Company's product development activities
in the areas of broadband communications and digital video technology for cable
set-top boxes, cable modems, high-speed networking, DBS and terrestrial digital
broadcast, and xDSL. The transmission solutions for each of these markets
benefit from the same underlying core technologies, which enables the Company to
leverage its ability to address various broadband communications markets with a
relatively focused investment in research and development.
The Company believes that the achievement of higher levels of integration
and the introduction of new products in its target markets is essential to its
growth. As a result, the Company plans to increase research and development
staffing levels in 1998 and 1999. Research and development expense for 1997,
1996 and 1995 and for the six months ended June 30, 1998 was approximately $16.2
million, $5.7 million, $2.7 million and $14.6 million, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
MANUFACTURING
Wafer Fabrication
The Company's products are manufactured in standard CMOS processes, which
permit the Company to engage independent silicon foundries to fabricate its ICs.
By subcontracting its manufacturing requirements, the Company is able to focus
its resources on design and test applications where the Company believes it has
greater competitive advantages and to eliminate the high cost of owning and
operating a semiconductor wafer fabrication facility.
The Company's Operations and Quality Engineering Group closely manages the
interface between manufacturing and design engineering. While the Company's
design methodology typically creates smaller than average die for a given
function, it also generates full-custom IC designs. As a result, the Company is
responsible for the complete functional and parametric performance testing of
its devices, including quality. The Company employs a fully staffed operations
and quality organization similar to a vertically integrated semiconductor
manufacturer. The Company arranges with its foundries to have online
work-in-progress control, making the manufacturing subcontracting process
transparent to the Company's customers.
The Company's key silicon foundries are TSMC in Taiwan and Chartered in
Singapore. While the Company currently uses two independent foundries, few of
the Company's components are manufactured at both foundries at any given time.
Any inability of one of its foundries to provide the necessary capacity or
output could result in significant production delays and could have a material
adverse effect on the Company's business, financial condition and results of
operations. While the Company currently believes it has adequate
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<PAGE> 42
capacity to support its current sales levels, the Company continues to work with
its existing foundries to obtain more production capacity and it intends to
qualify new foundries to provide additional production capacity. There can be no
assurance that adequate foundry capacity will be available on acceptable terms,
if at all. In the event either foundry experiences financial difficulties
(whether as a result of the Asian economic crisis or otherwise) or suffers any
damage or destruction to its facilities, or in the event of any other disruption
of foundry capacity, the Company may not be able to qualify alternative
manufacturing sources for existing or new products in a timely manner. See "Risk
Factors -- Dependence on Independent Foundries."
The Company's devices are currently fabricated using CMOS process
technology with 0.5 micron, triple layer metal and 0.35 micron, quad layer metal
feature sizes. The Company continuously evaluates the benefits, on a product by
product basis, of migrating to a smaller geometry process technology in order to
reduce costs. The Company's experience to date with the migration of products to
smaller geometry processes has been favorable, but there can be no assurance
that future process migration will be achieved without difficulty. Other
companies in the industry have experienced difficulty in effecting transitions
to new manufacturing processes and, consequently, have suffered reduced yields
or delays in product deliveries. The Company believes that the transition of its
products to smaller geometries will be important for the Company to remain
competitive. The Company's business, financial condition and results of
operations could be materially and adversely affected if any such transition is
substantially delayed or inefficiently implemented. See "Risk
Factors -- Transition to Smaller Geometry Process Technologies."
Assembly and Test
Wafer probe testing is performed by one of the foundries or by the
Company's wafer probe test subcontractors. Following completion of the wafer
probe tests, the die are assembled into packages and the finished products are
tested by one of the Company's two subcontractors: ASAT in Hong Kong and STATS
in Singapore. While the Company has not experienced any material disruption in
supply from assembly subcontractors to date, there can be no assurance that
assembly problems will not occur in the future. The availability of assembly and
testing services from these subcontractors could be adversely affected in the
event either subcontractor experiences financial difficulties (whether as a
result of the Asian economic crisis or otherwise) or suffers any damage or
destruction to its respective facilities, or in the event of any other
disruption of assembly and testing capacity. See "Risk Factors -- Dependence on
Third-Party Subcontractors for Assembly and Test."
Quality Assurance
The broadband communications industry demands high-quality and reliability
of the semiconductors incorporated into their equipment. The Company focuses on
product reliability from the initial stage of the design cycle through each
specific design process, including layout and production test design. In
addition, the Company's designs are subjected to in-depth circuit simulation at
temperature, voltage and processing extremes before being committed to silicon.
The Company prequalifies each assembly and foundry subcontractor. This
prequalification process consists of a series of industry standard environmental
product stress tests, as well as an audit and analysis of the subcontractor's
quality system and manufacturing capability. The Company also participates in
quality and reliability monitoring through each stage of the production cycle by
reviewing electrical and parametric data from its wafer foundry and assembly
subcontractors. The Company closely monitors wafer foundry production to ensure
consistent overall quality, reliability and yield levels. In cases where the
Company purchases wafers on a fixed cost basis, any improvement in yields can
reduce the Company's cost per IC.
As part of its total quality program, the Company plans to apply for ISO
9001 certification, a comprehensive International Standards Organization
specified quality system. The Company's objective is to exceed ISO 9001
requirements, especially in the areas of continuous improvements and customer
satisfaction. All of the Company's principal independent foundries and package
assembly facilities have achieved ISO 9000 certification.
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SALES AND MARKETING
The Company's sales and marketing strategy is to achieve design wins with
technology leaders in each of the Company's targeted broadband communications
markets by, among other things, providing superior field application and
engineering support. The Company markets and sells its products in the United
States through a direct sales force, which has largely been established within
the last year, based out of four regional sales offices located in Irvine and
San Jose, California, Atlanta, Georgia and Garwood, New Jersey. Sales managers
are dedicated to principal customers to promote close cooperation and
communication. The Company also provides its customers with reference platform
designs, which enable its customers to achieve easier and faster transitions
from the initial prototype designs through final production releases and
significantly enhance the customer's confidence that the Company's products will
meet their market requirements and product introduction schedules.
The Company also markets and sells its products internationally through a
direct sales force based out of regional sales offices located in Singapore,
Taiwan, United Kingdom and the Netherlands, as well as through a network of
independent distributors and representatives in France, Israel, Germany, Japan,
Taiwan and Korea. The Company selects these independent entities based on their
ability to provide effective field sales, marketing communications and technical
support to the Company's customers. All international sales to date have been
denominated in U.S. dollars.
COMPETITION
The broadband communications markets and semiconductor industries are
intensely competitive and are characterized by rapid technological change,
evolving standards, short product life cycles and price erosion. The Company
believes that the principal factors of competition for silicon providers to
these industries are product capabilities, level of integration, reliability,
price, time-to-market, system cost, intellectual property, customer support and
reputation. The Company believes it competes favorably with respect to each of
these factors.
The Company competes with a number of major domestic and international
suppliers of equipment in the markets for cable set-top boxes, cable modems,
high-speed networking, DBS and terrestrial digital broadcast, and xDSL, which
competition has resulted and may continue to result in declining average selling
prices for the Company's products. The Company currently competes in the cable
set-top box market with Fujitsu, LSI Logic, Philips Electronics, Rockwell
International and VLSI Technology for communication devices and with ATI
Technologies, C-Cube, LSI Logic, Motorola and STMicroelectronics in the
MPEG/graphics segment. The Company expects other major semiconductor
manufacturers to enter the market as digital broadcast television and other
digital cable television markets become more established. A number of companies,
including Hitachi, Libit Signal Processing, LSI Logic, Rockwell International,
STI and Toshiba have announced that they are developing and will introduce
MCNS/DOCSIS compliant products in the future, which could result in significant
competition in the cable modem market. In the high-speed networking market, the
Company principally competes with established suppliers including Level One
Communications, Lucent Technologies, National Semiconductor and Texas
Instruments. The Company's principal competitors in the DBS and terrestrial
broadcast market include LSI Logic, Lucent Technologies, Philips Electronics,
Rockwell International, Sony, STMicroelectronics and VLSI Technology. The
Company's principal competitors in the xDSL market include Alcatel, Analog
Devices, Globespan, Motorola, Rockwell International and Texas Instruments. The
Company also may face competition from suppliers of products based on new or
emerging technologies.
Many of the Company's competitors operate their own fabrication facilities
and have longer operating histories and presence in key markets, greater name
recognition, access to larger customer bases and significantly greater
financial, sales and marketing, manufacturing, distribution, technical and other
resources than the Company. As a result, such competitors may be able to adapt
more quickly to new or emerging technologies and changes in customer
requirements or devote greater resources to the promotion and sale of their
products than the Company. Current and potential competitors have established or
may establish financial or strategic relationships among themselves or with
existing or potential customers, resellers or other
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third parties. Accordingly, it is possible that new competitors or alliances
among competitors could emerge and rapidly acquire significant market share. In
addition, the Company's competitors may in the future develop technologies that
more effectively address the transmission of digital information through
existing analog infrastructures at a lower cost. There can be no assurance that
the Company will be able to compete successfully against current or potential
competitors, or that competition will not have a material adverse effect on the
Company's business, financial condition and results of operations.
INTELLECTUAL PROPERTY
The Company's success and future revenue growth will depend, in part, on
its ability to protect its intellectual property. The Company relies primarily
on patent, copyright, trademark and trade secret laws, as well as nondisclosure
agreements and other methods to protect its proprietary technologies and
processes. There can be no assurance that such measures will provide meaningful
protection for the Company's intellectual property. The Company has been issued
three United States patents and has filed 14 United States patent applications.
There can be no assurance that any patent will issue as a result of these
applications or future applications or, if issued, that any claims allowed will
be sufficiently broad to protect the Company's technology. In addition, there
can be no assurance that any existing or future patents will not be challenged,
invalidated or circumvented, or that any right granted thereunder would provide
meaningful protection to the Company. The failure of any patents to provide
protection to the Company's technology would make it easier for the Company's
competitors to offer similar products. In connection with its participation in
the development of various industry standards, the Company may be required to
agree to license certain of its patents to other parties, including its
competitors, that develop products based upon the adopted standards. The Company
also generally enters into confidentiality agreements with its employees and
strategic partners, and generally controls access to and distribution of its
documentation and other proprietary information. Despite these precautions, it
may be possible for a third party to copy or otherwise obtain and use the
Company's products, services or technology without authorization, develop
similar technology independently or design around the Company's patents. In
addition, effective copyright, trademark and trade secret protection may be
unavailable or limited in certain foreign countries. Certain of the Company's
customers have entered into agreements with the Company pursuant to which such
customers have the right to use the Company's proprietary technology in the
event the Company defaults in its contractual obligations, including product
supply obligations, and fails to cure the default within a specified period of
time. Moreover, the Company often incorporates the intellectual property of its
strategic customers into its designs, and the Company has certain obligations
with respect to the non-use and non-disclosure of such intellectual property.
There can be no assurance that the steps taken by the Company to prevent
misappropriation or infringement of the intellectual property of the Company or
its customers will be successful. Moreover, litigation may be necessary in the
future to enforce the intellectual property rights of the Company or its
customers, to protect the Company's trade secrets or to determine the validity
and scope of proprietary rights of others, including its customers. Such
litigation could result in substantial costs and diversion of the Company's
resources and could have a material adverse affect on the Company's business,
financial condition and results of operations.
The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights. From time to time, the Company has
received, and may continue to receive in the future, notices of claims of
infringement, misappropriation or misuse of other parties' proprietary rights.
The Company has received a letter from counsel for BroadCom, Inc. asserting
rights in the "Broadcom" trademark and demanding that the Company cease and
desist from any further use of the Broadcom name. The Company and Broadcom, Inc.
have exchanged correspondence outlining their respective positions on the
matter. In addition, the Company is currently involved in litigation with STI
concerning the alleged infringement of one of STI's patents by several of the
Company's modem products and with Sarnoff Corporation and Sarnoff Digital
Communications, Inc. concerning the alleged misappropriation and misuse of
certain of their trade secrets by the Company. There can be no assurance that
the Company will prevail in these actions, or that other actions alleging
infringement by the Company of third-party patents, misappropriation or misuse
by the Company of third-party trade secrets or invalidity of the patents held by
the Company will not be asserted or prosecuted against the Company, or that any
assertions of infringement, misappropriation or misuse or prosecutions seeking
to establish the invalidity of the Company's patents will not materially and
adversely
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affect the Company's business, financial condition and results of operations.
For example, in a patent or trade secret action, an injunction could be issued
against the Company requiring that the Company withdraw certain products from
the market or necessitating that certain products offered for sale or under
development be redesigned; the Company has also entered into certain
indemnification obligations in favor of its customers and strategic partners
that could be triggered upon an allegation or finding of the Company's
infringement misappropriation or misuse of other parties' proprietary rights.
Irrespective of the validity or successful assertion of such claims, the Company
would likely incur significant costs and diversion of its management and
personnel resources with respect to the defense of such claims, which could also
have a material adverse effect on the Company's business, financial condition
and results of operations. If any claims or actions are asserted against the
Company, the Company may seek to obtain a license under a third party's
intellectual property rights. There can be no assurance that under such
circumstances a license would be available on commercially reasonable terms, if
at all. See "-- Legal Proceedings."
EMPLOYEES
As of June 30, 1998, the Company had 353 full-time employees and 23
contract employees, including 241 employees engaged in research and development,
45 engaged in sales and marketing, 38 engaged in manufacturing operations and 52
engaged in general administration activities. The Company's employees are not
represented by any collective bargaining agreement, and the Company has never
experienced a work stoppage. The Company believes its employee relations are
good.
PROPERTIES
The Company leases three facilities in Irvine, California, which have
approximately 17,000 square feet, 26,300 square feet and 31,700 square feet
pursuant to three leases which expire in July 2000, December 1998 and February
1999, respectively. The Company also leases an additional 1,700 square feet in
Irvine, California on a month-to-month basis. These four facilities comprise the
Company's corporate headquarters and include the Company's administration, sales
and marketing, and research and development departments. In addition to these
facilities, the Company has leased office space, which consists of 152,350
square feet in two adjacent facilities located in Irvine, California, pursuant
to a lease which expires in November 2005, and an additional 15,000 square feet
in the same office complex through March 1999. The Company intends to relocate
all of its Irvine employees and operations to this complex in two stages
commencing in December 1998 and February 1999.
The Company also leases a 16,100 square foot facility in Atlanta, Georgia,
which houses the Company's Residential Broadband Business Unit. This lease
terminates in May 2002. In addition, the Company leases a 11,400 square foot
facility in San Jose, California, which lease expires in September 2000, for the
Company's Digital Video Technology Group. The Company believes its current
facilities, together with its planned expansion, will be adequate through 1999.
LEGAL PROCEEDINGS
In December 1996, Stanford Telecommunications, Inc. filed an action against
the Company in the United States District Court for the Northern District of
California. STI alleges that the Company's BCM3036, BCM3037, BCM3300, BCM93220
and BCM93220B products infringe one of STI's patents (the " '352 Patent"). STI
is seeking an injunction as well as the recovery of monetary damages, including
treble damages for willful infringement. The Company has filed an answer and
affirmative defenses to STI's complaint, denying the allegations in STI's
complaint, and has asserted a counterclaim requesting declaratory relief that
the Company is not infringing the '352 Patent and that the '352 Patent is
invalid and unenforceable. The Company believes that it has strong defenses to
STI's claims on invalidity, noninfringement and inequitable conduct grounds. The
Company and STI are currently conducting discovery in this case. On June 10,
1998 and July 21, 1998, the Court issued orders interpreting the claims of the
'352 patent. The Court has scheduled trial for May 1999. Although the Company
believes that it has strong defenses, a finding of infringement by the Company
in this action could lead to liability for monetary damages (which could be
trebled in the event that the infringement were found to have been willful), the
issuance of an injunction
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requiring that the Company withdraw various products from the market,
substantial product redesign expenses (assuming that a non-infringing design is
feasible and economic) and associated time-to-market delays, and indemnification
claims by the Company's customers or strategic partners, each of which events
could have a material adverse effect on the Company's business, financial
condition and results of operations.
In April 1997, Sarnoff Corporation and Sarnoff Digital Communications, Inc.
(collectively, "Sarnoff") filed a complaint in New Jersey Superior Court against
the Company and five former Sarnoff employees now employed by the Company (the
"Former Employees") asserting claims against the Former Employees for breach of
contract, misappropriation of trade secrets, and breach of the covenant of good
faith and fair dealing, and against the Company for inducing such actions. Those
claims relate to the alleged disclosure of certain technology of Sarnoff to the
Company. The complaint also asserts claims against the Company and the Former
Employees for unfair competition, misappropriation and misuse of trade secrets
and confidential, proprietary information of Sarnoff, and tortious interference
with present and prospective economic advantage, as well as a claim against the
Company alleging that it "illegally pirated" Sarnoff's employees. The complaint
seeks to preliminarily and permanently enjoin the Company and the Former
Employees from utilizing any alleged Sarnoff trade secrets, and to restrain the
Former Employees from violating their alleged statutory and contractual duties
of confidentiality to Sarnoff by, for example, precluding them from working for
six months in any capacity relating to certain of the Company's programs. The
Company has asserted and believes that Sarnoff's claims are without merit. The
Company has filed an answer and is vigorously defending itself in this action.
In May 1997, the New Jersey court denied Sarnoff's request for a temporary
restraining order. In June 1998, the New Jersey court denied the Company's
motion for summary judgment. Sarnoff has clarified its claims to some extent by
specifying in greater detail the trade secrets that it alleges the Company and
the Former Employees misappropriated. The Company has filed new motions for
summary judgment based on recent admissions and other events. In August 1998,
the New Jersey court set a new date, September 30, 1998, for the close of
discovery in this case. Trial is scheduled for November 1998.
In July 1997, the Company commenced an action against Sarnoff in the
California Superior Court alleging breach of contract, fraud, misappropriation
of trade secrets, false advertising, trade libel, intentional interference with
prospective economic advantage and unfair competition. The claims center on
Sarnoff's violation of a non-disclosure agreement entered into with the Company
with respect to limited use of certain of the Company's technology and on
inaccurate comparisons that the Company believes Sarnoff has made in its product
advertising and in statements to potential customers and others. This action was
removed to the United States District Court for the Central District of
California, and was stayed pending resolution of the New Jersey action described
in the preceding paragraph. Notwithstanding that the California action is
currently stayed, the Company believes that it involves facts, circumstances and
claims unrelated to those at issue in the New Jersey action, and the Company
intends to vigorously prosecute the California action against Sarnoff.
In March 1998, Scott O. Davis, the Company's former Chief Financial
Officer, filed a complaint in California Superior Court against the Company and
its Chief Executive Officer, Henry T. Nicholas, III, alleging claims for fraud
and deceit, negligent misrepresentation, breach of contract, breach of fiduciary
duty, constructive fraud, conversion, breach of the implied covenant of good
faith and fair dealing, and declaratory relief. These claims relate to Mr.
Davis' alleged ownership of 26,000 shares of Series D Preferred Stock originally
purchased by Mr. Davis in February 1996 (which shares would have converted into
78,000 shares of Class B Common Stock upon consummation of the initial public
offering). The purchase agreement between the Company and Mr. Davis contained a
provision permitting the Company to repurchase all 26,000 shares of Series D
Preferred Stock at the original price paid per share in the event that Mr. Davis
did not continue to be employed by the Company until the later of February 22,
1998 or one year after the consummation of the Company's initial public
offering. After Mr. Davis resigned from the Company in June 1997, the Company
exercised its repurchase right. Mr. Davis' complaint alleges that the repurchase
right should not be enforceable under several legal theories and seeks
unspecified damages and declaratory relief. If Mr. Davis is successful in his
claim, he may be entitled to receive the shares of Class B Common Stock
described above and may be entitled to certain other rights as a holder of
Series D Preferred Stock, including without limitation the right to acquire
certain shares of the Company's Series E Preferred Stock (or the shares of
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Class B Common Stock into which such shares of Series E Preferred Stock would
have converted upon consummation of the initial public offering). This case is
currently in discovery. In April 1998, the Company filed an answer and
affirmative defenses to Mr. Davis' complaint, denying the allegations in Mr.
Davis' complaint. The Company has also asserted counterclaims against Mr. Davis
for fraud and breach of fiduciary duty and is seeking to recover compensatory
and punitive damages, in addition to other relief.
The Company is also involved in other non-material legal proceedings,
claims and litigation arising in the ordinary course of business.
The litigation involving intellectual property rights involve complex
questions of fact and law and could require the expenditure of significant costs
and diversion of resources to defend. Although management believes that the
outcome of the Company's outstanding legal proceedings, claims and litigation
will not have a material adverse effect on the Company's financial position,
results of operations or liquidity, the results of litigation are inherently
uncertain, and an adverse outcome in any of the Company's pending litigation is
at least reasonably possible. The Company is unable to make an estimate of the
range of possible loss from outstanding litigation, and no amounts have been
provided for such matters in the accompanying financial statements. Any suit or
proceeding involving the Company or its intellectual property could be costly,
could result in a diversion of management's efforts and other Company resources,
and could restrict the Company from marketing certain of its products without a
license, which license may not be available on acceptable terms, if at all. Any
of these factors could have a material adverse effect on the Company's business,
financial condition and results of operations. See "-- Intellectual Property"
and "Risk Factors -- Risks Associated with Intellectual Property Protection."
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MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
The executive officers, key employees and directors of the Company, and
their ages as of June 30, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Henry T. Nicholas, III, 38 Co-Chairman, President and Chief Executive Officer
Ph.D.(1).......................
Henry Samueli, Ph.D.(1).......... 43 Co-Chairman, Vice President of Research and
Development and Chief Technical Officer
William J. Ruehle................ 56 Vice President and Chief Financial Officer
Timothy M. Lindenfelser.......... 38 Vice President of Marketing
Martin J. Colombatto............. 39 Vice President and General Manager, Networking
Business Unit
Vahid Manian..................... 37 Vice President of Manufacturing Operations
Aurelio E. Fernandez............. 43 Vice President of Worldwide Sales
David A. Dull.................... 49 Vice President of Business Affairs, General
Counsel and Secretary
Nariman Yousefi.................. 36 Director of Engineering, Networking Business Unit
Steve K. Tsubota................. 39 Director of Cable-TV Business Unit
Charles P. Reames, Ph.D.......... 41 Director of Cable and Satellite Systems
Myron S. Eichen(2)............... 69 Director
Alan E. Ross(2)(3)............... 63 Director
Werner F. Wolfen(3).............. 67 Director
</TABLE>
- ---------------
(1) Member of Option Committee
(2) Member of Compensation Committee
(3) Member of Audit Committee
Henry T. Nicholas, III co-founded the Company and has served as its
President, Chief Executive Officer and Co-Chairman since the Company's
inception. From 1988 through 1991, Dr. Nicholas was first a consultant and then
the Director of Microelectronics for PairGain Technologies, Inc. ("PairGain"), a
telecommunications equipment manufacturer, and was the founder of PairGain's
microelectronics organization. Prior to joining PairGain, Dr. Nicholas held
various senior management positions with the Microelectronics Center of TRW,
Inc. ("TRW") between 1982 and 1989. Dr. Nicholas attended the United States Air
Force Academy, and received a B.S., M.S. and Ph.D. in Electrical Engineering
from the University of California, Los Angeles.
Henry Samueli co-founded the Company and has served as its Co-Chairman,
Vice President of Research and Development and Chief Technical Officer since the
Company's inception. Since 1985, Dr. Samueli has also been a professor in the
Electrical Engineering Department at the University of California, Los Angeles,
where he supervises advanced research programs in broadband communications
circuits and has published more than 100 papers on the subject. Dr. Samueli was
the Chief Scientist and one of the founders of PairGain and he consulted for
PairGain from 1988 to 1994. From 1980 until 1985, Dr. Samueli was employed in
various engineering management positions in the Electronics and Technology
Division of TRW. Dr. Samueli received a B.S., M.S. and Ph.D. in Electrical
Engineering from the University of California, Los Angeles.
William J. Ruehle has served as the Company's Vice President and Chief
Financial Officer since joining the Company in June 1997. Mr. Ruehle was
employed by SynOptics Communications, Inc. as Vice President and Chief Financial
Officer from 1987 until the merger with Wellfleet Communications Incorporated in
1994 that created Bay Networks, Inc. ("Bay Networks"), a networking
communications company. Following the merger, Mr. Ruehle was promoted to
Executive Vice President and served as Chief Financial Officer of Bay Networks
until January 1997. Mr. Ruehle received a B.A. in Economics from Allegheny
College and an M.B.A. from Harvard Business School.
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Timothy M. Lindenfelser has served as the Company's Vice President of
Marketing since joining the Company in February 1994. During the past four years
until December 1997, Mr. Lindenfelser also served as Vice President of Worldwide
Sales. Prior to joining the Company, Mr. Lindenfelser was employed by Brooktree
Corporation, a semiconductor manufacturer, from November 1988 until February
1994, where he was responsible for all marketing and new business development
for the Communications Strategic Business Unit. Mr. Lindenfelser received a
B.S.E.E. from the University of Minnesota and an M.B.A. from the University of
San Diego.
Martin J. Colombatto joined the Company in July 1996 as its Director of
Marketing for Broadband Access, and became the Vice President and General
Manager of the Networking Business Unit in December 1997. Prior to joining the
Company, Mr. Colombatto held various sales positions with LSI Logic Corp., a
semiconductor manufacturer, including Director, North American Sales
Communication Segment, from August 1995 to July 1996; Director, European Sales
Communication and Consumer Segment, from April 1992 to July 1995; and Regional
Sales Manager from August 1987 to June 1992. Mr. Colombatto received a B.S. from
the California Polytechnic University, Pomona.
Vahid Manian joined the Company in January 1996 as its Director of
Operations and became the Vice President of Manufacturing Operations in December
1997. Prior to joining the Company, Mr. Manian served as the Director of
Operations at Silicon Systems, Inc. from November 1983 to January 1996, where he
led the implementation, production ramp and qualification of advanced PRML-read
channel ICs. Mr. Manian received a B.S.E.E. and an M.B.A. from the University of
California, Irvine.
Aurelio E. Fernandez has served as the Vice President of Worldwide Sales
since joining the Company in December 1997. From November 1996 to December 1997,
Mr. Fernandez served as the Senior Vice President of Sales at Exar Corporation,
a semiconductor manufacturer. From November 1994 to November 1996, Mr. Fernandez
served as the Senior Vice President of Sales at ICWorks, Inc., a semiconductor
manufacturer. Prior to that, Mr. Fernandez served in a number of positions, most
recently as Vice President of Telecom Sales, at VLSI Technology, Inc., a
semiconductor manufacturer. Mr. Fernandez received a B.S.E.E. from the
University of Florida and an M.B.A. from Florida Atlantic University.
David A. Dull has served as the Company's Vice President of Business
Affairs and General Counsel since March 1998 and was appointed Secretary in
April 1998. From 1985 until 1998, Mr. Dull was a Partner in the law firm of
Irell & Manella LLP ("Irell & Manella"), where as a business lawyer he
represented a number of public and private companies and individuals in the
entertainment and high technology industries, including the Company. Irell &
Manella has represented and continues to represent the Company in various
transactional and litigation matters. Mr. Dull received a B.A. and a J.D. from
Yale University.
Nariman Yousefi joined the Company in March 1994 as the Director of the
Networking Business Unit. Prior to joining the Company, he served as an
Engineering Manager at Standard Microsystems Corporation, a networking equipment
manufacturer, from 1991 to 1994. From 1988 to 1991, he held various engineering
positions at Western Digital Corporation, a disk drive manufacturer, and from
1984 to 1988, he led mixed-signal chip development at Silicon Systems, a
semiconductor company. Mr. Yousefi received his B.S.E.E. from the University of
California, Davis and an M.S.E.E. from the University of Southern California.
Steve K. Tsubota joined the Company in March 1995 as its Director of the
Cable-TV Business Unit. Prior to joining the Company, Mr. Tsubota served as
Director of Product Marketing of Summit Design, Inc., an Electronic Design
Automation ("EDA") company, from February 1994 to February 1995. From February
1991 to January 1994, he served as the Marketing Manager for the IC Group of
Mentor Graphics Corporation, an EDA company, and from June 1985 to March 1990,
Mr. Tsubota held various marketing, sales and engineering positions at Silicon
Compiler Systems Corporation, an EDA company. Mr. Tsubota received a B.S.E.E.
and M.S.E.E. from the University of California, Los Angeles.
Charles P. Reames joined the Company in June 1993 as its Director of Modem
Technology and most recently as the Director of Cable and Satellite Systems
since October 1995. Prior to joining the Company, Dr. Reames served in various
engineering positions in the Electronics and Technology Division of TRW from
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June 1985 through June 1993. Dr. Reames received a B.S. in Engineering from the
California Institute of Technology and an M.S. and Ph.D. in Electrical
Engineering from the University of California, Los Angeles.
Myron S. Eichen has served as an advisor to the Board of Directors since
1994. Mr. Eichen has served as a director of the Company since February 1998.
Mr. Eichen is presently a director of Rokenbok Toy Company and has founded and
served as a director for a number of companies including Brooktree Corporation
(now a division of Rockwell International), a semiconductor manufacturer.
Alan E. Ross has been a director of the Company since November 1995. Mr.
Ross is a Board member of several companies in the semiconductor industry,
including World Wide Semiconductor Manufacturing Corporation, Gambit Automated
Design, Inc. (of which he is also the Chief Executive Officer), Artest
Corporation, and ADC Telecommunications, Inc. In addition, Mr. Ross served as
President of Rockwell Semiconductor Systems, Inc. from 1988 to 1996.
Werner F. Wolfen has been a director of the Company since July 1994, when
he joined the Board of Directors as the nominee of a group of investors. Mr.
Wolfen is a Senior Partner of the law firm of Irell & Manella and was
Co-Chairman of the firm's Executive Committee from 1982 to 1992. Irell & Manella
has represented and continues to represent the Company in various transactional
and litigation matters. Mr. Wolfen received a J.D. from the University of
California Boalt Hall School of Law in 1953.
BOARD COMMITTEES
The Board of Directors currently has three committees: the Compensation
Committee, the Option Committee and the Audit Committee.
Compensation Committee. The Compensation Committee of the Board of
Directors reviews and makes recommendations to the Board regarding the Company's
compensation policies and all forms of compensation to be provided to executive
officers and directors of the Company, including, among other things, annual
salaries and bonuses, and stock option and other incentive compensation
arrangements. In addition, the Compensation Committee reviews bonus and stock
compensation arrangements for all other employees of the Company. As part of the
foregoing, the Compensation Committee also administers the Company's 1998 Stock
Incentive Plan. The current members of the Compensation Committee are Messrs.
Ross and Eichen.
Option Committee. The Option Committee of the Board of Directors is
responsible for administering the Discretionary Option Grant Program and the
Stock Issuance Program under the 1998 Plan, except with respect to officers and
directors subject to Section 16 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). The current members of the Option Committee are
Dr. Nicholas and Dr. Samueli.
Audit Committee. The Audit Committee of the Board of Directors reviews and
monitors the corporate financial reporting and the internal and external audits
of the Company, including, among other things, the Company's internal audit and
control functions, the results and scope of the annual audit and other services
provided by the Company's independent auditors and the Company's compliance with
legal matters that have a significant impact on the Company's financial reports.
The Audit Committee also consults with the Company's management and the
Company's independent auditors prior to the presentation of financial statements
to shareholders and, as appropriate, initiates inquiries into aspects of the
Company's financial affairs. In addition, the Audit Committee has the
responsibility to consider and recommend the appointment of, and to review fee
arrangements with, the Company's independent auditors. The current members of
the Audit Committee are Messrs. Ross and Wolfen.
DIRECTOR COMPENSATION AND OTHER ARRANGEMENTS
Directors of the Company do not receive cash compensation for their service
as directors. Each new nonemployee Director typically will receive an option to
purchase 40,000 shares of Class A Common Stock upon joining the Board of
Directors. Each incumbent director will be granted an option to purchase an
additional 3,000 shares of Class A Common Stock annually. See
"Management -- Employee Benefit Plans."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors currently consists of
Messrs. Ross and Eichen. No interlocking relationship exists between any member
of the Company's Board of Directors or the
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<PAGE> 51
Compensation Committee and any member of the board of directors or compensation
committee of any other company, and no such interlocking relationship has
existed in the past.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS
None of the Company's executive officers have employment agreements with
the Company. Accordingly, the employment of any such executive officer may be
terminated at any time at the discretion of the Board of Directors.
EXECUTIVE COMPENSATION
The following table sets forth for the year ended December 31, 1997 all
compensation received for services rendered to the Company in all capacities by
the Company's Chief Executive Officer and the only other executive officer of
the Company whose salary plus bonus exceeded $100,000 in 1997 (collectively, the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------
AWARDS
ANNUAL ------------
COMPENSATION SECURITIES
------------ UNDERLYING
NAME AND PRINCIPAL POSITIONS SALARY OPTIONS
---------------------------- ------------ ------------
<S> <C> <C>
Henry T. Nicholas, III, Ph.D................................ $165,000(1) 375,000
Co-Chairman, President and Chief Executive Officer
Henry Samueli, Ph.D......................................... 165,000(1) 375,000
Co-Chairman, Vice President of Research and Development
and Chief Technical Officer
</TABLE>
- ---------------
(1) Effective January 1, 1998, the annual salary of each of Dr. Nicholas and Dr.
Samueli was reduced to $110,000.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information concerning the grant of
stock options to each of the Named Executive Officers during the fiscal year
ended December 31, 1997.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZATION
------------------------------------------------- VALUE AT ASSUMED ANNUAL
NUMBER OF % OF TOTAL RATES OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(1)
OPTIONS EMPLOYEES PRICE EXPIRATION -----------------------
NAME GRANTED IN 1997 PER SHARE DATE 5% 10%
---- ---------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Henry T. Nicholas, III,
Ph.D........................ 375,000(2) 7.0% $1.25(3) 06/22/07 $221,494 $630,348
Henry Samueli, Ph.D........... 375,000(2) 7.0 1.25(3) 06/22/07 221,494 630,348
</TABLE>
- ---------------
(1) The 5% and 10% assumed rates of appreciation are prescribed by the rules and
regulations of the Securities and Exchange Commission (the "Commission") and
do not represent the Company's estimate or projection of the future trading
prices of its Common Stock. There can be no assurance that any of the values
reflected in this table will be achieved. Actual gains, if any, on stock
option exercises are dependent on numerous factors, including the future
performance of the Company, overall conditions and the option holder's
continued employment with the Company throughout the entire vesting period
and option term, which factors are not reflected in this table.
(2) Options were granted on June 23, 1997 under the Company's Amended and
Restated 1994 Stock Option Plan and are immediately exercisable. All of the
shares of Common Stock that are issuable upon exercise of unvested options
are subject to repurchase by the Company. The shares underlying the options
vest and the Company's repurchase right lapses in 48 equal monthly
installments commencing January 1, 1998.
(3) The exercise price was equal to 110% of the fair market value of the Common
Stock on the date of grant, as determined by the Board of Directors.
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<PAGE> 52
AGGREGATED OPTIONS EXERCISED IN LAST
FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table provides information with respect to the Named
Executive Officers concerning the unexercised options held as of December 31,
1997. No options were exercised during the last fiscal year by any of the Named
Executive Officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE MONEY OPTIONS
FISCAL YEAR END AT FISCAL YEAR END(1)
------------------------------ ------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------- ------------- ----------- ---------------
<S> <C> <C> <C> <C>
Henry T. Nicholas, III, Ph.D.......... 375,000 -- $2,531,250 --
Henry Samueli, Ph.D................... 375,000 -- 2,531,250 --
</TABLE>
- ---------------
(1) Represents the difference between the fair market value of the shares of
Common Stock underlying the options at December 31, 1997 ($8.00 per share,
as determined by the Board of Directors) and the exercise price of such
options ($1.25 per share)
EMPLOYEE BENEFIT PLANS
1998 Stock Incentive Plan
The Company's 1998 Stock Incentive Plan (the "1998 Plan"), which became
effective on April 8, 1998 (the "Plan Effective Date"), is intended to serve as
the successor equity incentive program to the Company's 1994 Amended and
Restated Stock Option Plan (the "1994 Plan") and the Company's 1998 Special
Stock Option Plan (the "Special Plan"). A total of 15,948,439 shares of Common
Stock have been authorized for issuance under the 1998 Plan. Such share reserve
consists of (i) the number of shares which remain available for issuance under
the 1994 Plan and the Special Plan on the Plan Effective Date, including the
shares subject to outstanding options, and (ii) an additional increase of
3,000,000 shares of Class A Common Stock. To the extent any unvested shares of
Class B Common Stock issued under the 1994 Plan or the Special Plan are
repurchased by the Company after the Plan Effective Date, at the exercise price
paid per share, in connection with a shareholder's termination of service, those
repurchased shares will be added to the reserve of Class A Common Stock
available for issuance under the 1998 Plan. In addition, the number of shares of
Class A Common Stock reserved for issuance under the 1998 Plan will
automatically increase on the first trading day of each calendar year, beginning
in calendar year 1999, by an amount equal to 3% percent of the total number of
shares of Common Stock outstanding on the last trading day of the immediately
preceding calendar year. In no event, however, may any one participant in the
1998 Plan receive option grants, separately exercisable stock appreciation
rights or direct stock issuances for more than 1,500,000 shares of Class A
Common Stock in the aggregate per calendar year.
In April 1998, outstanding options under the 1994 Plan and the Special Plan
were incorporated into the 1998 Plan, and no further option grants may be made
under the 1994 Plan or the Special Plan. The incorporated options will continue
to be governed by their existing terms, unless the Plan Administrator elects to
extend one or more features of the 1998 Plan to those options. Except as
otherwise noted below, the incorporated options have substantially the same
terms as will be in effect for grants made under the Discretionary Option Grant
Program of the 1998 Plan.
The 1998 Plan is divided into five separate components: (i) the
Discretionary Option Grant Program under which eligible individuals in the
Company's employ or service (including officers, non-employee Board members and
consultants) may, at the discretion of the Plan Administrator, be granted
options to purchase shares of Class A Common Stock at an exercise price not less
than 85% of their fair market value on the grant date, (ii) the Salary
Investment Option Grant Program which may, in the Plan Administrator's sole
discretion, be activated for one or more calendar years and, if so activated,
will allow executive officers and other highly compensated employees the
opportunity to apply a portion of their base salary to the acquisition of
special below-market stock option grants, (iii) the Stock Issuance Program under
which such individuals may, at the Plan Administrator's discretion, be issued
shares of Class A Common Stock directly, through the
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<PAGE> 53
purchase of such shares at a price not less than 100% of their fair market value
at the time of issuance or as a bonus tied to the performance of services, (iv)
the Automatic Option Grant Program under which option grants will automatically
be made at periodic intervals to eligible non-employee Board members to purchase
shares of Class A Common Stock at an exercise price equal to 100% of their fair
market value on the grant date and (v) the Director Fee Option Grant Program
which may, in the Plan Administrator's sole discretion, be activated for one or
more calendar years and, if so activated, will allow non-employee Board members
the opportunity to apply a portion of the retainer fee otherwise payable to them
in cash each year to the acquisition of special below-market option grants.
The Discretionary Option Grant Program and the Stock Issuance Program are
administered by the Options Committee except with respect to officers and
directors subject to Section 16 of the Securities and Exchange Act ("Section 16
executives"). The Option Committee as Plan Administrator has complete discretion
to determine which eligible individuals are to receive option grants or stock
issuances under those programs, the time or times when such option grants or
stock issuances are to be made, the number of shares subject to each such grant
or issuance, the status of any granted option as either an incentive stock
option or a non-statutory stock option under the Federal tax laws, the vesting
schedule to be in effect for the option grant or stock issuance and the maximum
term for which any granted option is to remain outstanding. The Compensation
Committee administers the Discretionary Option Grant and Stock Issuance Programs
with respect to Section 16 executives and will also have the exclusive authority
to select the executive officers and other highly compensated employees who may
participate in the Salary Investment Option Grant Program in the event that
program is activated for one or more calendar years, but neither the
Compensation Committee nor the Option Committee nor the Board will exercise any
administrative discretion with respect to the option grants made under the
Salary Investment Option Grant Program or under the Automatic Option Grant and
Director Fee Option Grant Programs for the non-employee Board members. All
grants under those three latter programs will be made in strict compliance with
the express provisions of each such program.
The exercise price for the shares of Class A Common Stock subject to option
grants made under the 1998 Plan may be paid in cash or in shares of Class A
Common Stock valued at fair market value on the exercise date. The option may
also be exercised through a same-day sale program without any cash outlay by the
optionee. In addition, the Plan Administrator may provide financial assistance
to one or more optionees in the exercise of their outstanding options or the
purchase of their unvested shares by allowing such individuals to deliver a
full-recourse promissory note in payment of the exercise price and any
associated withholding taxes incurred in connection with such exercise or
purchase.
The Plan Administrator has the authority to effect the cancellation of
outstanding options under the Discretionary Option Grant Program (including
options incorporated from the 1994 Plan and the Special Plan) in return for the
grant of new options for the same or different number of option shares with an
exercise price per share based on the fair market value per share of Class A
Common Stock on the new grant date.
Stock appreciation rights are authorized for issuance under the
Discretionary Option Grant Program which provide the holders with the election
to surrender their outstanding options for an appreciation distribution from the
Company equal to the excess of (i) the fair market value of the vested shares of
Class A Common Stock subject to the surrendered option over (ii) the aggregate
exercise price payable for such shares. Such appreciation distribution may be
made in cash or in shares of Class A Common Stock. None of the incorporated
options from the 1994 Plan or the Special Plan contain any stock appreciation
rights.
In the event that the Company is acquired by merger or asset sale, each
outstanding option under the Discretionary Option Grant Program which is not to
be assumed by the successor corporation will automatically accelerate in full,
and all unvested shares under the Discretionary Option Grant and Stock Issuance
Programs will immediately vest, except to the extent the Company's repurchase
rights with respect to those shares are to be assigned to the successor
corporation. The Plan Administrator will have complete discretion to grant one
or more options under the Discretionary Option Grant Program which will become
fully exercisable for all the option shares in the event those options are
assumed in the acquisition and the optionee's service with the Company or the
acquiring entity terminates within a designated period following such
acquisition. The vesting of outstanding shares under the Stock Issuance Program
may be accelerated
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<PAGE> 54
upon similar terms and conditions. The Plan Administrator will also have the
authority to grant options which will immediately vest upon an acquisition of
the Company, whether or not those options are assumed by the successor
corporation. The Plan Administrator is also authorized under the Discretionary
Option Grant and Stock Issuance Programs to grant options and to structure
repurchase rights so that the shares subject to those options or repurchase
rights will immediately vest in connection with a change in control of the
Company (whether by successful tender offer for more than 50% of the outstanding
voting stock or a change in the majority of the Board by reason of one or more
contested elections for Board membership), with such vesting to occur either at
the time of such change in control or upon the subsequent termination of the
individual's service within a designated period following such change in
control. The options incorporated from the 1994 Plan and the Special Plan will
immediately vest in full upon an acquisition of the Company by merger or asset
sale, unless those options are assumed by the successor entity.
In the event the Plan Administrator elects to activate the Salary
Investment Option Grant Program for one or more calendar years, each director,
executive officer and other highly compensated employee of the Company selected
for participation may elect, prior to the start of the calendar year, to reduce
his or her base salary for that calendar year by a specified dollar amount not
less than $10,000 nor more than $50,000. If such election is approved by the
Plan Administrator, the individual will automatically be granted, on the first
trading day in January of the calendar year for which that salary reduction is
to be in effect, a non-statutory option to purchase that number of shares of
Class A Common Stock determined by dividing the salary reduction amount by
two-thirds of the fair market value per share of Class A Common Stock on the
grant date. The option will be exercisable at a price per share equal to
one-third of the fair market value of the option shares on the grant date. As a
result, the total spread on the option shares at the time of grant (the fair
market value of the option shares on the grant date less the aggregate exercise
price payable for those shares) will be equal to the amount of salary invested
in that option. The option will vest in a series of twelve successive equal
monthly installments over the calendar year for which the salary reduction is to
be in effect and will be subject to full and immediate vesting upon certain
changes in the ownership or control of the Company.
Under the Automatic Option Grant Program, each individual on the Board at
the Underwriting Date or who first becomes a non-employee Board member at any
time after April 18, 1998 will automatically receive an option grant for 40,000
shares of Class A Common Stock on the date such individual joins the Board,
provided such individual has not been in the prior employ of the Company. In
addition, on the date of each Annual Shareholders Meeting held after the Plan
Effective Date, each non-employee Board member who is to continue to serve as a
non-employee Board member will automatically be granted an option to purchase
3,000 shares of Class A Common Stock, provided such individual has served on the
Board for at least six months.
Each automatic grant for the non-employee Board members will have a term of
ten years, subject to earlier termination following the optionee's cessation of
Board service. Each automatic option will be immediately exercisable for all of
the option shares; however, any unvested shares purchased under the option will
be subject to repurchase by the Company, at the exercise price paid per share,
should the optionee cease Board service prior to vesting in those shares. The
shares subject to each initial 40,000 share automatic option grant will vest in
a series of four successive equal annual installments upon the individual's
completion of each year of Board service over the four year period measured from
the option grant date. Each annual 3,000 share automatic option grant will vest
upon the individual's completion of one year of Board service measured from the
grant date. However, the shares subject to each automatic grant will immediately
vest in full upon certain changes in control or ownership of the Company or upon
the optionee's death or disability while a Board member.
Should the Director Fee Option Grant Program be activated in the future,
each non-employee Board member will have the opportunity to apply all or a
portion of any annual retainer fee otherwise payable in cash to the acquisition
of a below-market option grant. The option grant will automatically be made on
the first trading day in January in the year for which the retainer fee would
otherwise be payable in cash. The option will have an exercise price per share
equal to one-third of the fair market value of the option shares on the grant
date, and the number of shares subject to the option will be determined by
dividing the amount of the
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<PAGE> 55
retainer fee applied to the program by two-thirds of the fair market value per
share of Class A Common Stock on the grant date. As a result, the total spread
on the option (the fair market value of the option shares on the grant date less
the aggregate exercise price payable for those shares) will be equal to the
portion of the retainer fee invested in that option. The option will become
exercisable for the option shares in a series of twelve successive equal monthly
installments over the calendar year for which the election is to be in effect.
However, the option will become immediately exercisable for all the option
shares upon (i) certain changes in the ownership or control of the Company or
(ii) the death or disability of the optionee while serving as a Board member.
The shares subject to each option under the Salary Investment Option Grant,
Automatic Option Grant and Director Fee Option Grant Programs will immediately
vest upon (i) an acquisition of the Company by merger or asset sale or (ii) the
successful completion of a tender offer for more than 50% of the Company's
outstanding voting stock or a change in the majority of the Board effected
through one or more contested elections for Board membership.
Limited stock appreciation rights will automatically be included as part of
each grant made under the Automatic Option Grant, Salary Investment Option Grant
and Director Fee Option Grant Programs and may be granted to one or more
officers of the Company as part of their option grants under the Discretionary
Option Grant Program. Options with such a limited stock appreciation right may
be surrendered to the Company upon the successful completion of a hostile tender
offer for more than 50% of the Company's outstanding voting stock. In return for
the surrendered option, the optionee will be entitled to a cash distribution
from the Company in an amount per surrendered option share equal to the excess
of (i) the highest price per share of Class A Common Stock paid in connection
with the tender offer over (ii) the exercise price payable for such share.
The Board may amend or modify the 1998 Plan at any time, subject to any
required shareholder approval. The 1998 Plan will terminate on the earliest of
(i) January 31, 2008, (ii) the date on which all shares available for issuance
under the 1998 Plan have been issued as fully-vested shares or (iii) the
termination of all outstanding options in connection with certain changes in
control or ownership of the Company.
As of June 30, 1998, options to purchase an aggregate of 714,550 shares of
Class A Common Stock were outstanding at a weighted average exercise price per
share of $32.14, and options to purchase an aggregate of 7,970,103 shares of
Class B Common Stock were outstanding at a weighted average exercise price per
share of $5.20.
1998 Employee Stock Purchase Plan
The Company's 1998 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board and approved by the shareholders in February 1998 and
became effective in April 1998. The Purchase Plan is designed to allow eligible
employees of the Company and participating subsidiaries to purchase shares of
Class A Common Stock, at semi-annual intervals, through their periodic payroll
deductions under the Purchase Plan, and a reserve of 750,000 shares of Class A
Common Stock has been established for this purpose.
The Purchase Plan will be implemented in a series of successive offering
periods, each with a maximum duration of 24 months. However, the initial
offering period began in April 1998 and will end on the last business day in
April 2000. The next offering period will commence on the first business day in
May 2000, and subsequent offering periods will commence as designated by the
Plan Administrator.
Individuals who are eligible employees (scheduled to work more than 20
hours per week for more than five calendar months per year) on the start date of
any offering period may enter the Purchase Plan on that start date or on any
subsequent semi-annual entry date. Individuals who become eligible employees
after the start date of the offering period may join the Purchase Plan on any
subsequent semi-annual entry date within that offering period.
Payroll deductions may not exceed 15% of total compensation, and the
accumulated payroll deductions of each participant will be applied to the
purchase of shares on his or her behalf on each semi-annual purchase
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<PAGE> 56
date (the last business day in April and October each year) at a purchase price
per share equal to 85% of the lower of (i) the fair market value of the Class A
Common Stock on the participant's entry date into the offering period or (ii)
the fair market value on the semi-annual purchase date. In no event, however,
may any one participant purchase more than 1,500 shares, nor may all
participants in the aggregate purchase more than 150,000 shares on any one
semi-annual purchase date.
Should the fair market value per share of Class A Common Stock on any
purchase date be less than the fair market value per share on the start date of
the two-year offering period, then that offering period will automatically
terminate, and a new two-year offering period will begin on the next business
day, with all participants in the terminated offering to be automatically
transferred to the new offering period.
In the event the Company is acquired by merger or asset sale, all
outstanding purchase rights will automatically be exercised immediately prior to
the effective date of such acquisition. The purchase price will be equal to 85%
of the lower of (i) the fair market value per share of Class A Common Stock on
the participant's entry date into the offering period in which such acquisition
occurs or (ii) the fair market value per share of Class A Common Stock
immediately prior to such acquisition.
The Purchase Plan will terminate on the earlier of (i) the last business
day of April 2008, (ii) the date on which all shares available for issuance
under the Purchase Plan shall have been sold pursuant to purchase rights
exercised thereunder or (iii) the date on which all purchase rights are
exercised in connection with an acquisition of the Company by merger or asset
sale.
The Board may at any time alter, suspend or discontinue the Purchase Plan.
However, certain amendments to the Purchase Plan may require shareholder
approval.
401(k) Profit Sharing Plan
The Company has an employee profit sharing plan that qualifies as a
deferred salary arrangement under Section 401(k) of the Internal Revenue Code
(the "401(k) Plan"). The 401(k) Plan allows eligible employees to defer up to
20% of their pre-tax earnings, subject to the Internal Revenue Service annual
contribution limit. At the Company's discretion, the Company may make matching
contributions to the 401(k) Plan. To date, the Company has not made any matching
contributions under the 401(k) Plan.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Articles of Incorporation limit the personal liability of its
directors for monetary damages to the fullest extent permitted by the California
General Corporation Law (the "California Law"). Under the California Law, a
director's liability to a company or its shareholders may not be limited (i) for
acts or omissions that involve intentional misconduct or a knowing and culpable
violation of law, (ii) for acts or omissions that a director believes to be
contrary to the best interests of the Company or its shareholders or that
involve the absence of good faith on the part of the director, (iii) for any
transaction from which a director derived an improper personal benefit, (iv) for
acts or omissions that show a reckless disregard for the director's duty to the
Company or its shareholders in circumstances in which the director was aware, or
should have been aware, in the ordinary course of performing a director's
duties, of a risk of a serious injury to the Company or its shareholders, (v)
for acts or omissions that constitute an unexcused pattern of inattention that
amounts to an abdication of the director's duty to the Company or its
shareholders, (vi) under Section 310 of the California Law concerning contacts
or transactions between the Company and a director, or (vii) under Section 316
of the California Law concerning directors' liability for improper dividends,
loans and guarantees. The limitation of liability does not affect the
availability of injunctions and other equitable remedies available to the
Company's shareholders for any violation by a director of the director's
fiduciary duty to the Company or its shareholders.
The Company's Articles of Incorporation also include an authorization for
the Company to indemnify its "agents" (as defined in Section 317 of the
California Law) through bylaw provisions, by agreement or otherwise, to the
fullest extent permitted by law. Pursuant to this provision, the Company's
Bylaws provide for indemnification of the Company's directors, officers and
employees. In addition, the Company may, at its
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discretion, provide indemnification to persons whom the Company is not obligated
to indemnify. The Bylaws also allow the Company to enter into indemnity
agreements with individual directors, officers, employees and other agents.
These indemnity agreements have been entered into with all directors and
executive officers and provide the maximum indemnification permitted by law.
These agreements, together with the Company's Bylaws and Articles of
Incorporation, may require the Company, among other things, to indemnify these
directors or executive officers (other than for liability resulting from willful
misconduct of a culpable nature), to advance expenses to them as they are
incurred, provided that they undertake to repay the amount advanced if it is
ultimately determined by a court that they are not entitled to indemnification,
and to obtain directors' and officers' insurance if available on reasonable
terms. Section 317 of the California Law and the Company's Bylaws make provision
for the indemnification of officers, directors and other corporate agents in
terms sufficiently broad to indemnify such persons, under certain circumstances,
for liabilities (including reimbursement of expense incurred) arising under the
Securities Act. The Company is not aware of any pending litigation or
proceeding, other than the pending litigation with Scott Davis, involving any
director, officer, employee or agent of the Company in which indemnification
will be required or permitted. See "Business -- Legal Proceedings." Moreover,
the Company is not aware of any threatened litigation or proceeding that might
result in a claim for such indemnification. The Company believes that the
foregoing indemnification provisions and agreements are necessary to attract and
retain qualified persons as directors and executive officers.
The Company currently maintains directors' and officers' liability
insurance.
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CERTAIN TRANSACTIONS
Since January 1, 1995, there has not been any transaction or series of
similar transactions to which the Company was or is a party in which the amount
involved exceeded or exceeds $60,000 and in which any director, executive
officer, holder of more than 5% of any class of the Company's voting securities,
or any member of the immediate family of any of the foregoing persons had or
will have a direct or indirect material interest, other than the transactions
described below.
Series D Preferred Stock Financing. In February 1996, the Company issued
and sold an aggregate of 493,839 shares of convertible Series D Preferred Stock
for an aggregate purchase price of $2,963,034 or $6.00 per share. The investors
in such shares included, among others, (i) Werner F. Wolfen, a director of the
Company, who purchased 24,644 shares of convertible Series D Preferred Stock,
(ii) Alan E. Ross, a director of the Company, who purchased 5,000 shares of
convertible Series D Preferred Stock, (iii) Myron S. Eichen, a director of the
Company, who purchased 24,644 shares of convertible Series D Preferred Stock and
(iv) a trust controlled by Leon M. Samueli and Barbara Jane Samueli, relatives
of Henry Samueli (the Company's Co-Chairman, Vice President of Research and
Development and Chief Technical Officer), which purchased 30,000 shares of
convertible Series D Preferred Stock. Each share of convertible Series D
Preferred Stock automatically converted into three shares of the Company's Class
B Common Stock upon consummation of the Company's initial public offering.
Series E Preferred Stock Financing. In September 1997, the Company issued
and sold 1,500,000 shares of convertible Series E Preferred Stock to General
Instrument for an aggregate purchase price of $22,725,000 or $15.15 per share
(the "Series E Financing"). Each share of convertible Series E Preferred Stock
automatically converted into 1.5 shares of the Company's Class B Common Stock
upon consummation of the Company's initial public offering. In connection with
the Series E Financing, General Instrument and the Company entered into a
Development, Supply and License Agreement, pursuant to which, among other
things, the Company has agreed to supply to General Instrument, and General
Instrument has agreed to purchase from the Company, a specified percentage of
General Instrument's silicon requirements for its digital cable set-top box
subscriber products. For 1997, the Company's sales to General Instrument (and
its subcontractor) were approximately $11.8 million or 31.9% of the Company's
total revenue. See "Business -- Customers and Strategic Relationships."
Development Agreement with Cisco Systems. Effective September 1996, the
Company entered into a development agreement with Cisco Systems, pursuant to
which the Company granted to Cisco Systems an option to purchase shares of the
Company's Class A Common Stock at the initial public offering price, net of
underwriting discounts and commissions. Cisco Systems exercised this option and
purchased 500,000 shares at a price of $22.32 per share in a non-underwritten
registered offering concurrent with the closing of the Company's initial public
offering. In addition, Cisco Systems has agreed that it will be subject to
certain restrictions following this offering, including (i) a one-year lock-up
period during which the shares purchased by Cisco Systems cannot be transferred,
(ii) a restriction on selling more than a certain number of shares per quarter
during the first year following termination of the initial one-year lock-up
period, (iii) a notification obligation should Cisco Systems desire to sell more
than a specified number of shares after the one-year lock-up period, (iv) a
three-year standstill agreement preventing Cisco Systems from acquiring more
than 10% of the Company's Common Stock, and (v) a seven-year voting agreement
with respect to certain matters, which agreement includes an obligation to vote
its shares in favor of all directors nominated by the Board of Directors of the
Company. Some of these restrictions may terminate early upon certain events,
such as an acquisition of the Company. For 1997, the Company's sales to Cisco
Systems were approximately $2,000,000, or 5.4% of the Company's total revenue.
See "Business -- Customers and Strategic Relationships" and "Sale of Shares to
Cisco Systems."
Sale of Common Stock to Irell & Manella. Pursuant to an agreement dated as
of October 31, 1997, the Company issued and sold 225,000 shares of Class B
Common Stock to Irell & Manella for an aggregate purchase price of $1,050,000 or
$4.67 per share. Werner F. Wolfen, a director of the Company, is a Senior
Partner of Irell & Manella.
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<PAGE> 59
Engagement Agreement with Irell & Manella. Irell & Manella has represented
and continues to represent the Company in various legal matters pursuant to an
engagement agreement dated as of January 1, 1997, and amended as of January 1,
1998. Under the engagement agreement, the Company has agreed to pay Irell &
Manella a fixed fee plus costs for the firm's legal services rendered from and
after January 1, 1998 with respect to certain litigation matters. Irell &
Manella has agreed to render legal services to the Company on most other matters
at reduced rates from the firm's standard rates for the two-year period
commencing January 1, 1998. During 1997, the Company paid approximately $1.2
million to Irell & Manella for legal services rendered by that firm.
Officer Promissory Notes. Between March 1995 and December 1997, the Company
entered into full-recourse promissory notes with certain of its officers and
directors to finance the purchase of Class B Common Stock upon exercise of stock
options. See "Management -- Executive Compensation" and "Employee Benefit
Plans -- 1998 Stock Incentive Plan." All of the notes are full-recourse, secured
by the shares purchased and are due and payable upon the earlier of the stated
due date or thirty days (ninety days in the case of Mr. Ruehle) after the
termination of such officer's employment with the Company. In July 1997, in
connection with the exercise of a stock option, William J. Ruehle, the Chief
Financial Officer of the Company, delivered a $467,500 full-recourse promissory
note to the Company. Such note bears interest at 6.5% per annum and is due in
July 2002. The Company has agreed to pay Mr. Ruehle the amount necessary to
compensate him for the interest expense. In December 1997, in connection with
the exercise of a stock option, Aurelio E. Fernandez, Vice President of
Worldwide Sales, delivered a $1,800,000 full-recourse promissory note to the
Company that is due in December 2002. Mr. Fernandez will be deemed to have paid
interest with respect to such note at the applicable federal rate, 6.5% per
annum at December 31, 1997. In addition, in January 1998, Mr. Fernandez
delivered a $130,000 full-recourse promissory note to the Company. Such note
bears interest at 6.5% per annum and is due in January 2002. This loan was made
to Mr. Fernandez to allow him to pay off a similar loan from his prior employer
that became due when he left that company.
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<PAGE> 60
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information as of June 30, 1998
regarding beneficial ownership of the Company's Common Stock, as adjusted to
reflect the sale of 3,000,000 shares of Class A Common Stock offered hereby, by
(i) each person (or group of affiliated persons) known by the Company to own
beneficially more than 5% of the Class A Common Stock or the Class B Common
Stock, (ii) each of the Company's directors and Named Executive Officers, (iii)
the Company's directors and executive officers as a group and (iv) all other
Selling Shareholders.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO OFFERING SHARES AFTER OFFERING
------------------------------------------ OF CLASS A -------------------------------------
NUMBER OF NUMBER OF PERCENT OF COMMON NUMBER OF NUMBER OF PERCENT OF
CLASS A CLASS B TOTAL VOTING STOCK CLASS A CLASS B TOTAL VOTING
NAME OF BENEFICIAL OWNERS SHARES SHARES POWER(1) OFFERED(2) SHARES SHARES POWER(1)
------------------------- --------- ---------- ------------ ---------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Henry T. Nicholas, III,
Ph.D.(3)...................... -- 11,000,000(4)(5) 27.7% 430,000 -- 10,570,000 28.2%
Henry Samueli, Ph.D.(3)......... -- 11,000,000(4)(6) 27.7 430,000 -- 10,570,000 28.2
General Instrument
Corporation(7)................ -- 2,250,000 5.7 -- -- 2,250,000 6.1
Intel Corporation(8)............ -- 1,576,800 4.0 630,580 -- 946,220 2.6
Scientific-Atlanta, Inc.(9)..... -- 900,000 2.3 340,000 -- 560,000 1.5
Dawson Samberg Capital
Management Inc.(10) .......... 586,000 -- * -- 586,000 -- *
Irell & Manella LLP(11)......... -- 525,000 1.3 52,036 -- 472,964 1.3
Cisco Systems(12)............... 500,000 -- * -- 500,000 -- *
Timothy M. Lindenfelser......... -- 446,738(13) 1.1 90,000 -- 356,738 1.0
William J. Ruehle............... -- 410,500 1.0 40,000 -- 370,500 1.0
Myron S. Eichen................. 40,000(14) 345,351(15) * 45,000 40,000 300,351 *
Donald Brooks(16)............... -- 375,000 1.0 37,168 -- 337,832 *
Werner F. Wolfen................ 40,000(14) 250,632(17) * 38,250 40,000 212,382 *
Aurelio E. Fernandez............ -- 255,000(18) * 30,000 -- 225,000 *
Zweig-DiMenna Entities(19)...... 251,200 -- * -- 251,200 -- *
Roston Enterprises(20).......... -- 239,292 * 23,718 -- 215,574 *
Herb Alpert(21)................. -- 223,932 * 22,195 -- 201,737 *
Richard Carpenter(21)........... -- 223,932 * 22,195 -- 201,737 *
Jerome Moss(21)................. -- 223,932 * 22,195 -- 201,737 *
Hiromi Yoshida(21).............. -- 223,932 * 22,195 -- 201,737 *
Vahid Manian.................... -- 195,000(22) * 33,000 -- 162,000 *
Alan E. Ross.................... 40,000(14) 105,000 * 19,800 40,000 85,200 *
David A. Dull................... -- 25,152(23) * 15,000 -- 10,152 *
All executive officers and
directors as a group (10
persons)(24).................. 120,000(25) 24,033,373(26) 59.6 1,171,050 120,000 22,862,323 60.2
All other Selling Shareholders,
each owning less than 1% of
the total voting power prior
to this offering (62
persons)...................... -- 2,029,197(27) 5.1 264,168 -- 1,765,029 4.7
</TABLE>
- ---------------
* Less than one percent.
(1) The number of shares beneficially owned and the percentage of shares
beneficially owned are based on (i) 4,839,750 shares of Class A Common
Stock and 38,878,199 shares of Class B Common Stock outstanding as of June
30, 1998, and (ii) 7,839,750 shares of Class A Common Stock and 36,270,699
shares of Class B Common Stock outstanding upon consummation of this
offering. Beneficial ownership is determined in accordance with the rules
and regulations of the Commission. Shares of Common Stock subject to
options that are currently exercisable or exercisable within 60 days of
October 14, 1998 are deemed to be outstanding and beneficially owned by the
person holding such options for the purpose of computing the number of
shares beneficially owned and the percentage ownership of such person, but
are not deemed to be outstanding for the purpose of computing the
percentage ownership of any other person. Except as indicated in the
footnotes to this table, and subject to applicable community property laws,
such persons have sole and voting investment power with respect to all
shares of the Company's Common Stock shown as beneficially owned by them.
(2) Assumes no exercise of the Underwriters' over-allotment option to purchase
up to an aggregate of 77,500 shares of Class A Common Stock from the
Company and up to an aggregate of 372,500 shares from certain of the
Selling Shareholders.
(3) The address for each of Dr. Nicholas and Dr. Samueli is 16251 Laguna Canyon
Road, Irvine, California 92618. Dr. Nicholas and Dr. Samueli will each sell
60,000 additional shares if the Underwriters' over-allotment option is
exercised in full.
(4) Includes 375,000 shares of Class B Common Stock issuable pursuant to
options that are exercisable within 60 days of October 14, 1998.
(5) Includes 10,625,000 shares of Class B Common Stock held by Dr. Nicholas and
his spouse, as trustees of the Nicholas Family Trust.
(6) Includes (i) 900,000 shares of Class B Common Stock owned by HS Management,
L.P., of which Dr. Samueli is the General Partner, (ii) 1,200,000 shares of
Class B Common Stock held by Dr. Samueli, as Trustee for the Lifetime
Benefit Trust for Henry Samueli, (iii) 4,025,000 shares of Class B Common
Stock held by Dr. Samueli and his spouse, as Trustees of the Samueli Family
1995 Trust, and (iv) 4,500,000 shares of Class B Common Stock held by HS
Portfolio L.P., of which Dr. Samueli is the General Partner.
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<PAGE> 61
(7) The address for General Instrument Corporation is 101 Tournament Drive,
Horsham, Pennsylvania 19044.
(8) Intel will sell an additional 119,420 shares if the Underwriters'
over-allotment option is exercised in full.
(9) Scientific-Atlanta will sell an additional 60,000 shares if the
Underwriters' over-allotment option is exercised in full. Excludes 600,000
shares of Class A Common Stock sold by Scientific-Atlanta in October 1998.
(10) The address for Dawson Samberg Capital Management, Inc. is 354 Pequot
Avenue, Southport, Connecticut 06490. Ownership interest presented is based
upon a Schedule 13-G which was previously filed with the Commission.
(11) Irell & Manella will sell 11,965 additional shares if the Underwriters'
over-allotment option is exercised in full.
(12) The address for Cisco Systems is 170 West Tasman Drive, San Jose,
California.
(13) Includes 90,000 shares of Class B Common Stock pursuant to options that are
exercisable within 60 days of October 14, 1998.
(14) Consists of 40,000 shares of Class A Common Stock issuable pursuant to
options that are exercisable within 60 days of October 14, 1998.
(15) Consists of 345,351 shares of Class B Common Stock owned by the Eichen
Family Trust, of which Mr. Eichen is a trustee.
(16) Mr. Brooks will sell 8,547 additional shares of the Underwriters'
over-allotment option is exercised in full.
(17) Includes (i) 18,750 shares of Class B Common Stock held by the Werner F.
Wolfen Annuity Trust B, of which Mr. Wolfen is a beneficiary and (ii)
18,750 shares of Class B Common Stock held by the Mary G. Wolfen Annuity
Trust B, of which Mr. Wolfen's spouse is a beneficiary. Also includes
45,000 shares of Class B Common Stock owned by the Estate of Lawrence P.
Wolfen, of which Mr. Wolfen serves as executor and of which Mr. Wolfen
disclaims beneficial ownership. Excludes 525,000 shares of Class B Common
Stock issued and sold to Irell & Manella, of which Mr. Wolfen's
participation in the beneficial ownership therein is less than 5% of such
shares. See "Certain Transactions."
(18) Includes 30,000 shares of Class B Common Stock pursuant to options that are
exercisable within 60 days of October 14, 1998.
(19) The address for the Zweig-DiMenna entities is 900 Third Avenue, New York,
New York 10022. Pursuant to a Schedule 13-G filed with the Commission,
includes (i) 132,800 shares of Class A Common Stock held by Zweig-DiMenna
International Limited, (ii) 54,600 shares of Class A Common Stock held by
Zweig-DiMenna Partners, L.P., (iii) Zweig-DiMenna International Managers,
(iv) 32,500 shares of Class A Common Stock held by Zweig-DiMenna Special
Opportunities, (v) 8,200 shares of Class A Common Stock held by Gotham
Advisors, Inc., on behalf of a discretionary account, and (vi)
Zwieg-DiMenna Investors, L.P.
(20) Roston Enterprises will sell 5,454 additional shares if the Underwriters'
over-allotment option is exercised in full.
(21) Such shareholder will sell 5,104 additional shares if the Underwriters'
over-allotment option is exercised in full.
(22) Includes 75,000 shares of Class B Common Stock pursuant to options that are
exercisable within 60 days of October 14, 1998.
(23) Includes 21,875 shares of Class A Common Stock issuable pursuant to options
that are exercisable within 60 days of October 14, 1998.
(24) All executive officers and directors as a group will sell 120,000
additional shares if the Underwriters' over-allotment option is exercised
in full.
(25) Consists of an aggregate of 120,000 shares of Class A Common Stock issuable
pursuant to options that are exercisable within 60 days of October 14,
1998.
(26) Includes an aggregate of 966,875 shares of Class B Common Stock issuable
pursuant to options that are exercisable within 60 days of October 14,
1998.
(27) Includes an aggregate of 140,745 shares of Class B Common Stock issuable
pursuant to options that are exercisable within 60 days of October 14,
1998. These Selling Shareholders will sell an aggregate of 26,698
additional shares of Class B Common Stock in the event the Underwriters'
over-allotment option is exercised in full.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 200,000,000 shares
of Class A Common Stock, 100,000,000 shares of Class B Common Stock and
10,000,000 shares of Preferred Stock. The following summary of the capital stock
of the Company and certain provisions of the Company's Articles of Incorporation
and Bylaws does not purport to be complete and is qualified in its entirety by
the provisions of the Articles of Incorporation and Bylaws, copies of which have
been filed as exhibits to the Registration Statement of which this Prospectus is
a part.
COMMON STOCK
The Company is authorized to issue 300,000,000 shares of Common Stock,
$.0001 par value, of which 200,000,000 shares have been designated as Class A
Common Stock and 100,000,000 shares have been designated as Class B Common
Stock. At June 30, 1998, 4,839,750 shares and 38,878,199 shares of Class A
Common Stock and Class B Common Stock, respectively, were outstanding. Such
shares were held of record by approximately 43 holders and 328 holders,
respectively.
Voting Rights. Holders of Class A Common Stock are entitled to one vote per
share and holders of Class B Common Stock are entitled to ten votes per share.
Holders of Common Stock will vote together as a single class on all matters
submitted to a vote of shareholders, except (i) as otherwise required by law and
(ii) in the case of a proposed issuance of shares of Class B Common Stock, which
issuance shall require the affirmative vote of the holders of the majority of
the outstanding Class B Common Stock shares voting separately as a class. Under
the Company's Articles of Incorporation and Bylaws, holders of Common Stock will
not have cumulative voting rights after the Company is a "listed corporation"
(as defined in California Corporations Code Section 301.5) and, holders of
shares representing a majority of the voting power of Common Stock can elect all
of the directors. In such event, the holders of the remaining shares will not be
able to elect any directors. The Company anticipates it will qualify as a listed
corporation as of its first annual meeting of the shareholders following this
offering, provided that the Company has at least 800 holders of its equity
securities as of the record date of such meeting.
Dividends. Holders of record of shares of Common Stock are entitled to
receive such dividends when, if and as may be declared by the Board of Directors
out of funds legally available for such purposes, subject to the rights of
preferred shareholders and the terms of any existing or future agreements
between the Company and its debtholders. No dividends may be declared or paid on
any share of any class of Common Stock, unless such dividend, at the same rate
per share, is simultaneously declared or paid on each share of the other class
of Common Stock. In the case of a stock dividend or distribution, holders of
Class A Common Stock are entitled to receive the same percentage dividend or
distribution as holders of Class B Common Stock and vice versa, except that
stock dividends and distributions shall be made in shares of Class A Common
Stock to the holders of Class A Common Stock and in shares of Class B Common
Stock to the holders of Class B Common Stock unless the Company's Board of
Directors determines in its discretion that it is more desirable to distribute
shares of Class A Common Stock with respect to Class B Common Stock. The Company
presently intends to retain future earnings, if any, for use in the operation
and expansion of its business and does not anticipate paying cash dividends in
the foreseeable future.
Convertibility. Each share of Class B Common Stock is convertible, at the
option of its holder, into one fully paid and nonassessable share of Class A
Common Stock at any time. The Class A Common Stock is not convertible into Class
B Common Stock. Each share of Class B Common Stock shall automatically be
converted into one share of Class A Common Stock in the event such share shall
be transferred (including, without limitation, by way of sale, assignment,
exchange, gift, bequest, appointment or otherwise) to any person or entity other
than a Permitted Transferee as such term is defined in the Articles of
Incorporation. A Permitted Transferee generally includes the following
transferees, among others: the shareholder's spouse, the lineal descendants or
spouse of such descendants, the trustee of a trust for the benefit of the holder
or a charitable organization, a charitable organization, or certain
corporations, partnerships or other entities owned by the holder.
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Liquidation Rights. Upon liquidation, dissolution or winding-up of the
Company, the holders of Class A Common Stock are entitled to share ratably with
the holders of Class B Common Stock in all assets available for distributions
after payment in full to creditors and holders of Preferred Stock.
Other Provisions. The holders of Common Stock are not entitled to
preemptive or subscription rights. In any merger, consolidation or business
combination, the consideration to be received per share by holders of Class A
Common Stock is identical to that to be received by holders of Class B Common
Stock. No class of Common Stock may be subdivided, consolidated, reclassified or
otherwise changed unless the other class of Common Stock concurrently is
subdivided, consolidated, reclassified or otherwise changed in the same
proportion and in the same manner. All outstanding shares are, and the shares of
Class A Common Stock offered hereby will be upon issuance, validly issued, fully
paid and nonassessable.
PREFERRED STOCK
The Company has authorized 10,000,000 shares of Preferred Stock, $.0001 par
value per share, which may be issued in series from time to time with such
designations, relative rights, priorities, preferences, qualifications,
limitations and restrictions thereof, to the extent that such qualities are not
fixed in the Company's Articles of Incorporation, as the Board of Directors
determines. No shares of the Company's Preferred Stock are outstanding. The
rights, preferences, limitations and restrictions of different series of
Preferred Stock may differ with respect to dividend rates, amounts payable on
liquidation, voting rights, conversion rights, redemption provisions, sinking
fund provisions and other matters. The Board of Directors may authorize the
issuance of Preferred Stock with rights senior to the Common Stock with respect
to the payment of dividends and the distribution of assets on liquidation. In
addition, the Board of Directors is authorized to fix the limitations and
restrictions, if any, upon the payment of dividends on Common Stock to be
effective while any shares of Preferred Stock are outstanding. The Board of
Directors, without shareholder approval, can issue Preferred Stock with voting
and conversion rights which could adversely affect the voting power of the
holders of Common Stock. The Company believes that the Preferred Stock will
provide the Company with increased flexibility in structuring possible future
financings and acquisitions, and in meeting other corporate needs that might
arise. Having such authorized shares available for issuance will allow the
Company to issue shares of Preferred Stock without the expense and delay of a
special shareholders' meeting. Although the Company's Board of Directors has no
intention at the present time of doing so, it could issue a series of Preferred
Stock, the terms of which, subject to certain limitations imposed by the
securities laws, could impede the completion of a merger, tender offer or other
takeover attempt. The Company's Board of Directors will make any determination
to issue such shares based on its judgment as to the best interests of the
Company and its shareholders at the time of issuance. The Company's Board of
Directors, in so acting, could issue Preferred Stock having terms that could
discourage an acquisition attempt or other transaction that some, or a majority,
of the shareholders might believe to be in their best interests or in which
shareholders might receive a premium for their stock over the then market price
of such stock.
REGISTRATION RIGHTS
Upon consummation of this offering, the holders of approximately 27,571,097
shares of Common Stock (the "Registrable Securities") will be entitled to
certain rights with respect to the registration of such shares under the
Securities Act. In the event that the Company proposes to register any of its
securities under the Securities Act, either for its own account or the account
of other securityholders, the holders of Registrable Securities are entitled to
notice of such registration and are entitled to include their Registrable
Securities in such registration, subject to certain marketing and other
limitations. The Company is generally obligated to bear the expenses, other than
underwriting discounts and sales commissions, of these registrations. The
Company may in certain circumstances defer such registrations and the
underwriters have the right, subject to certain limitations, to limit the number
of Registrable Securities included in such registrations.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is U.S.
Stock Transfer Corporation. Its telephone number is (818) 502-1404.
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SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Class A Common Stock in the
public market following this offering could adversely affect the market price of
the Company's Class A Common Stock. The number of shares of Common Stock
available for sale in the public market is limited by restrictions under the
Securities Act and by the following lock-up agreements: (i) principally in
connection with a partial release of 635,915 shares held by certain shareholders
in August 1998 of lock-up agreements entered into in connection with the
Company's initial public offering that expire on October 14, 1998 (the "IPO
Lock-Up Agreements"), such shareholders and certain other shareholders agreed
(the "Extended Lock-Up Agreements) to extend their respective IPO Lock-Up
Agreements by an additional 30 days until November 13, 1998; and (ii) in
connection with this offering, the Company's officers, directors, the Selling
Shareholders and certain other shareholders have entered into agreements with
Morgan Stanley & Co. Incorporated (the "Follow-On Lock-Up Agreements") pursuant
to which such holders have agreed not to sell or otherwise dispose of any of
their shares for 90 days following the date of this offering without the prior
consent of Morgan Stanley & Co. Incorporated. However, Morgan Stanley & Co.
Incorporated may, in its sole discretion at any time and without notice, release
all or any portion of the securities subject to the lock-up agreements described
above. Upon completion of this offering, the Company will have outstanding an
aggregate of 44,265,656 shares of Common Stock (based upon shares outstanding at
September 30, 1998), of which 2,318,516 unvested shares are subject to the
Company's repurchase right, and an aggregate of 961,830 shares issuable upon
exercise of options vested as of October 14, 1998. Of the 41,947,140 shares not
subject to repurchase, 8,787,649 shares (including the 3,000,000 shares
registered in this offering, the 4,025,000 shares sold in the Company's initial
public offering, 289,734 shares that were subject to IPO Lock-Up Agreements that
expire on October 14, 1998 and the 1,472,915 shares that were sold in connection
with partial early releases from the IPO Lock-Up Agreements) will be freely
tradeable without restriction or further registration under the Securities Act,
unless such shares are purchased by "Affiliates." The remaining 34,121,321
shares of Common Stock (including shares issuable upon exercise of options
vested as of October 14, 1998) are subject to lock-up agreements or are
"restricted securities" as that term is defined in Rule 144 under the Securities
Act. Of such shares: (i) 4,609,365 shares will become eligible for sale on
November 13, 1998, the expiration date of the Extended Lock-Up Agreements; (ii)
26,201,956 shares will become eligible for sale 90 days following the date of
this offering (including shares subject to the Follow-On Lock-Up Agreements);
and (iii) 3,250,000 shares will become eligible for sale pursuant to Rule 701 or
Rule 144 on various dates after the expiration of the Follow-On Lock-Up
Agreements. Of such shares, 500,000 shares of Common Stock sold to Cisco Systems
in April 1998 will be eligible for sale upon expiration of a one-year holding
period, subject to certain contractual restrictions on transfer. Furthermore, in
connection with a partial release from the IPO Lock-Up Agreement of 600,000
shares of the Company's Class B Common Stock owned by Scientific-Atlanta
commencing October 2, 1998, Scientific-Atlanta has agreed to lock-up an
additional 500,000 shares until April 13, 1999 and an additional 60,000 shares
until 30 days following the date of this offering to the extent such shares are
not sold in the Underwriters' over-allotment option.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for at
least one year (including the holding period of any prior owner except an
Affiliate) would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of: (i) one percent of the number of
shares of Class A Common Stock then outstanding (which will equal approximately
78,397 shares immediately after this offering); or (ii) the average weekly
trading volume of the Class A Common Stock on the Nasdaq National Market during
the four calendar weeks preceding the filing of a notice on Form 144 with
respect to such sale. Sales under Rule 144 are also subject to certain manner of
sale provisions and notice requirements and to the availability of current
public information about the Company. Under Rule 144(k), a person who is not
deemed to have been an Affiliate of the Company at any time during the 90 days
preceding a sale, and who has beneficially owned the shares proposed to be sold
for at least two years (including the holding period of any prior owner except
an Affiliate), is entitled to sell such shares without complying with the manner
of sale, public information, volume limitation or notice provisions of Rule 144;
therefore, unless otherwise restricted, "144(k) shares" may therefore be sold
immediately upon the completion of this offering. In general, under Rule 701 of
the Securities Act as currently in effect, any employee, consultant or advisor
of the Company who purchases shares from the Company
63
<PAGE> 65
pursuant to Rule 701 in connection with a compensatory stock or option plan or
other written agreement is eligible to resell, unless contractually restricted,
such shares 90 days after the effective date of this offering in reliance on
Rule 144, but without compliance with certain restrictions, including the
holding period, contained in Rule 144.
The Company is unable to estimate the number of shares that will be sold
under Rule 144, as this will depend on the market price for the Common Stock of
the Company, the personal circumstances of the sellers and other factors. Prior
to this offering, there has been no public market for the Common Stock, and
there can be no assurance that a significant public market for the Common Stock
will develop or be sustained after this offering. Any future sale of substantial
amounts of Common Stock in the open market may adversely affect the market price
of the Common Stock offered hereby.
Pursuant to a Registration Rights Agreement among the Company and certain
of its shareholders, holders of 27,571,097 shares of Common Stock will be
entitled to certain piggy-back registration rights with respect to such shares.
See "Description of Capital Stock -- Registration Rights." Registration of such
shares under the Securities Act would result in such shares becoming freely
tradable without restriction under the Securities Act (except for shares
purchased by Affiliates).
In August 1998, the Company filed a registration statement on Form S-8
under the Securities Act covering shares of Common Stock reserved for issuance
under the 1998 Plan and the Purchase Plan. See "Management -- Employee Benefit
Plans." Accordingly, shares registered under such registration statement are,
subject to Rule 144 volume limitations applicable to affiliates of the Company,
available for sale in the open market, unless such shares are subject to vesting
restrictions with the Company or the lock-up agreements described above. As of
June 30, 1998, options to purchase 7,970,103 shares of Class B Common Stock and
714,550 shares of Class A Common Stock were issued and outstanding. See
"Management -- Executive Compensation" and "-- Employee Benefit Plans."
64
<PAGE> 66
UNDERWRITERS
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), the Underwriters
named below (the "Underwriters"), for whom Morgan Stanley & Co. Incorporated, BT
Alex. Brown Incorporated, Credit Suisse First Boston Corporation, Hambrecht &
Quist LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated are acting as
Representatives (the "Representatives"), have severally agreed to purchase, and
the Company and the Selling Shareholders have agreed to sell to them, severally,
the respective number of shares of Class A Common Stock set forth opposite the
names of such Underwriters below:
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated...........................
BT Alex. Brown Incorporated.................................
Credit Suisse First Boston Corporation......................
Hambrecht & Quist LLC.......................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..........................................
---------
Total............................................. 3,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Class A Common
Stock offered hereby are subject to the approval of certain legal matters by
their counsel and to certain other conditions. The Underwriters are obligated to
take and pay for all of the shares of Class A Common Stock offered hereby (other
than those covered by the Underwriters' over-allotment option described below)
if any such shares are taken.
The Underwriters initially propose to offer part of the shares of Class A
Common Stock directly to the public at the public offering price set forth on
the cover page hereof and part to certain dealers at a price that represents a
concession not in excess of $ a share under the public offering price.
Any Underwriter may allow, and such dealers may reallow, a concession not in
excess of $ a share to other Underwriters or to certain dealers. After
the initial offering of the shares of Class A Common Stock, the offering price
and other selling terms may from time to time be varied by the Representatives.
The Company and certain Selling Shareholders have granted to the
Underwriters an option, exercisable for 30 days from the date of this
Prospectus, to purchase up to an aggregate of 450,000 additional shares of Class
A Common Stock at the public offering price set forth on the cover page hereof,
less underwriting discounts and commissions. The Underwriters may exercise such
option solely for the purpose of covering over-allotments, if any, incurred in
the sale of the shares of Class A Common Stock offered hereby. To the extent
such option is exercised, each Underwriter will become obligated, subject to
certain conditions, to purchase approximately the same percentage of such
additional shares as the number set forth next to such Underwriter's name in the
preceding table bears to the total number of shares of Class A Common Stock set
forth next to the names of all the Underwriters in the preceding table.
The Company, the Selling Shareholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.
Each of the Company and the directors, executive officers, Selling
Shareholders and certain other shareholders of the Company has agreed that,
without the prior written consent of Morgan Stanley & Co. Incorporated on behalf
of the Underwriters, it will not, during the period ending 90 days after the
date of this Prospectus, (i) 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, lend 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 (ii) enter
into any swap or other arrangement that transfers to another, in
65
<PAGE> 67
whole or in part, any of the economic consequences of ownership of the Common
Stock, whether any such transaction described in clause (i) or (ii) above is to
be settled by delivery of Common Stock or such other securities, in cash or
otherwise.
In order to facilitate the offering of the Class A Common Stock, the
Underwriters may engage in transactions that stabilize, maintain or otherwise
affect the price of the Class A Common Stock. Specifically, the Underwriters may
over-allot in connection with the offering, creating a short position in the
Class A Common Stock for their own account. In addition, to cover
over-allotments or to stabilize the price of the Class A Common Stock, the
Underwriters may bid for, and purchase, shares of Class A Common Stock in the
open market. Finally, the underwriting syndicate may reclaim selling concessions
allowed to an Underwriter or a dealer for distributing the Class A Common Stock
in the offering, if the syndicate repurchases previously distributed Class A
Common Stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the Class A Common Stock above independent
market levels. The Underwriters are not required to engage in these activities,
and may end any of these activities at any time.
The Underwriters and dealers may engage in passive market making
transactions in the Class A Common Stock in accordance with Rule 103 of
Regulation M promulgated by the Commission. In general, a passive market maker
may not bid for, or purchase, the Class A Common Stock at a price that exceeds
the highest independent bid. In addition, the net daily purchases made by any
passive market maker generally may not exceed 30% of its average daily trading
volume in the Class A Common Stock during a specified two month prior period or
200 shares, whichever is greater. A passive market maker must identify passive
market making bids as such on the Nasdaq electronic inter-dealer reporting
system. Passive market making may stabilize or maintain the market price of the
Class A Common Stock above independent market levels. Underwriters and dealers
are not required to engage in passive market making and may end passive market
making activities at any time.
66
<PAGE> 68
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company and the Selling Shareholders by Brobeck, Phleger & Harrison
LLP, Irvine, California. Brobeck, Phleger & Harrison LLP holds a warrant to
purchase 10,000 shares of Class A Common Stock at an exercise price equal to
$24.00 per share. Certain legal matters relating to this offering will be passed
upon for the Underwriters by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, Palo Alto, California.
EXPERTS
The financial statements and schedules of the Company at December 31, 1996
and 1997 and for each of the three years in the period ended December 31, 1997,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their reports thereon
appearing elsewhere herein, and are included in reliance upon such reports given
upon the authority of such firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed a Registration Statement on Form S-1 under the
Securities Act with respect to the Class A Common Stock offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, omits
certain of the information contained in the Registration Statement and the
exhibits and schedules thereto on file with the Commission pursuant to the
Securities Act and the rules and regulations of the Commission thereunder. For
further information with respect to the Company and its Common Stock, reference
is made to the Registration Statement and the exhibits and schedules thereto.
Statements contained in this Prospectus regarding the contents of any agreement
or other document filed as an exhibit to the Registration Statement are not
necessarily complete, and in each instance reference is made to the copy of such
agreement filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference. The Registration Statement,
including the exhibits and schedules thereto, can be inspected and copied at the
Commission's offices as described above.
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files annual and quarterly reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information filed by the Company with the Commission pursuant to the
informational requirements of the Exchange Act may be inspected and copied at
the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Room 1024, Judiciary Plaza, Washington, D.C. 20549, as well as at
the Commission's Regional Offices at 7 World Trade Center, Suite 1300, New York,
New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material may be obtained at prescribed
rates from the Public Reference Room of the Commission at 450 Fifth Street,
N.W., Judiciary Plaza, Washington, D.C. 20549. Information concerning the
operation of the Public Reference Room may be obtained by calling the Commission
at 1-800-SEC-0330. The Commission maintains an Internet site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants, including the Company, that file
electronically with the Commission.
67
<PAGE> 69
GLOSSARY OF TECHNICAL TERMS
Adaptive Equalization......... Receiver technique for compensating for
distortions in a transmission media.
ADSL.......................... Asymmetric Digital Subscriber Line.
Twisted-pair modem technology that achieves
data rates up to 8 Mbps downstream to the
subscriber and 1 Mbps upstream to the network
at distances up to 18,000 feet.
Bandwidth..................... A range of signal frequencies, measured in
cycles per second or Hertz (Hz). Also refers to
the speed at which data is transmitted,
measured in bits per second (bps).
Broadband Communications...... Data transmission at speeds of greater than 1.5
Mbps.
CMOS.......................... Complementary Metal Oxide Semiconductor.
Technology used to manufacture silicon
integrated circuits.
DBS........................... Digital Broadcast Satellite. A broadband
communications technology that broadcasts
digital television programming from satellites
directly to dish antennas.
DSP........................... Digital Signal Processing.
Ethernet (10Base-T)........... Networking protocol widely used in LANs for
connecting devices by means of copper twisted
pair wiring at speeds of 10 Mbps.
Fast Ethernet (100Base-T)..... An extension to the 10Base-T Ethernet network
access method which operates at 100 Mbps.
FEC........................... Forward Error Correction. A receiver technique
for correcting errors in the received data.
GHz........................... GigaHertz. One billion cycles per second.
Gigabit Ethernet
(1000Base-T).................. An extension to the 100Base-T Ethernet network
access method which operates at 1,000 Mbps or
equivalently 1 Gbps.
Headend....................... The central distribution point in a cable
television system. Typically serves tens to
hundreds of thousands of homes.
HFC........................... Hybrid Fiber Coax. Upgraded cable plant which
uses a combination of fiber optic cable in the
backbone and coaxial cable in the subscriber
feeder plant.
IC............................ Integrated Circuit.
kbps.......................... Kilobits per second.
LAN........................... Local Area Network. A private data
communications network linking a variety of
data devices such as computers and printers
within an office or home environment.
LMDS.......................... Local Multipoint Distribution System. A
broadband wireless communications network that
uses microwave frequencies around 28 GHz to
transmit video and data to residences over a
cellular-like network at distances under a few
miles.
MAC........................... Media Access Control. Protocol for controlling
the upstream and downstream traffic flow in a
local or wide area network.
Mbps.......................... Megabits per second. Million bits per second.
68
<PAGE> 70
MCNS/DOCSIS................... Multimedia Cable Network System/Data Over Cable
Service Interface Specifications. Industry
specification that defines the technical
equipment for high-speed cable modem and
headend equipment.
MMDS.......................... Multichannel Multipoint Distribution Service. A
broadband wireless communications network that
uses microwave frequencies around 2.5 GHz to
transmit video to residences at distances up to
tens of miles.
MPEG.......................... Moving Picture Experts Group. Industry standard
for compressing and decompressing digital audio
video signals.
NIC........................... Network Interface Card. Plug-in adapter card
enables a computer to connect to a LAN.
QAM........................... Quadrature Amplitude Modulation. A digital
modulation technique that allows very efficient
transmission of data over media with limited
available bandwidth.
QPSK.......................... Quadrature Phase Shift Keying. A digital
technique which is widely employed in direct
broadcast satellite transmission systems.
VDSL.......................... Very High Bit-Rate Digital Subscriber Line.
Twisted pair modem technology that achieves
data rates up to 52 Mbps downstream to the
subscriber and 6 Mbps upstream to the network
at distances up to 4,000 feet.
WAN........................... Wide Area Network. A data communications
network, such as the Internet, which links a
variety of data devices over a large
geographical distance.
xDSL.......................... Generic representation of the entire family of
Digital Subscriber Line technology spanning
data rates from 128 kbps to 52 Mbps depending
on the distance between the central office and
subscriber.
69
<PAGE> 71
BROADCOM CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-2
FINANCIAL STATEMENTS
Balance Sheets at December 31, 1996 and 1997 and June 30,
1998 (Unaudited).......................................... F-3
Statements of Operations for the Years Ended December 31,
1995, 1996 and 1997 and the Six Months Ended June 30, 1997
and 1998 (Unaudited)...................................... F-4
Statements of Shareholders' Equity for the Years Ended
December 31, 1995, 1996 and 1997 and the Six Months Ended
June 30, 1997 and 1998 (Unaudited)........................ F-5
Statements of Cash Flows for the Years Ended December 31,
1995, 1996 and 1997 and the Six Months Ended June 30, 1998
(Unaudited)............................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 72
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Broadcom Corporation
We have audited the accompanying balance sheets of Broadcom Corporation as
of December 31, 1996 and 1997, and the related statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. 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 generally accepted auditing
standards. 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 financial position of Broadcom Corporation at
December 31, 1996 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
Orange County, California
January 16, 1998, except for
Note 9, as to which
the date is March 31, 1998
and Note 7, as to which
the date is September 25, 1998
F-2
<PAGE> 73
BROADCOM CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30,
1996 1997 1998
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,657 $22,116 $ 64,711
Short-term investments.................................... -- -- 2,629
Accounts receivable (net of allowance for doubtful
accounts and sales returns of $147, $721 and $2,892 in
1996, 1997 and 1998)................................... 3,722 9,913 24,226
Inventory................................................. 854 2,705 11,473
Deferred taxes............................................ 519 1,090 1,090
Income taxes receivable................................... -- 433 402
Prepaid expenses.......................................... 227 262 1,252
------- ------- --------
Total current assets.............................. 9,979 36,519 105,783
Property and equipment, net................................. 4,298 8,449 16,305
Long-term investments....................................... -- -- 25,094
Other assets................................................ 90 276 919
------- ------- --------
Total assets...................................... $14,367 $45,244 $148,101
======= ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.................................... $ 2,140 $ 7,380 $ 15,280
Wages and related benefits................................ 372 846 1,794
Income taxes payable...................................... 1,812 -- --
Accrued liabilities....................................... 57 933 2,211
Current portion of long-term debt......................... 69 1,098 89
------- ------- --------
Total current liabilities......................... 4,450 10,257 19,374
Long-term debt, less current portion........................ 147 1,595 45
Commitments and contingencies
Shareholders' equity:
Convertible Preferred Stock $.0001 par value:
Authorized shares -- 10,000,000
Issued and outstanding shares -- 2,093,839 in 1996,
3,567,839 in 1997 and none in 1998................... 6,084 28,617 --
Class A Common Stock, $.0001 par value:
Authorized shares--200,000,000.........................
Issued and outstanding shares--none in 1996, 1997 and
4,839,750 in 1998....................................
Class B Common Stock, $.0001 par value:
Authorized shares--100,000,000
Issued and outstanding shares--29,403,768 in 1996,
31,501,560 in 1997 and 38,878,199 in 1998............ 3 3 4
Additional paid-in capital................................ 1,160 7,126 120,621
Notes receivable from employees........................... (748) (3,362) (3,464)
Deferred compensation..................................... -- (1,090) (5,956)
Retained earnings......................................... 3,271 2,098 17,477
------- ------- --------
Total shareholders' equity........................ 9,770 33,392 128,682
------- ------- --------
Total liabilities and shareholders' equity........ $14,367 $45,244 $148,101
======= ======= ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 74
BROADCOM CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------- ------------------
1995 1996 1997 1997 1998
------ ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Product revenue......................... $4,317 $18,981 $31,668 $ 8,169 $78,493
Development revenue..................... 1,790 2,389 5,287 2,257 2,019
------ ------- ------- ------- -------
Total revenue................... 6,107 21,370 36,955 10,426 80,512
Cost of revenue........................... 1,398 7,860 14,926 4,810 34,212
------ ------- ------- ------- -------
Gross profit.............................. 4,709 13,510 22,029 5,616 46,300
Operating expense:
Research and development................ 2,687 5,662 16,204 6,205 14,619
Selling, general and administrative..... 2,135 3,546 8,063 2,541 9,322
------ ------- ------- ------- -------
Total operating expense......... 4,822 9,208 24,267 8,746 23,941
------ ------- ------- ------- -------
Income (loss) from operations............. (113) 4,302 (2,238) (3,130) 22,359
Interest and other income, net............ 120 213 290 63 1,301
------ ------- ------- ------- -------
Income (loss) before income taxes......... 7 4,515 (1,948) (3,067) 23,660
Provision (benefit) for income taxes...... 3 1,499 (775) (1,226) 8,281
------ ------- ------- ------- -------
Net income (loss)......................... $ 4 $ 3,016 $(1,173) $(1,841) $15,379
====== ======= ======= ======= =======
Basic earnings (loss) per share........... $ .00 $ .12 $ (.04) $ (.07) $ .45
====== ======= ======= ======= =======
Diluted earnings (loss) per share......... $ .00 $ .09 $ (.04) $ (.07) $ .35
====== ======= ======= ======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE> 75
BROADCOM CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONVERTIBLE NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE
-------------------- ------------------- PAID-IN FROM DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL EMPLOYEES COMPENSATION
---------- ------- ---------- ------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994......... 1,100,000 $ 2,161 22,995,000 $2 $ 60 $ -- $ --
Issuance of Preferred Stock, net of
issuance costs of $11............ 500,000 989 -- -- -- -- --
Exercise of stock options.......... -- -- 5,100,000 1 339 (332) --
Net income......................... -- -- -- -- -- -- --
---------- ------- ---------- -- -------- ------- -------
Balance at December 31, 1995......... 1,600,000 3,150 28,095,000 3 399 (332) --
Issuance of Preferred Stock, net of
issuance costs of $29............ 493,839 2,934 -- -- -- -- --
Exercise of stock options, net of
repurchases...................... -- -- 1,308,768 -- 761 (416) --
Net income......................... -- -- -- -- -- -- --
---------- ------- ---------- -- -------- ------- -------
Balance at December 31, 1996......... 2,093,839 6,084 29,403,768 3 1,160 (748) --
Issuance of Preferred Stock, net of
issuance costs of $36............ 1,500,000 22,689 -- -- -- -- --
Repurchases of Preferred Stock..... (26,000) (156) -- -- -- -- --
Issuance of Class B Common Stock... -- -- 285,000 -- 1,050 -- --
Exercise of stock options, net of
repurchases...................... -- -- 1,812,792 -- 3,569 (2,614) --
Tax benefit from exercise of stock
options.......................... -- -- -- -- 191 -- --
Deferred compensation related to
grant of stock options........... -- -- -- -- 1,156 -- (1,156)
Amortization of deferred
compensation..................... -- -- -- -- -- -- 66
Net loss........................... -- -- -- -- -- -- --
---------- ------- ---------- -- -------- ------- -------
Balance at December 31, 1997......... 3,567,839 28,617 31,501,560 3 7,126 (3,362) (1,090)
Conversion of Preferred Stock into
Class B Common Stock (unaudited)... (3,567,839) (28,617) 8,453,517 1 28,616 -- --
Issuance of Class A Common Stock in
initial public offering, net of
offering costs of $1,628
(unaudited)...................... -- -- 3,620,000 -- 79,170 -- --
Exercise of stock options, net of
repurchases (unaudited).......... -- -- 142,872 -- 340 (191) --
Repayment of notes receivable from
employees (unaudited)............ -- -- -- -- -- 89 --
Deferred compensation related to
grant of stock options
(unaudited)...................... -- -- -- -- 5,369 -- (5,369)
Amortization of deferred
compensation (unaudited)......... -- -- -- -- -- -- 503
Net income (unaudited)............. -- -- -- -- -- -- --
---------- ------- ---------- -- -------- ------- -------
Balance at June 30, 1998
(unaudited)........................ -- $ -- 43,717,949 $4 $120,621 $(3,464) $(5,956)
========== ======= ========== == ======== ======= =======
<CAPTION>
TOTAL
RETAINED SHAREHOLDERS'
EARNINGS EQUITY
-------- -------------
<S> <C> <C>
Balance at December 31, 1994......... $ 251 $ 2,474
Issuance of Preferred Stock, net of
issuance costs of $11............ -- 989
Exercise of stock options.......... -- 8
Net income......................... 4 4
------- --------
Balance at December 31, 1995......... 255 3,475
Issuance of Preferred Stock, net of
issuance costs of $29............ -- 2,934
Exercise of stock options, net of
repurchases...................... -- 345
Net income......................... 3,016 3,016
------- --------
Balance at December 31, 1996......... 3,271 9,770
Issuance of Preferred Stock, net of
issuance costs of $36............ -- 22,689
Repurchases of Preferred Stock..... -- (156)
Issuance of Class B Common Stock... -- 1,050
Exercise of stock options, net of
repurchases...................... -- 955
Tax benefit from exercise of stock
options.......................... -- 191
Deferred compensation related to
grant of stock options........... -- --
Amortization of deferred
compensation..................... -- 66
Net loss........................... (1,173) (1,173)
------- --------
Balance at December 31, 1997......... 2,098 33,392
Conversion of Preferred Stock into
Class B Common Stock (unaudited)... -- --
Issuance of Class A Common Stock in
initial public offering, net of
offering costs of $1,628
(unaudited)...................... -- 79,170
Exercise of stock options, net of
repurchases (unaudited).......... -- 149
Repayment of notes receivable from
employees (unaudited)............ -- 89
Deferred compensation related to
grant of stock options
(unaudited)...................... -- --
Amortization of deferred
compensation (unaudited)......... -- 503
Net income (unaudited)............. 15,379 15,379
------- --------
Balance at June 30, 1998
(unaudited)........................ $17,477 $128,682
======= ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 76
BROADCOM CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------------- -------------------------
1995 1996 1997 1997 1998
------- ------- ------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)..................... $ 4 $ 3,016 $(1,173) $(1,841) $ 15,379
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization.... 451 897 3,039 1,443 2,841
Amortization of deferred
compensation................... -- -- 66 -- 503
Deferred taxes................... (48) (416) (571) -- --
Change in operating assets and
liabilities:
Accounts receivable............ 547 (2,982) (6,191) (874) (14,313)
Inventory...................... (242) (461) (1,851) 483 (8,768)
Other assets................... (32) (251) (221) (118) (1,633)
Accounts payable............... 443 1,276 5,240 (704) 7,900
Income taxes payable........... (23) 1,835 (2,245) (3,076) 31
Other accrued liabilities...... (43) 285 1,350 3,118 2,226
------- ------- ------- ------- --------
Net cash provided by (used in)
operating activities................ 1,057 3,199 (2,557) (1,569) 4,166
INVESTING ACTIVITIES
Purchases of property and equipment... (1,112) (3,747) (7,132) (2,985) (10,697)
Proceeds from sales of investments
available-for-sale.................. 996 -- -- -- (27,723)
------- ------- ------- ------- --------
Net cash used in investing
activities.......................... (116) (3,747) (7,132) (2,985) (38,420)
FINANCING ACTIVITIES
Proceeds from bank term loan.......... -- -- 3,000 3,000 --
Payments on bank term loan............ -- -- (500) -- (2,500)
Payments on capital lease
obligations......................... (48) (64) (81) (36) (59)
Proceeds from issuance of Preferred
Stock............................... 989 2,934 22,689 -- --
Payments on repurchase of Preferred
Stock............................... -- -- (156) -- --
Net proceeds from initial public
offering of Class A Common Stock.... -- -- -- -- 79,170
Net proceeds from issuance (payments
for repurchase) of Class B Common
Stock............................... 8 345 2,196 (6) 238
------- ------- ------- ------- --------
Net cash provided by financing
activities.......................... 949 3,215 27,148 2,958 76,849
------- ------- ------- ------- --------
Increase in cash and cash
equivalents......................... 1,890 2,667 17,459 (1,596) 42,595
Cash and cash equivalents at beginning
of year............................. 100 1,990 4,657 7,417 22,116
------- ------- ------- ------- --------
Cash and cash equivalents at end of
year................................ $ 1,990 $ 4,657 $22,116 $ 5,821 $ 64,711
======= ======= ======= ======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Interest paid......................... $ 8 $ 26 $ 191 $ 11 $ 37
======= ======= ======= ======= ========
Income taxes paid..................... $ 125 $ 79 $ 1,850 $ 1,500 $ 8,250
======= ======= ======= ======= ========
</TABLE>
See accompanying notes.
F-6
<PAGE> 77
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Broadcom is a leading developer of highly integrated silicon solutions
which enable broadband digital data transmission to the home and within the
business enterprise. The Company's products enable the transmission of broadband
data over existing communications infrastructures, most of which were not
originally intended for digital data transmission.
In anticipation of an initial public offering of the Company's Class A
Common Stock, in February 1998, the Board of Directors approved the amendment
and restatement of the articles of incorporation to authorize 200,000,000 shares
of Class A Common Stock, 100,000,000 shares of Class B Common Stock and
10,000,000 shares of Preferred Stock. Upon consummation of the initial public
offering, each share of Series A, B, C and D Preferred Stock converted into
three shares of Class B Common Stock, and each share of Series E Preferred Stock
converted into 1.5 shares of Class B Common Stock. Effective with the amendment
of the articles of incorporation, outstanding stock options at December 31, 1997
become exercisable for shares of Class B Common Stock. The shares of Class A and
Class B Common Stock are substantially identical, except that holders of Class A
Common Stock are entitled to one vote for each share held, and holders of Class
B Common Stock are entitled to ten votes for each share held on all matters
submitted to a vote of the shareholders.
UNAUDITED INTERIM FINANCIAL INFORMATION
The financial information at June 30, 1998 and for the six months ended
June 30, 1997 and 1998 is unaudited but includes all adjustments (consisting
only of normal recurring adjustments) which the Company considers necessary for
a fair presentation of the financial position at such date and the operating
results and cash flows for those periods. Results for the six month period ended
June 30, 1998 are not necessarily indicative of results that may be expected for
the year ending December 31, 1998.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Significant estimates made in preparing the financial statements include the
allowance for doubtful accounts, inventory reserves and income tax valuation
allowances.
STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, the Company considers
investment securities with original maturities of three months or less to be
cash equivalents.
The following table sets forth certain non-cash transactions excluded from
the statements of cash flows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------- --------------------
1995 1996 1997 1997 1998
------ ------ -------- ---- ----
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Purchase of equipment through capital
leases.................................. $ 12 $231 $ 58 $ 6 $ --
Notes receivable from employees issued in
connection with exercise of stock
options................................. 332 416 2,614 $191 $461
</TABLE>
F-7
<PAGE> 78
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Revenue from product sales is recognized at the time of shipment. Provision
is made currently for estimated product returns. Development revenue is
recognized when earned.
INVESTMENTS
The Company accounts for its investments in debt securities under Financial
Accounting Standards Board (FASB) Statement No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Management determines the appropriate
classification of such securities at the time of purchase and reevaluates such
classification as of each balance sheet date. The investments are adjusted for
amortization of premiums and discounts to maturity and such amortization is
included in interest income. Realized gains and losses and declines in value
judged to be other than temporary are determined based on the specific
identification method and are reported in the statement of operations.
INVENTORY
Inventory is stated at the lower of cost (first-in, first-out) or market
and consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30,
1996 1997 1998
------ ------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Work in process................................ $ 579 $ 2,315 $ 4,299
Finished goods................................. 1,024 2,076 9,875
------ ------- -------
1,603 4,391 14,174
Less reserve for excess and obsolete
inventory.................................... (749) (1,686) (2,701)
------ ------- -------
$ 854 $ 2,705 $11,473
====== ======= =======
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment is carried at cost. Depreciation and amortization
have been provided on the straight-line method over the assets' estimated useful
lives ranging from two to seven years. Property and equipment were comprised of
the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1996 1997 1998
------- ------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Office furniture.............................. $ 176 $ 273 $ 644
Computer equipment............................ 5,621 12,563 22,359
Leasehold improvements........................ 145 296 826
------- ------- -------
5,942 13,132 23,829
Less accumulated depreciation and
amortization................................ (1,644) (4,683) (7,524)
------- ------- -------
$ 4,298 $ 8,449 $16,305
======= ======= =======
</TABLE>
F-8
<PAGE> 79
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS
Effective January 1, 1996, the Company adopted FASB Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of, which requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present.
Implementation of Statement No. 121 was immaterial to the financial statements
of the Company.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB 25) and related
Interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under FASB Statement No. 123,
Accounting for Stock-Based Compensation, requires use of option valuation models
that were not developed for use in valuing employee stock options.
EARNINGS PER SHARE
In 1997, the FASB issued Statement No. 128, Earnings Per Share, which
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is similar to fully diluted earnings per
share. All earnings per share amounts for all periods have been presented to
conform with the Statement No. 128 requirements and the accounting rules set
forth in Staff Accounting Bulletin 98 issued by the Securities and Exchange
Commission on February 3, 1998.
The following table sets forth the computation of earnings (loss) per
share:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------- ------------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Numerator: Net income (loss)............. $ 4 $ 3,016 $(1,173) $(1,841) $15,379
======= ======= ======= ======= =======
Denominator:
Weighted-average shares outstanding.... 25,618 28,840 30,213 29,483 37,652
Less: nonvested common shares
outstanding......................... (3,888) (3,901) (3,761) (3,553) (3,368)
------- ------- ------- ------- -------
Denominator for basic earnings per common
share.................................. 21,730 24,939 26,452 25,930 34,284
Effect of dilutive securities:
Nonvested common shares................ -- 1,851 -- -- 2,040
Stock options.......................... -- 195 -- -- 4,026
Convertible Preferred Stock............ 4,550 6,158 -- -- 4,226
------- ------- ------- ------- -------
Denominator for diluted earnings per
common share........................... 26,280 33,143 26,452 25,930 44,576
======= ======= ======= ======= =======
Basic earnings (loss) per share........ $ .00 $ .12 $ (.04) $ (.07) $ .45
======= ======= ======= ======= =======
Diluted earnings (loss) per share...... $ .00 $ .09 $ (.04) $ (.07) $ .35
======= ======= ======= ======= =======
</TABLE>
F-9
<PAGE> 80
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT EXPENDITURES
Research and development expenditures are expensed in the period incurred.
WARRANTY
The Company provides a one-year warranty on all products and records a
related provision for estimated warranty costs at the date of sale. The Company
had no reserve for estimated warranty liability at December 31, 1995 and 1996,
and had a reserve of $150,000 at December 31, 1997.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist principally of cash and cash
equivalents, short-term and long-term investments, receivables, accounts
payable, and borrowings. The Company believes all of the financial instruments'
recorded values approximate current values.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive
Income, which establishes standards for the reporting and display of
comprehensive income and its components in financial statements. Comprehensive
income generally represents all changes in shareholders' equity except those
resulting from investments by distributions to shareholders. Statement No. 130
is effective for fiscal years beginning after December 15, 1997 and requires
restatement of earlier periods presented.
Also in June 1997, the FASB issued Statement No. 131, Disclosures about
Segments of an Enterprise and Related Information, which requires publicly-held
companies to report financial and descriptive information about its operating
segments in financial statements issued to shareholders for interim and annual
periods. The statement also requires additional disclosures with respect to
products and services, geographical areas of operations, and major customers.
Statement No. 131 is effective for fiscal years beginning after December 15,
1997 and requires restatement of earlier periods presented.
2. INCOME TAXES
The Company utilizes the liability method of accounting for income taxes as
set forth in Statement No. 109, Accounting for Income Taxes. Under the liability
method, deferred taxes are determined based on the differences between the
financial statement and tax bases of assets and liabilities using enacted tax
rates.
A reconciliation of the provision (benefit) for income taxes at the federal
statutory rate compared to the Company's effective tax rate follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1995 1996 1997
----- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Statutory federal provision (benefit) for income taxes...... $ 2 $1,535 $(662)
Increase (decrease) in taxes resulting from:
State taxes, net of federal benefit....................... 1 218 40
Benefit of research and development tax credits........... (7) (270) (229)
Other..................................................... 7 16 76
--- ------ -----
Total provision (benefit) for income taxes.................. $ 3 $1,499 $(775)
=== ====== =====
</TABLE>
F-10
<PAGE> 81
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
2. INCOME TAXES (CONTINUED)
The federal and state income tax provision (benefit) is summarized as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1995 1996 1997
----- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal.................................................. $ 50 $1,578 $(205)
State.................................................... 1 337 1
---- ------ -----
51 1,915 (204)
Deferred:
Federal.................................................. (48) (409) (631)
State.................................................... -- (7) 60
---- ------ -----
(48) (416) (571)
---- ------ -----
$ 3 $1,499 $(775)
==== ====== =====
</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 taxes are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------ ----- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax liabilities:
Tax depreciation in excess of book depreciation........... $ (33) $(54) $ --
Deferred tax assets:
Book depreciation in excess of tax depreciation........... -- -- 60
Research and experimentation tax credit carryforwards..... 164 -- 141
Net operating loss carryforwards.......................... -- -- 5
Reserves and accruals not currently deductible for tax
purposes............................................... 73 447 1,208
State tax, net of federal benefit......................... -- 117 --
Other..................................................... -- 9 9
Valuation allowance....................................... (101) -- (333)
----- ---- ------
Net deferred tax assets..................................... $ 103 $519 $1,090
===== ==== ======
</TABLE>
The reduction in the valuation allowance in 1996 was primarily due to the
utilization of research and experimentation tax credit carryforwards. The
increase in the valuation allowance in 1997 was entirely related to the state
deferred tax assets because of the uncertainty of the effect of anticipated
stock option exercises on future state taxable income. Any future benefits
recognized from any reduction of the valuation allowance will result in a
reduction of income tax expense.
At December 31, 1997, the Company had approximately $91,000 of state net
operating loss carryforwards and $141,000 of state research credit
carryforwards. These state net operating loss carryforwards and research credit
carryforwards will expire in 2002 and 2012, respectively.
F-11
<PAGE> 82
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
3. LONG-TERM DEBT
In March 1995, the Company entered into a Loan and Security Agreement with
Silicon Valley Bank (SVB) which, as amended in June 1997, provides for a $3.0
million term loan and a $3.0 million revolving credit facility. A $500,000
letter of credit facility is also provided in the agreement provided that
sufficient credit is available under the other two facilities. During 1997, the
full amount of the $3.0 million term loan facility was utilized at an interest
rate of SVB's prime rate as announced from time to time plus .5%. At December
31, 1997, $2.5 million was outstanding under the term loan facility which
matures in June 2000. The borrowing base for the revolving credit facility is
equal to 80% of the Company's eligible accounts receivable from United States
customers. Interest on this facility is equal to SVB's prime rate announced from
time to time. At December 31, 1997, no amounts were outstanding under the
revolving credit or letter of credit facilities, which expired on April 5, 1998.
The Loan and Security Agreement prohibits the payment of cash dividends,
limits the amount of additional indebtedness the Company may incur, and contains
certain minimum net worth, profitability and various other financial ratio
requirements. Substantially all of the Company's assets are collateral under the
loan and security agreement.
The following is a summary of the Company's long-term debt and other loans
at:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- JUNE 30,
1996 1997 1998
---- ------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Silicon Valley Bank term loan collateralized by
substantially all of the Company's assets, payable in
varying monthly installments at a rate of 9.3%....... $ -- $ 2,500 $ --
Capitalized lease obligations payable in varying
monthly installments at rates from 10.4% to 22.3%.... 216 193 134
---- ------- ----
216 2,693 134
Less current portion of long-term debt................. (69) (1,098) (89)
---- ------- ----
$147 $ 1,595 $ 45
==== ======= ====
</TABLE>
Principal payments on long-term debt are as follows: $1,098,000 in 1998;
$1,041,000 in 1999; $537,000 in 2000; $16,000 in 2001; and $1,000 in 2002.
Interest expense for the years ended December 31, 1995, 1996 and 1997 was
$8,000, $26,000 and $171,000, respectively.
4. COMMITMENTS
The Company has entered into operating leases for its computer equipment
and facilities with varying terms and escalation clauses. Future minimum
payments under noncancelable operating leases with initial terms of one year or
more are as follows: $656,000 in 1998; $327,000 in 1999; $244,000 in 2000;
$140,000 in 2001; and $48,000 in 2002.
Rent expense for the years ended December 31, 1995, 1996, and 1997
aggregated $177,000, $325,000 and $739,000, respectively.
The Company had commitments totaling approximately $2.1 million as of
December 31, 1997 for the purchase of test equipment.
F-12
<PAGE> 83
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
5. SHAREHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
Preferred Stock consisted of the following at December 31, 1997:
<TABLE>
<CAPTION>
SHARES SHARES ISSUED LIQUIDATION
SERIES AUTHORIZED AND OUTSTANDING PREFERENCE
------ ---------- --------------- -----------
<S> <C> <C> <C>
A.............................................. 500,000 500,000 $ 1,000,000
B.............................................. 600,000 600,000 1,200,000
C.............................................. 500,000 500,000 1,000,000
D.............................................. 500,000 467,839 2,807,034
E.............................................. 1,800,000 1,500,000 22,725,000
Undesignated................................... 6,100,000 -- --
---------- --------- -----------
10,000,000 3,567,839 $28,732,034
========== ========= ===========
</TABLE>
Each share of Series A, B, C and D Preferred Stock is convertible into
three shares of Class B Common Stock. Each share of Series E Preferred Stock is
convertible into 1.5 shares of Class B Common Stock. Such shares may be
converted at any time at the option of the holder and automatically convert into
Class B Common Stock in the event of an underwritten public offering of the
Company's Common Stock as long as the value of the Company for purposes of the
public offering is not less than $45,000,000.
Holders of the Company's Series A, B, C, D and E Preferred Stock are
entitled to noncumulative annual dividends of $0.20 per share in preference to
holders of Common Stock when declared by the Board of Directors. No such cash
dividends have been declared since the inception of the Company.
In the event of the liquidation of the Company, holders of Series A, B, C,
D and E Preferred Stock are entitled to receive an amount per share equal to the
original issuance price plus declared and unpaid dividends, prior and in
preference to any distribution of assets to holders of Common Stock.
The holders of Series A, B, C, D and E Preferred Stock have the right to
purchase additional shares of stock in order to maintain their ownership
percentage in the event of certain future sales of stock by the Company.
Holders of Series A, B, C, D and E Preferred Stock are entitled to the same
number of votes per share on any and all matters submitted to a shareholders
vote as the Class B Common Stock into which the Preferred Stock is convertible.
COMMON STOCK
Pursuant to an agreement dated as of October 31, 1997, the Company issued
and sold an aggregate of 225,000 shares of Class B Common Stock to Irell &
Manella LLP for an aggregate purchase price of $1,050,000. Werner F. Wolfen, a
director of the Company, is a Senior Partner of Irell & Manella. During 1997,
the Company paid approximately $1.2 million to Irell & Manella for legal
services rendered by that firm. Irell & Manella has represented and continues to
represent the Company in various legal matters.
STOCK OPTIONS
Under the Company's Amended and Restated 1994 Stock Option Plan (the 1994
Plan), the Board of Directors or a Committee consisting of two or more members
of its Board of Directors is authorized to grant options to purchase the
Company's Class B Common Stock to its employees, members of the Board of
Directors, and certain consultants. Incentive options may be granted at an
exercise price equal to or greater
F-13
<PAGE> 84
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
than 100% of the fair market value at the date of grant, and non-qualified
options may be granted at an exercise price equal to or greater than 85% of the
fair market value on the date of grant.
The options are exercisable immediately upon issuance and generally have a
term of ten years. The Company reserves the right to purchase all unvested
shares held by the participant upon the participant's termination at the
original purchase price. Fully vested shares not purchased by the participant
within three months after termination are cancelled and returned to the plan.
The vesting schedule is determined by the Board or the Committee at the time of
issuance. Stock options generally vest at the rate of 25% after one year and
ratably on a monthly basis for three years thereafter. Until the Company's
Common Stock is registered with the Securities and Exchange Commission, the
Company has the right of first refusal to purchase any shares of Common Stock
issued under the 1994 Plan.
At the discretion of the Board or the Committee, the Company may make
secured loans to option holders in amounts up to the exercise price of their
options plus related taxes or permit the option holder to pay the exercise price
in installments over a determined period. During 1995, 1996 and 1997, the
Company loaned $332,000, $416,000 and $2,614,000 to employees for the exercise
of options, respectively. These notes are full-recourse, are secured by the
shares of stock, are interest bearing with rates ranging from 6.0% to 6.5%, are
due between three and five years from the exercise date and must be repaid upon
sale of the underlying shares of stock.
During 1995, 1996 and 1997, the Company's Board of Directors approved an
increase in the number of common shares reserved and available for issuance
under the 1994 Plan by 1,650,000 shares, 4,500,000 shares and 9,600,000 shares,
respectively (or from 3,750,000 shares in 1995 to 19,500,000 shares in 1997).
Activity under the 1994 Plan is set forth below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------------
WEIGHTED-
SHARES AVERAGE
AVAILABLE NUMBER OF PRICE EXERCISE
FOR GRANT SHARES PER SHARE PRICE
---------- ---------- -------------- --------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994.......... 492,000 3,258,000 $ .07 $ .07
Additional shares reserved.......... 1,650,000 -- -- --
Options granted..................... (1,942,500) 1,942,500 .07 .07
Options canceled.................... 3,000 (3,000) .07 .07
Options exercised................... -- (5,100,000) .07 .07
---------- ---------- -------------- -----
Balance at December 31, 1995.......... 202,500 97,500 .07 .07
Additional shares reserved.......... 4,500,000 -- -- --
Options granted..................... (3,269,250) 3,269,250 .07 - 1.13 .73
Options exercised................... -- (1,314,300) .07 - 1.13 .51
---------- ---------- -------------- -----
Balance at December 31, 1996.......... 1,433,250 2,052,450 .07 - 1.13 .85
Additional shares reserved.......... 9,600,000 -- -- --
Options granted..................... (5,330,400) 5,330,400 1.13 - 8.00 2.52
Options canceled.................... 11,061 (11,061) .50 - 1.13 .79
Options exercised................... -- (1,970,357) .50 - 8.00 1.87
---------- ---------- -------------- -----
Balance at December 31, 1997.......... 5,713,911 5,401,432 $ .07 - $8.00 $2.12
========== ========== ============== =====
</TABLE>
F-14
<PAGE> 85
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
The weighted average remaining contractual life and weighted average
exercise price of options outstanding and of options exercisable as of December
31, 1997 were as follows:
<TABLE>
<CAPTION>
OUTSTANDING
-------------------------------------------------
WEIGHTED AVERAGE EXERCISABLE
NUMBER OF REMAINING ------------------------------
RANGE OF SHARES CONTRACTUAL LIFE WEIGHTED AVERAGE SHARES WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ .07 to $1.00....... 698,325 8.37 $ .62 698,325 $ .62
$1.13 to $1.25....... 3,089,707 9.28 $1.16 3,089,707 $1.16
$3.00 to $5.00....... 1,376,400 9.83 $4.04 1,376,400 $4.04
$8.00................ 237,000 9.99 $8.00 237,000 $8.00
</TABLE>
Additional information relating to the 1994 Plan is as follows at December
31:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ----------
<S> <C> <C> <C>
Nonvested common shares subject to repurchase.... 3,888,092 3,900,590 3,572,742
Weighted average repurchase price................ $.07 $.21 $1.05
Unvested options outstanding..................... 90,000 1,997,273 5,385,588
Total reserved Class B Common Stock shares for
stock option plans............................. 300,000 3,485,700 11,115,343
</TABLE>
The Company recorded deferred compensation of $1,156,000 during the year
ended December 31, 1997 for the difference between the exercise price and the
deemed value of certain of the Company's stock options granted under the 1994
Plan. These amounts are being amortized by charges to operations over the
vesting periods of the individual stock options, which are generally four years.
In the year ended December 31, 1997, $66,000 (pre-tax) was amortized to expense.
PRO FORMA DISCLOSURES OF THE EFFECT OF STOCK-BASED COMPENSATION PLANS
Pro forma information regarding results of operations and net income (loss)
per share is required by Statement No. 123 for stock-based awards to employees
as if the Company had accounted for such awards using a valuation method
permitted under Statement No. 123.
Stock-based awards to employees under the Plan during the years ended
December 31, 1995, 1996 and 1997 were valued using the minimum value method,
assuming no expected dividends, a weighted-average expected life of 3.5 years
and a weighted-average risk-free interest rate of 6.0%. Should the Company
complete an initial public offering of its common stock, stock-based awards
granted thereafter will be valued using the Black-Scholes option pricing model.
Among other things, the Black-Scholes model considers the expected volatility of
the Company's stock price, determined in accordance with Statement No. 123, in
arriving at an estimated fair value. The minimum value method does not consider
stock price volatility. Further, certain other assumptions necessary to apply
the Black-Scholes model may differ significantly from assumptions used to
calculate the value of stock-based awards under the minimum value method.
F-15
<PAGE> 86
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
The weighted-average minimum values of options granted to employees during
1995, 1996 and 1997 were $0.01, $0.12 and $0.75, respectively. For pro forma
purposes, the estimated minimum value of the Company's stock-based awards to
employees is amortized over the vesting period of the underlying instruments.
The results of applying Statement No. 123 to the Company's stock-based awards to
employees would approximate the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
---- ------ -------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
Pro forma:
Net income (loss)................................... $ -- $2,947 $(1,755)
Basic earnings (loss) per share..................... $.00 $ .12 $ (.07)
Diluted earnings (loss) per share................... $.00 $ .08 $ (.07)
</TABLE>
6. EMPLOYEE BENEFIT PLANS
The Company sponsors a defined contribution 401(k) Savings and Investment
Plan which was established in 1996, covering substantially all of the Company's
employees, subject to certain eligibility requirements. At its discretion, the
Company may make contributions to the plan. No contributions were made by the
Company in 1996 or 1997.
7. LITIGATION
In December 1996, Stanford Telecommunications, Inc. filed an action against
the Company in the United States District Court for the Northern District of
California. STI alleges that the Company's BCM3036, BCM3037, BCM3300, BCM93220
and BCM93220B products infringe one of STI's patents (the " '352 Patent"). STI
is seeking an injunction as well as the recovery of monetary damages, including
treble damages for willful infringement. The Company has filed an answer and
affirmative defenses to STI's complaint, denying the allegations in STI's
complaint, and has asserted a counterclaim requesting declaratory relief that
the Company is not infringing the '352 Patent and that the '352 Patent is
invalid and unenforceable. The Company believes that it has strong defenses to
STI's claims on invalidity, noninfringement and inequitable conduct grounds. The
Company and STI are currently conducting discovery in this case. On June 10,
1998 and July 21, 1998, the Court issued orders interpreting the claims of the
'352 patent. The Court has scheduled trial for May 1999. Although the Company
believes that it has strong defenses, a finding of infringement by the Company
in this action could lead to liability for monetary damages (which could be
trebled in the event that the infringement were found to have been willful), the
issuance of an injunction requiring that the Company withdraw various products
from the market, substantial product redesign expenses (assuming that a
non-infringing design is feasible and economic) and associated time-to-market
delays, and indemnification claims by the Company's customers or strategic
partners, each of which events could have a material adverse effect on the
Company's business, financial condition and results of operations.
In April 1997, Sarnoff Corporation and Sarnoff Digital Communications, Inc.
(collectively, "Sarnoff") filed a complaint in New Jersey Superior Court against
the Company and five former Sarnoff employees now employed by the Company (the
"Former Employees") asserting claims against the Former Employees for breach of
contract, misappropriation of trade secrets, and breach of the covenant of good
faith and fair dealing, and against the Company for inducing such actions. Those
claims relate to the alleged disclosure of certain technology of Sarnoff to the
Company. The complaint also asserts claims against the Company and the Former
Employees for unfair competition, misappropriation and misuse of trade secrets
and confidential,
F-16
<PAGE> 87
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
7. LITIGATION (CONTINUED)
proprietary information of Sarnoff, and tortious interference with present and
prospective economic advantage, as well as a claim against the Company alleging
that it "illegally pirated" Sarnoff's employees. The complaint seeks to
preliminarily and permanently enjoin the Company and the Former Employees from
utilizing any alleged Sarnoff trade secrets, and to restrain the Former
Employees from violating their alleged statutory and contractual duties of
confidentiality to Sarnoff by, for example, precluding them from working for six
months in any capacity relating to certain of the Company's programs. The
Company has asserted and believes that Sarnoff's claims are without merit. The
Company has filed an answer and is vigorously defending itself in this action.
In May 1997, the New Jersey court denied Sarnoff's request for a temporary
restraining order. In June 1998, the New Jersey court denied the Company's
motion for summary judgment. Sarnoff has clarified its claims to some extent by
specifying in greater detail the trade secrets that it alleges the Company and
the Former Employees misappropriated. The Company has filed new motions for
summary judgment based on recent admissions and other events. In August 1998,
the New Jersey court set a new date, September 30, 1998, for the close of
discovery in this case. Trial is scheduled for November 1998.
In July 1997, the Company commenced an action against Sarnoff in the
California Superior Court alleging breach of contract, fraud, misappropriation
of trade secrets, false advertising, trade libel, intentional interference with
prospective economic advantage and unfair competition. The claims center on
Sarnoff's violation of a non-disclosure agreement entered into with the Company
with respect to limited use of certain of the Company's technology and on
inaccurate comparisons that the Company believes Sarnoff has made in its product
advertising and in statements to potential customers and others. This action was
removed to the United States District Court for the Central District of
California, and was stayed pending resolution of the New Jersey action described
in the preceding paragraph. Notwithstanding that the California action is
currently stayed, the Company believes that it involves facts, circumstances and
claims unrelated to those at issue in the New Jersey action, and the Company
intends to vigorously prosecute the California action against Sarnoff.
In December 1997, Rockwell Semiconductor Systems, Inc. ("RSSI") filed a
complaint in California Superior Court against the Company asserting
misappropriation of trade secrets, breach of duty of loyalty, tortious
interference with prospective business advantage, unfair business practices and
unfair competition. These alleged claims related to the Company's hiring of
several former employees of RSSI. The Company and RSSI have executed a
settlement agreement in this action, pursuant to which the Company has agreed
not to hire or extend an offer to any employees from RSSI for 30 days following
the consummation of the Company's initial public offering. While the settlement
agreement requires RSSI to dismiss this action without prejudice, it does not
release any claims that RSSI may assert in the future regarding the actual use
or misappropriation by the Company of trade secrets or other proprietary
information of RSSI.
In March 1998, Scott O. Davis, the Company's former Chief Financial
Officer, filed a complaint in California Superior Court against the Company and
its Chief Executive Officer, Henry T. Nicholas, III, alleging claims for fraud
and deceit, negligent misrepresentation, breach of contract, breach of fiduciary
duty, constructive fraud, conversion, breach of the implied covenant of good
faith and fair dealing, and declaratory relief. These claims relate to Mr.
Davis' alleged ownership of 26,000 shares of Series D Preferred Stock originally
purchased by Mr. Davis in February 1996 (which shares would have converted into
78,000 shares of Class B Common Stock upon consummation of the initial public
offering). The purchase agreement between the Company and Mr. Davis contained a
provision permitting the Company to repurchase all 26,000 shares of Series D
Preferred Stock at the original price paid per share in the event that Mr. Davis
did not continue to be employed by the Company until the later of February 22,
1998 or one year after the consummation of the Company's initial public
offering. After Mr. Davis resigned from the Company in June 1997, the Company
F-17
<PAGE> 88
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
7. LITIGATION (CONTINUED)
exercised its repurchase right. Mr. Davis' complaint alleges that the repurchase
right should not be enforceable under several legal theories and seeks
unspecified damages and declaratory relief. If Mr. Davis is successful in his
claim, he may be entitled to receive the shares of Class B Common Stock
described above and may be entitled to certain other rights as a holder of
Series D Preferred Stock, including without limitation the right to acquire
certain shares of the Company's Series E Preferred Stock (or the shares of Class
B Common Stock into which such shares of Series E Preferred Stock would have
converted upon consummation of the initial public offering). This case is
currently in discovery. In April 1998, the Company filed an answer and
affirmative defenses to Mr. Davis' complaint, denying the allegations in Mr.
Davis' complaint. The Company has also asserted counterclaims against Mr. Davis
for fraud and breach of fiduciary duty and is seeking to recover compensatory
and punitive damages, in addition to other relief.
The Company is also involved in other legal proceedings, claims and
litigation arising in the ordinary course of business.
The cases involving intellectual property rights involve complex questions
of fact and law and could require the expenditure of significant costs and
diversion of resources to defend. Although management believes the outcome of
the Company's outstanding legal proceedings, claims and litigation will not have
a material adverse effect on the Company's financial position, results of
operations or liquidity, the results of litigation are inherently uncertain, and
such outcome is at least reasonably possible. The Company is unable to make an
estimate of the range of possible loss from outstanding litigation, and no
amounts have been provided for such matters in the accompanying financial
statements.
8. SEGMENT, SIGNIFICANT CUSTOMER AND SUPPLIER INFORMATION
The Company operates in one industry segment, broadband communications.
During 1995, 1996 and 1997, the Company had a total of five customers whose
revenue represented a significant portion of total revenue in certain or all
years. Revenue from two of these customers was approximately 13.9% and 10.9% of
total revenue in 1995. Revenue from another customer represented approximately
13.8% in 1995, 28.0% in 1996, and 31.9% in 1997 of total revenue for the
respective year. Revenue from a fourth customer accounted for approximately
16.1% of total revenue in 1996. Revenue from a fifth customer was approximately
15.2% in 1996 and 14.6% in 1997 of total revenue for the respective year.
No other customer represented more than 10% of the Company's annual
revenue.
The Company performs periodic credit evaluations of its customers'
financial condition and generally does not require collateral. Credit losses
have been within management's expectations and amounts provided for doubtful
accounts.
Export revenue to all foreign customers as a percent of total revenue was
as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Europe............................................... 10.5% 6.1% 5.2%
Asia................................................. 10.1 2.9 6.7
Other................................................ 1.9 3.5 3.5
---- ---- ----
22.5% 12.5% 15.4%
==== ==== ====
</TABLE>
The Company does not own or operate a fabrication facility, and
substantially all of its semiconductor device requirements are currently
supplied by two outside foundries in Asia. Any sudden demand for an
F-18
<PAGE> 89
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
8. SEGMENT, SIGNIFICANT CUSTOMER AND SUPPLIER INFORMATION (CONTINUED)
increased amount of semiconductor devices or sudden reduction or elimination of
any existing source or sources of semiconductor devices could result in a
material delay in the shipment of the Company's products. In addition,
substantially all of the Company's products are assembled and tested by one of
two third-party subcontractors in Asia. The Company does not have long-term
agreements with any of these suppliers. Any problems associated with the
fabrication facilities, and the delivery, quality or cost of the Company's
products could have a material adverse effect on the Company's business,
financial condition and results of operations.
9. SUBSEQUENT EVENTS
STOCK SPLIT
On February 3, 1998, the Board of Directors approved a 3-for-2 split,
effective March 9, 1998, of the Company's Common Stock. All share and per share
amounts in the accompanying financial statements have been retroactively
restated to reflect the stock split in the Company's capital structure.
SALE OF SHARES TO CISCO SYSTEMS
On February 3, 1998, Cisco Systems, Inc. (Cisco) exercised its option to
purchase 500,000 shares of Class A Common Stock upon consummation of the
Company's initial public offering at a price per share equal to the initial
public offering price, net of underwriting discounts and commissions. Such
option was granted to Cisco in connection with the Development and License
Agreement entered into between the Company and Cisco and effective in September
1996, as amended on February 3, 1998.
STOCK OPTION PLANS
The 1998 Stock Incentive Plan (the 1998 Plan) was adopted on February 3,
1998 to serve as the successor equity incentive program to the Company's 1994
Plan. A total of 15,980,563 shares of Common Stock have been authorized for
issuance under the 1998 Plan. On the 1998 Plan effective date, outstanding
options under the 1994 Plan and the 1998 Special Stock Option Plan (the Special
Plan), a plan adopted to permit options to be granted with terms permitted by
the 1998 Plan prior to the 1998 Plan becoming effective, will be incorporated
into the 1998 Plan, and no further option grants will be made under the 1994
Plan or the Special Plan.
During the three month period ended March 31, 1998, the Company's Board of
Directors granted stock options to employees under the Company's 1994 Plan and
its Special Plan on an aggregate of 3,009,675 shares of the Company's Class B
Common Stock, of which options on 2,929,675 shares are exercisable at $10 per
share and options on 80,000 shares are exercisable at the initial public
offering price of the Company's Class A Common Stock. In the quarter ended March
31, 1998, the Company will record an additional $6.1 million of deferred
compensation related to 1,518,500 options granted in late March 1998, which
amount is equal to the difference between the exercise price and the deemed
value of such options. This amount will be presented as a reduction of
shareholders' equity and amortized ratably over the vesting period of the
applicable options. As a result, the Company will amortize approximately $17,000
(pre-tax) of deferred compensation in the quarter ended March 31, 1998 and
expects to amortize the remaining balance at the rate of approximately $380,000
(pre-tax) per quarter through March 31, 2002.
1998 EMPLOYEE STOCK PURCHASE PLAN
The 1998 Employee Stock Purchase Plan (the Purchase Plan) was adopted on
February 3, 1998, which allows employees to designate up to 15 percent of their
total compensation to purchase shares of the
F-19
<PAGE> 90
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
9. SUBSEQUENT EVENTS (CONTINUED)
Company's Class A Common Stock at 85% of fair market value. 750,000 shares of
Class A Common Stock have been reserved for issuance under the Purchase Plan.
ENGAGEMENT AGREEMENT WITH IRELL & MANELLA
Irell & Manella has represented and continues to represent the Company in
various legal matters pursuant to an engagement agreement dated as of January 1,
1997, and amended as of January 1, 1998. Under the engagement agreement, the
Company has agreed to pay Irell & Manella a fixed fee plus costs for the firm's
legal services rendered from and after January 1, 1998 with respect to certain
litigation matters. Irell & Manella has agreed to render legal services to the
Company on most other matters at reduced rates from the firm's standard for the
two-year period commencing January 1, 1998.
10. SUPPLEMENTARY UNAUDITED INFORMATION
INITIAL PUBLIC OFFERING
In April 1998, the Company completed its initial public offering (the
"Offering") of 4,025,000 shares of its Class A Common Stock. Of these shares,
the Company sold 3,120,000 shares (including 355,000 shares issued in connection
with the exercise of the underwriters' over-allotment option), and selling
shareholders sold 905,000 shares (including 170,000 shares in connection with
the exercise of the underwriters' over-allotment option), at a price of $24.00
per share. In addition, the Company sold 500,000 shares of Class A Common Stock
to Cisco Systems, Inc. ("Cisco Systems"), in a concurrent registered offering
that was not underwritten, at a price of $22.32 per share. The Company received
aggregate net proceeds from the Offering and the sale of shares to Cisco Systems
of approximately $79.2 million in cash (net of underwriting discounts and
commissions and estimated offering costs). Upon consummation of the Offering,
all outstanding shares of the Company's Convertible Preferred Stock were
automatically converted into an aggregate of 8,453,517 shares of Class B Common
Stock.
Approximately $2.3 million of the Company's net proceeds were used to
retire all outstanding indebtedness under an SVB term loan in April 1998.
INVESTMENTS
At June 30, 1998, all of the Company's investments were in state, municipal
and county government bonds and were classified as held-to-maturity. Debt
securities are classified as held-to-maturity when the Company has the positive
intent and ability to hold the securities to maturity. Held-to-maturity
investments are stated at cost, adjusted for amortization of premiums and
discounts to maturity. A summary of held-to-maturity securities by balance sheet
caption at June 30, 1998, is as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash equivalents......................... $ 8,104 $-- $ -- $ 8,104
Short-term investments................... 2,629 1 -- 2,630
Long-term investments.................... 25,094 8 (15) 25,087
------- --- ---- -------
Securities classified as
held-to-maturity....................... $35,827 $ 9 $(15) $35,821
======= === ==== =======
</TABLE>
F-20
<PAGE> 91
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
10. SUPPLEMENTARY UNAUDITED INFORMATION (CONTINUED)
Scheduled maturities of held-to-maturity investments at June 30, 1998 were
as follows:
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
--------- -------
(IN THOUSANDS)
<S> <C> <C>
Debt securities maturing within:
One year............................... $10,733 $10,734
Two years.............................. 18,326 18,320
Three years............................ 6,768 6,767
------- -------
$35,827 $35,821
======= =======
</TABLE>
INCOME TAXES
Income tax expense for the six month periods ended June 30, 1997 and 1998
has been provided at the estimated annualized effective tax rates based on the
estimated income tax liability or asset and change in deferred taxes for the
respective fiscal years.
COMMITMENTS
The Company had commitments totaling approximately $5.4 million as of June
30, 1998 for the purchase of workstation software and hardware. In addition, the
Company has entered into additional facilities lease agreements commencing
November 1998 for approximately $200,000 per month through November 2005.
ISSUANCE OF STOCK OPTIONS
Activity under the 1994 Plan, the Special Plan and the 1998 Plan during the
six month period ended June 30, 1998 is set forth below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------------------
WEIGHTED-
SHARES AVERAGE
AVAILABLE NUMBER OF PRICE EXERCISE
FOR GRANT SHARES PER SHARE PRICE
---------- --------- --------------- ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1997..... 5,713,911 5,401,432 $ .07 - $ 8.00 $ 2.12
Additional shares reserved....... 5,000,000 -- -- --
Options granted.................. (3,734,076) 3,734,076 10.00 - 69.88 14.84
Options cancelled................ 305,825 (305,825) 1.13 - 10.00 6.93
Options repurchased.............. 3,000 -- -- --
Options exercised................ -- (145,030) .50 - 10.00 2.56
---------- --------- --------------- ------
Balance at June 30, 1998......... 7,288,660 8,684,653 $ .07 - $69.88 $ 7.42
========== ========= =============== ======
</TABLE>
Included above are stock options granted during the three month period
ended June 30, 1998 to employees under the Company's Special Plan and its 1998
Plan on an aggregate of 724,401 shares of the Company's Class A & B Common Stock
at an average exercise price of $33.40.
F-21
<PAGE> 92
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
10. SUPPLEMENTARY UNAUDITED INFORMATION (CONTINUED)
The weighted average remaining contractual life and weighted average
exercise price of all options outstanding and of all options exercisable as June
30, 1998 were as follows:
<TABLE>
<CAPTION>
OUTSTANDING
-------------------------------------------------
WEIGHTED AVERAGE EXERCISABLE
NUMBER OF REMAINING ------------------------------
RANGE OF SHARES CONTRACTUAL LIFE WEIGHTED AVERAGE SHARES WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ .07 - $ 1.00 687,075 7.87 $ .61 687,075 $ .61
$ 1.13 - $ 1.25 2,912,358 8.77 $ 1.16 2,912,358 $ 1.16
$ 3.00 - $ 8.00 1,533,945 9.35 $ 4.71 1,533,945 $ 4.71
$10.00 2,690,925 9.70 $10.00 2,690,925 $10.00
$24.00 - $69.88 860,350 9.82 $30.76 120,000 $24.00
</TABLE>
Additional information relating to the 1994 Plan, Special Plan and 1998
Plan is as follows at June 30, 1998: i) nonvested common shares subject to
repurchase amount to 2,852,834 with a weighted average repurchase price of
$1.23, ii) unvested options outstanding total 8,021,883 and iii) total reserved
Class A and Class B Common Stock shares for stock option plans total 15,973,313.
In the six months ended June 30, 1998, the Company amortized an aggregate
of $503,000 of deferred compensation and eliminated approximately $705,000 in
recorded deferred compensation, representing the unamortized balance of deferred
compensation on stock options that were cancelled. The remaining balance of
total deferred compensation will be amortized at a rate of approximately
$406,000 (pre-tax) per quarter through September 2001 and approximately $338,000
(pre-tax) for the quarters ended December 2001 and March 2002.
PRO FORMA DISCLOSURES OF THE EFFECT OF STOCK-BASED COMPENSATION PLANS
The value of the Company's stock-based awards granted to employees prior to
the initial public offering of its common stock in April 1998, was estimated
using the minimum value method, which does not consider stock price volatility.
Stock-based awards granted in 1998 subsequent to the initial public offering
have been valued using the Black-Scholes option pricing model. Among other
things, the Black-Scholes model considers the expected volatility of the
Company's stock price, determined in accordance with Statement No. 123, in
arriving at an option valuation. Estimates and other assumptions necessary to
apply the Black-Scholes model may differ significantly from assumptions used in
calculating the value of options granted prior to the initial public offering
under the minimum value method.
The fair value of the Company's stock-based awards to employees was
estimated assuming no expected dividends, a weighted average expected life of
3.5 years, a weighted average risk-free interest rate of 6.0% and no expected
volatility for options granted prior to the initial public offering and an
expected volatility of 0.73 for options granted after the initial public
offering. The fair value of employee stock purchase rights was estimated
assuming no expected dividends, a weighted average expected life of 15 months, a
weighted average risk-free interest rate of 6.0% and an expected volatility of
.73.
The weighted-average fair value of options granted during the six months
ended June 30, 1997 and 1998 was $.34 and $5.68, respectively. The
weighted-average fair value of employee stock purchase rights granted in the six
months ended June 30, 1998 was $11.45. For pro forma purposes, the estimated
value of the Company's stock-based awards to employees is amortized over the
vesting period of the underlying instruments. The results of applying Statement
No. 123 to the Company's stock-based awards to employees would approximate the
following:
F-22
<PAGE> 93
BROADCOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
10. SUPPLEMENTARY UNAUDITED INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------
1997 1998
------- -------
<S> <C> <C>
Pro forma:
Net income (loss)...................................... $(1,935) $13,266
Basic earnings (loss) per share........................ $ (.07) $ .39
Diluted earnings (loss) per share...................... $ (.07) $ .30
</TABLE>
ISSUANCE OF WARRANTS
In April 1998, the Company issued a Class A Common Stock Purchase Warrant
(the "Warrant") to Brobeck, Phleger & Harrison LLP, counsel to the Company, to
purchase up to 10,000 shares of the Company's Class A Common Stock at an
exercise price of $24.00 per share. The Warrant is exercisable from April 30,
1999 to April 30, 2000. The Warrant was issued in a transaction exempt from
registration by virtue of Section 4(2) of the Securities Act of 1933, as
amended.
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement No. 130, Reporting
Comprehensive Income, which establishes standards for reporting and displaying
comprehensive income and its components in the financial statements. For the
three months ended March 31, 1998 and 1997, the Company did not have any
components of comprehensive income as defined in Statement No. 130.
F-23
<PAGE> 94
Broadcom Logo
<PAGE> 95
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable in connection with the sale and
distribution of the securities being registered. All amounts are estimated
except the Securities and Exchange Commission registration fee, the Nasdaq
listing fee and NASD registration fees. All of the expenses below will be paid
by the Registrant.
<TABLE>
<CAPTION>
ITEM
----
<S> <C>
SEC Registration fee........................................ $ 78,367
Nasdaq listing fee.......................................... 9,400
NASD filing fee............................................. 27,065
Blue sky fees and expenses.................................. 5,000
Printing and engraving expenses............................. 150,000
Legal fees and expenses..................................... 175,000
Accounting fees and expenses................................ 35,000
Transfer Agent and Registrar fees........................... 7,500
Miscellaneous............................................... 12,668
--------
Total............................................. $500,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's Articles of Incorporation limit the personal liability of
its directors for monetary damages to the fullest extent permitted by the
California General Corporation Law (the "California Law"). Under the California
Law, a director's liability to a company or its shareholders may not be limited
(1) for acts or omissions that involve intentional misconduct or a knowing and
culpable violation of law, (ii) for acts or omissions that a director believes
to be contrary to the best interest of the Company or its shareholders or that
involve the absence of good faith on the part of the director, (iii) for any
transaction from which a director derived an improper personal benefit, (iv) for
acts or omissions that show a reckless disregard for the director's duty to the
Registrant or its shareholders in circumstances in which the director was aware,
or should have been aware, in the ordinary course of performing a director's
duties, of a risk of a serious injury to the Registrant or its shareholders, (v)
for acts or omissions that constitute an unexcused pattern of inattention that
amounts to an abdication of the director's duty to the Registrant or its
shareholders, (vi) under Section 310 of the California Law concerning contacts
or transactions between the Registrant and a director, or (vii) under Section
316 of the California Law concerning directors' liability for improper
dividends, loans and guarantees. The limitation of liability does not affect the
availability of injunctions and other equitable remedies available to the
Registrant's shareholders for any violation by a director of the director's
fiduciary duty to the Registrant or its shareholders.
The Company's Articles of Incorporation also include an authorization for
the Registrant to indemnify its "agents" (as defined in Section 317 of the
California Law), through bylaw provisions, by agreement or otherwise, to the
fullest extent permitted by law. Pursuant to this provision, the Registrant's
Bylaws provide for indemnification of the Company's directors, officers and
employees. In addition, the Registrant, at its discretion, may provide
indemnification to persons whom the Registrant is not obligated to indemnify.
The Bylaws also allow the Registrant to enter into indemnity agreements with
individual directors, officers, employees and other agents. These indemnity
agreements have been entered into with all directors and executive officers and
provide the maximum indemnification permitted by law. These agreements, together
with the Registrant's Bylaws and Articles of Incorporation, may require the
Registrant, among other things, to indemnify these directors or executive
officers (other than for liability resulting from willful misconduct of a
II-1
<PAGE> 96
culpable nature), to advance expenses to them as they are incurred, provided
that they undertake to repay the amount advanced if it is ultimately determined
by a court that they are not entitled to indemnification, and to obtain
directors' and officers' insurance if available on reasonable terms. Section 317
of the California Law and the Registrant's Bylaws make provision for the
indemnification of officers, directors and other corporate agents in terms
sufficiently broad to indemnify such persons, under certain circumstances, for
liabilities (including reimbursement of expense incurred) arising under the
Securities Act. The Registrant currently maintains directors' and officers'
liability insurance.
There is no pending litigation or proceeding involving any director,
officer, employee or agent of the Registrant in which indemnification will be
required or permitted. Moreover, the Registrant is not aware of any threatened
litigation or proceeding that might result in a claim for such indemnification
other than the litigation pending with Scott O. Davis, the Registrant's former
Chief Financial Officer. The Registrant believes that the foregoing
indemnification provisions and agreements are necessary to attract and retain
qualified persons as directors and executive officers.
The Underwriting Agreement (the form of which is filed as Exhibit 1.1
hereto) provides for indemnification by the Underwriters of the Registrant and
its officers and directors, and by the Registrant of the Underwriters, for
certain liabilities arising under the Securities Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Each share of Class B Common Stock is convertible into one share of Class A
Common Stock at any time at the option of the holder, and will automatically
convert upon transfer, except to certain Permitted Transferees as defined in the
Articles of Incorporation. The following is a summary of transactions by the
Registrant since January 1, 1995 involving sales of the Registrant's securities
that were not registered under the Securities Act:
1. In March 1995, the Registrant issued and sold 500,000 shares of
Series C Preferred Stock to Scientific-Atlanta, Inc. at a price per share
of $2.00. Each share of Series C Preferred Stock converted into three
shares of Class B Common Stock upon consummation of the Registrant's
initial public offering.
2. In February 1996, the Registrant issued and sold an aggregate of
493,839 shares of Series D Preferred Stock to 22 accredited individual
investors and strategic partners at a price per share of $6.00, or an
aggregate purchase price of $2,963,000. Each share of Series D Preferred
Stock converted into three shares of Class B Common Stock upon consummation
of the Registrant's initial public offering.
3. In June 1997, the Registrant issued and sold 60,000 shares of Class
B Common Stock to the Regents of the University of New Mexico ("UNM") in
connection with a License Agreement between UNM and the Registrant. The
shares were issued as part of the Registrant's consideration to UNM in
return for a license grant and certain research and development services
rendered to the Registrant. The consideration tendered to the Registrant
was valued at an aggregate of $67,800 or $1.13 per share.
4. In September 1997, the Registrant issued and sold 1,500,000 shares
of Series E Preferred Stock to General Instrument Corporation at a price
per share of $15.15, or an aggregate purchase price of $22,750,000. This
transaction was undertaken in connection with a Development, Supply and
License Agreement between General Instrument and the Registrant. Each share
of Series E Preferred Stock converted into 1.5 shares of Class B Common
Stock upon consummation of the Registrant's initial public offering.
5. Pursuant to an agreement dated as of October 31, 1997, the
Registrant issued and sold 225,000 shares of Class B Common Stock to Irell
& Manella LLP at a price per share of $4.67, or an aggregate purchase price
of $1,050,000.
6. Since January 1, 1995, the Registrant has issued non-qualified
stock options under its 1994 Plan and Special Plan to certain eligible
officers, directors, consultants and employees to the purchase an aggregate
of 13,590,325 shares of Class B Common Stock. Such optionees included
consultants who rendered bonafide consulting services to the Registrant,
which services included engineering support, marketing services and
strategic planning and guidance.
II-2
<PAGE> 97
None of the optionees paid any cash consideration for such options. Such
options did not involve a "sale" of securities; and, accordingly, registration
was not required. The following table sets forth the grant date, number of
options, current exercise price and class of optionees for all of such options:
<TABLE>
<CAPTION>
NO. OF EXERCISE
GRANT DATE OPTIONS PRICE CLASS OF OPTIONEES
- -------------------- --------- -------- -------------------------
<S> <C> <C> <C>
03/01/95 to 01/31/96 2,212,500 $ 0.07 Employees and Consultants
03/01/96 to 07/08/96 1,507,500 $ 0.50 Employees and Consultants
07/11/96 to 07/31/96 418,500 $ 1.00 Employees and Consultants
08/06/96 to 08/29/97 3,770,250 $ 1.13 Employees and Consultants
06/23/97 750,000 $ 1.25 Two Officers
09/15/97 to 09/30/97 421,500 $ 3.00 Employees
10/09/97 to 10/31/97 514,200 $ 4.00 Employees
11/03/97 to 11/28/97 485,700 $ 5.00 Employees and a Director
12/01/97 to 12/31/97 462,000 $ 8.00 Employees
01/01/98 to 03/27/98 2,968,175 $10.00 Employees, Consultants
and Officers
</TABLE>
Between March 28, 1998 and March 31, 1998, the Registrant granted options
to employees to purchase an aggregate of 80,000 shares of Class B Common Stock
at an exercise price per share of $24.00. The sale and issuance of securities
set forth above were deemed to be exempt from registration under the Securities
Act by virtue of Section 4(2) thereof or Rule 701 adopted thereunder. The
recipients of the securities in each of the transactions set forth in above
represented their intention to acquire such securities for investment only and
not with a view to or for sale in connection with any distribution thereof, and
appropriate legends were affixed to the share certificates and instruments used
in such transactions. All recipients received adequate information about the
Registrant at the time of the acquisition of such securities or had access,
through employment or other relationships with the Registrant, to such
information.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following Exhibits are attached hereto and incorporated herein by
reference.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
1.1 Form of Underwriting Agreement.
3.1* Amended and Restated Articles of Incorporation of the
Registrant.
3.2* Bylaws of the Registrant.
5.1** Opinion of Brobeck Phleger & Harrison LLP.
10.1* Form of Indemnification Agreement for the Directors of the
Registrant.
10.2* Form of Indemnification Agreement for the Officers of the
Registrant.
10.3* 1994 Amended and Restated Stock Option Plan, together with
form of Stock Option Agreement, form of Stock Purchase
Agreement, form of promissory note and form of stock pledge
agreement.
10.4*** 1998 Stock Incentive Plan, together with form of Stock
Option Agreements, Notices of Grant, Stock Issuance
Agreement, Stock Purchase Agreement and related Addenda.
10.5**** 1998 Employee Stock Purchase Plan, Form of ESPP Stock
Purchase Agreement and Enrollment/Change Form.
10.6* Loan and Security Agreement dated March 23, 1995 between the
Registrant and Silicon Valley Bank, as amended.
10.7* Standard Form Office Lease dated April 30, 1995 between the
Registrant and Laguna Canyon, Inc., as amended.
</TABLE>
II-3
<PAGE> 98
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.8+* Development, Supply and License Agreement dated September
29, 1997 between the Registrant and General Instrument
Corporation, formerly known as NextLevel Systems, Inc.
10.9* Stock Purchase Agreement dated February 3, 1998 between the
Registrant and Cisco Systems, Inc.
10.10* Registration Rights Agreement dated February 26, 1996 among
the Registrant and certain of its shareholders, as amended.
10.11* Industrial Lease dated February 16, 1998 between the
Registrant and Irvine Technology Partners.
10.12* 1994 Special Stock Option Plan, together with form of Stock
Option Agreement and form of Stock Purchase Agreement.
10.13* Stock Purchase Agreement dated October 31, 1997 between the
Registrant and Irell & Manella LLP.
10.14+* Engagement Agreement dated January 1, 1997, as amended,
between the Registrant and Irell & Manella LLP.
10.15** Industrial Lease (Single Tenant; Net) dated August 7, 1998
between the Registrant and The Irvine Company.
11.1* Statement Regarding Computation of Earnings Per Share.
23.1 Consent of Independent Auditors.
23.2 Consent of Brobeck Phleger & Harrison LLP (contained in
Exhibit 5.1).
24.1 Power of Attorney (contained on signature page on page
II-3).
</TABLE>
- ---------------
* Incorporated by reference to the similarly numbered exhibit to the
Registration Statement on Form S-1 filed by the Registrant (Reg. No.
333-45619).
** Previously filed.
*** Incorporated by reference to Exhibits 99.1 through 99.11 to the
Registration Statement on Form S-8 filed by the Registrant (Reg. No.
333-60763).
**** Incorporated by reference to Exhibits 99.12 through 99.14 to the
Registration Statement on Form S-8 filed by the Registrant (Reg. No.
333-60763).
+ Confidential treatment has previously been granted by the Commission for
certain portions of the referenced exhibit pursuant to Rule 406.
(b)FINANCIAL STATEMENT SCHEDULES
(1) Report of Independent Auditors on Financial Statement Schedule
(2) Schedule II -- Valuation and Qualifying Accounts
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
II-4
<PAGE> 99
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreements certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit, or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus as filed as
part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this Registration Statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 100
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Irvine,
State of California, on the 13th day of October, 1998.
BROADCOM CORPORATION
By: /s/ HENRY T. NICHOLAS
------------------------------------
Henry T. Nicholas, III, Ph.D.,
Co-Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-1 has been signed by the following persons in
the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ HENRY T. NICHOLAS Co-Chairman, President and October 13, 1998
- ----------------------------------------------------- Chief Executive Officer
Henry T. Nicholas, III, Ph.D. (principal executive officer)
* Co-Chairman, Vice President of October 13, 1998
- ----------------------------------------------------- Research and Development and
Henry Samueli, Ph.D. Chief Technical Officer
/s/ WILLIAM J. RUEHLE Chief Financial Officer and October 13, 1998
- ----------------------------------------------------- Vice President, Finance
William J. Ruehle (principal financial and
accounting officer)
* Director October 13, 1998
- -----------------------------------------------------
Myron S. Eichen
* Director October 13, 1998
- -----------------------------------------------------
Alan Ross
* Director October 13, 1998
- -----------------------------------------------------
Werner F. Wolfen
</TABLE>
*By: /s/ HENRY T. NICHOLAS
-------------------------------
Henry T. Nicholas,
as attorney-in-fact
II-6
<PAGE> 101
REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULE
Board of Directors and Shareholders
Broadcom Corporation
We have audited the financial statements of Broadcom Corporation as of
December 31, 1996 and 1997, and for each of the three years in the period ended
December 31, 1997, and have issued our report thereon dated January 16, 1998,
except for Note 9, as to which the date is March 31, 1998 and Note 7, as to
which the date is September 25, 1998 (included elsewhere in this Registration
Statement). Our audits also included the financial statement schedule listed in
Item 16(b) of this Registration Statement. This schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Orange County, California
January 16, 1998, except for
Note 9, as to which
the date is March 31, 1998
and Note 7, as to which
the date is September 25, 1998
S-1
<PAGE> 102
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
BROADCOM CORPORATION
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- ------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995:
Deducted from asset accounts:
Allowance for doubtful accounts and
sales returns.................... $ 50,000 $ 162,000 $ -- $ 50,000 $ 162,000
Reserve for excess and obsolete
inventory........................ -- 55,000 -- -- 55,000
-------- ---------- ---- -------- ----------
Total......................... $ 50,000 $ 217,000 $ -- $ 50,000 $ 217,000
======== ========== ==== ======== ==========
Year ended December 31, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts and
sales returns.................... $162,000 $ 213,000 $ -- $228,000 $ 147,000
Reserve for excess and obsolete
inventory........................ 55,000 1,055,000 -- 361,000 749,000
-------- ---------- ---- -------- ----------
Total......................... $217,000 $1,268,000 $ -- $589,000 $ 896,000
======== ========== ==== ======== ==========
Year ended December 31, 1997:
Deducted from asset accounts:
Allowance for doubtful accounts and
sales returns.................... $147,000 $ 574,000 $ -- $ -- $ 721,000
Reserve for excess and obsolete
inventory........................ 749,000 1,028,000 -- 91,000 1,686,000
-------- ---------- ---- -------- ----------
Total......................... $896,000 $1,602,000 $ -- $ 91,000 $2,407,000
======== ========== ==== ======== ==========
</TABLE>
S-2
<PAGE> 103
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED
- ------- ----------- PAGE
<S> <C> <C>
1.1 Form of Underwriting Agreement.
3.1* Amended and Restated Articles of Incorporation of the
Registrant.
3.2* Bylaws of the Registrant.
5.1** Opinion of Brobeck Phleger & Harrison LLP.
10.1* Form of Indemnification Agreement for the Directors of the
Registrant.
10.2* Form of Indemnification Agreement for the Officers of the
Registrant.
10.3* 1994 Amended and Restated Stock Option Plan, together with
form of Stock Option Agreement, form of Stock Purchase
Agreement, form of promissory note and form of stock pledge
agreement.
10.4*** 1998 Stock Incentive Plan, together with form of Stock
Option Agreements, Notices of Grant, Stock Issuance
Agreement, Stock Purchase Agreement and related Addenda.
10.5**** 1998 Employee Stock Purchase Plan, Form of ESPP Stock
Purchase Agreement and Enrollment/Change Form.
10.6* Loan and Security Agreement dated March 23, 1995 between the
Registrant and Silicon Valley Bank, as amended.
10.7* Standard Form Office Lease dated April 30, 1995 between the
Registrant and Laguna Canyon, Inc., as amended.
10.8+* Development, Supply and License Agreement dated September
29, 1997 between the Registrant and General Instrument
Corporation, formerly known as NextLevel Systems, Inc.
10.9* Stock Purchase Agreement dated February 3, 1998 between the
Registrant and Cisco Systems, Inc.
10.10* Registration Rights Agreement dated February 26, 1996 among
the Registrant and certain of its shareholders, as amended.
10.11* Industrial Lease dated February 16, 1998 between the
Registrant and Irvine Technology Partners.
10.12* 1994 Special Stock Option Plan, together with form of Stock
Option Agreement and form of Stock Purchase Agreement.
10.13* Stock Purchase Agreement dated October 31, 1997 between the
Registrant and Irell & Manella LLP.
10.14+* Engagement Agreement dated January 1, 1997, as amended,
between the Registrant and Irell & Manella LLP.
10.15** Industrial Lease (Single Tenant; Net) dated August 7, 1998
between the Registrant and The Irvine Company.
11.1* Statement Regarding Computation of Earnings Per Share.
23.1 Consent of Independent Auditors.
23.2 Consent of Brobeck Phleger & Harrison LLP (contained in
Exhibit 5.1).
24.1 Power of Attorney (contained on signature page on page
II-3).
</TABLE>
- ---------------
* Incorporated by reference to the similarly numbered exhibit to the
Registration Statement on Form S-1 filed by the Registrant (Reg. No.
333-45619).
** Previously filed.
*** Incorporated by reference to Exhibits 99.1 through 99.11 to the
Registration Statement on Form S-8 filed by the Registrant (Reg. No.
333-60763).
**** Incorporated by reference to Exhibits 99.12 through 99.14 to the
Registration Statement on Form S-8 filed by the Registrant (Reg. No.
333-60763).
+ Confidential treatment has previously been granted by the Commission for
certain portions of the referenced exhibit pursuant to Rule 406.
<PAGE> 1
EXHIBIT 1.1
DRAFT DATED
9/27/98
3,000,000 SHARES
BROADCOM CORPORATION
CLASS A COMMON STOCK, PAR VALUE $.0001 PER SHARE
UNDERWRITING AGREEMENT
__________________, 1998
<PAGE> 2
October __, 1998
Morgan Stanley & Co. Incorporated
BT Alex. Brown Incorporated
Credit Suisse First Boston Corporation
Hambrecht & Quist LLC
Merrill Lynch, Pierce, Fenner & Smith Incorporated
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Dear Sirs and Mesdames:
Broadcom Corporation, a California corporation (the "COMPANY")
co-founded by Henry T. Nicholas and Henry Samueli (individually a "FOUNDER" and
collectively the "FOUNDERS"), proposes to issue and sell to the several
Underwriters named in Schedule II hereto (the "UNDERWRITERS"), and certain
shareholders of the Company (the "SELLING SHAREHOLDERS") named in Schedule I
hereto severally propose to sell to the several Underwriters, an aggregate of
3,000,000 shares (the "FIRM SHARES") of the Class A Common Stock, par value
$0.001 per share, of the Company (the "CLASS A COMMON STOCK"), of which 392,500
shares are to be issued and sold by the Company and 2,607,500 shares are to be
sold by the Selling Shareholders, each Selling Shareholder selling the amount
set forth opposite such Selling Shareholder's name in Schedule I hereto.
The Company also proposes to issue and sell and certain Selling
Shareholders propose to sell to the several Underwriters not more than an
additional 450,000 shares of its Class A Common Stock (the "ADDITIONAL SHARES")
if and to the extent that you, as Managers of the offering, shall have
determined to exercise, on behalf of the Underwriters, the right to purchase
such shares of common stock granted to the Underwriters in Section 3 hereof. The
Firm Shares and the Additional Shares are hereinafter collectively referred to
as the "SHARES." The shares of Class A Common Stock and Class B Common Stock,
par value $0.001 per share (the "CLASS B COMMON STOCK"), of the Company to be
outstanding after giving effect to the sales contemplated hereby are hereinafter
referred to as the "COMMON STOCK." The Company and the Selling Shareholders are
hereinafter sometimes collectively referred to as the "SELLERS."
The Company has filed with the Securities and Exchange Commission
(the "COMMISSION") a registration statement, including a prospectus, relating to
the Shares. The registration statement as amended at the time it becomes
effective, including the information (if any) deemed to be part of the
registration statement at the time of effectiveness pursuant to Rule 430A under
the Securities Act of 1933, as amended (the "SECURITIES ACT"), is hereinafter
referred to as the "REGISTRATION STATEMENT;" the prospectus in the form first
used to confirm sales of Shares is hereinafter referred to as the "PROSPECTUS."
If the Company has filed an abbreviated registration statement to register
additional shares of Class A Common Stock pursuant to Rule
-2-
<PAGE> 3
462(b) under the Securities Act (the "RULE 462 REGISTRATION STATEMENT"), then
any reference herein to the "REGISTRATION STATEMENT" shall be deemed to include
such Rule 462 Registration Statement.
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND FOUNDERS. The
Company and, to the best of their knowledge, the Founders severally, but not
jointly, represent and warrant to and agree with each of the Underwriters that:
(a) The Registration Statement has become effective under the
Securities Act; no stop order suspending the effectiveness of the
Registration Statement is in effect, and no proceedings for such purpose
are pending before or, to the Company's knowledge, threatened by the
Commission.
(b) (i) The Registration Statement, when it became effective, did
not contain and, as amended or supplemented, if applicable, will not
contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) the Registration Statement and the
Prospectus comply and, as amended or supplemented, if applicable, will
comply in all material respects with the Securities Act and the applicable
rules and regulations of the Commission thereunder and (iii) the
Prospectus does not contain and, as amended or supplemented, if
applicable, will not contain any untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, except that the representations and warranties set forth in
this paragraph do not apply to statements or omissions in the Registration
Statement or the Prospectus based upon information relating to any
Underwriter furnished to the Company in writing by such Underwriter
through you expressly for use therein.
(c) The Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the state of California,
has the corporate power and authority to own its property and to conduct
its business as described in the Prospectus and is duly qualified to
transact business and is in good standing in each jurisdiction in which
the conduct of its business or its ownership or leasing of property
requires such qualification, except to the extent that the failure to be
so qualified or be in good standing would not have a material adverse
effect on the Company.
(d) The Company has no subsidiaries.
(e) This Agreement has been duly authorized, executed and delivered
by the Company.
(f) The authorized capital stock of the Company conforms as to legal
matters to the description thereof set forth under the caption
"Description of Capital Stock in the Prospectus."
(g) The shares of Common Stock (including the Shares to be sold by
the Selling Shareholders) outstanding prior to the issuance of the Shares
to be sold by the Company have been duly authorized and are validly
issued, fully paid and non-assessable; except as set forth in the
Prospectus, the Company does not have any outstanding options to purchase,
or any preemptive rights or other rights to subscribe for or to purchase,
any securities or obligations convertible into, or any contracts or
commitments to issue or sell, shares of its capital stock or any such
options, rights, convertible securities or obligations; and, except where
failure to do so would not have a material adverse effect on the Company,
all outstanding shares of capital stock and options and other rights to
acquire capital stock have been issued in compliance with the registration
and qualification provisions
-3-
<PAGE> 4
of all applicable securities laws and were not issued in violation of any
preemptive rights, rights of first refusal or other similar rights that
have not been waived.
(h) The Shares to be sold by the Company have been duly authorized
and, when issued and delivered in accordance with the terms of this
Agreement, will be validly issued, fully paid and non-assessable, and the
issuance of such Shares will not be subject to any preemptive rights,
rights of first refusal or similar rights.
(i) The execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement will
not contravene any provision of applicable law or the articles of
incorporation or bylaws of the Company or any agreement or other
instrument binding upon the Company that is material to the Company or any
judgment, order or decree of any governmental body, agency or court having
jurisdiction over the Company, and no consent, approval, authorization or
order of, or qualification with, any governmental body or agency is
required for the performance by the Company of its obligations under this
Agreement, except such as may be required by the securities or Blue Sky
laws of the various states and jurisdictions or the National Association
of Securities Dealers, Inc. (the "NASD") in connection with the offer and
sale of the Shares.
(j) There has not occurred any material adverse change, or any
development reasonably likely to result in a material adverse change, in
the condition, financial or otherwise, or in the earnings, business or
operations of the Company from that set forth in the Prospectus (exclusive
of any amendments or supplements thereto subsequent to the date of this
Agreement).
(k) There are no legal, regulatory or governmental proceedings
pending or, to the Company's knowledge, threatened to which the Company is
a party or to which any of the properties of the Company is subject that
are required to be described in the Registration Statement or the
Prospectus and are not so described or any statutes, regulations,
contracts or other documents that are required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement that are not described or filed as required.
(l) The Company has all necessary consents, authorizations,
approvals, orders, certificates and permits of and from, and has made all
declarations and filings with, all foreign, federal, state, local and
other governmental authorities, all self-regulatory organizations and all
courts and other tribunals, to own, lease, license and use its properties
and assets and to conduct its business in the manner described in the
Prospectus, except to the extent that the failure to obtain or file would
not, singly or in the aggregate, have a material adverse effect on the
Company.
(m) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or
filed pursuant to Rule 424 under the Securities Act, complied when so
filed in all material respects with the Securities Act and the applicable
rules and regulations of the Commission thereunder.
(n) The Company is not and, after giving effect to the offering and
sale of the Shares and the application of the proceeds thereof as
described in the Prospectus, will not be an "investment company" as such
term is defined in the Investment Company Act of 1940, as amended.
-4-
<PAGE> 5
(o) The Company (i) is in compliance with any and all applicable
foreign, federal, state and local laws and regulations relating to the
protection of human health and safety, the environment or hazardous or
toxic substances or wastes, pollutants or contaminants (collectively,
"ENVIRONMENTAL LAWS"), (ii) has received all permits, licenses or other
approvals required of them under applicable Environmental Laws to conduct
their respective businesses and (iii) is in compliance with all terms and
conditions of any such permit, license or approval, except where such
noncompliance with Environmental Laws, failure to receive required
permits, licenses or other approvals or failure to comply with the terms
and conditions of such permits, licenses or approvals would not, singly or
in the aggregate, have a material adverse effect on the Company.
(p) There are no costs or liabilities associated with Environmental
Laws (including, without limitation, any capital or operating expenditures
required for clean-up, closure of properties or compliance with
Environmental Laws or any permit, license or approval, any related
constraints on operating activities and any potential liabilities to third
parties) which would, singly or in the aggregate, have a material adverse
effect on the Company.
(q) Except as described in the Prospectus, there is no legal or
beneficial owner of any securities of the Company who has any rights, not
effectively satisfied or waived, to require registration of any shares of
capital stock of the Company in connection with the filing of the
Registration Statement.
(r) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, (i) the Company
has not incurred any material liability or obligation, direct or
contingent, nor entered into any material transaction not in the ordinary
course of business; (ii) the Company has not purchased any of its
outstanding capital stock, nor declared, paid or otherwise made any
dividend or distribution of any kind on its capital stock other than
ordinary and customary dividends; and (iii) there has not been any
material change in the capital stock, short-term debt or long-term debt of
the Company, except in each case as described in the Prospectus.
(s) The Company has good and marketable title in fee simple to all
real property and good and marketable title to all personal property owned
by it that is material to the business of the Company, in each case free
and clear of any security interest, lien, encumbrance, claim, defect or
adverse interest of any nature except such as are described in the
Prospectus or such as do not materially affect the value of such property
and do not interfere with the use made and proposed to be made of such
property by the Company; and any real property and buildings held under
lease by the Company are held by it under valid, subsisting and
enforceable leases with such exceptions as are not material and do not
interfere with the use made and proposed to be made of such property and
buildings by the Company, in each case except as described in the
Prospectus.
(t) The Company owns or possesses adequate licenses or other rights
to use all material patents, patent rights inventions, trade secrets,
copyrights, trademarks, service marks, trade names, technology and
know-how currently employed or proposed to be employed by it in connection
with its business as described in the Prospectus, the Company is not
obligated to pay a royalty, grant a license, or provide other
consideration to any third party in connection with its material patents,
copyrights, trademarks, service marks, trade names, or technology other
than as disclosed in the Prospectus, and, except as disclosed in the
Prospectus, the Company has not received any notice of infringement or
conflict with (and the Company does not know of any infringement or
conflict with) asserted rights of
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<PAGE> 6
others with respect to any patents, patent rights, inventions, trade
secrets, copyrights, trademarks, service marks, trade names, technology or
know-how which could result in any material adverse effect upon the
Company; and, except as disclosed in the Prospectus, the discoveries,
inventions, products or processes of the Company referred to in the
Prospectus do not, to the knowledge of the Company, infringe or conflict
with any right or patent of any third party, or any discovery, invention,
product or process which is the subject of a patent application filed by
any third party known to the Company, which could have a material adverse
effect on the Company. The University of California, Los Angeles, does not
possess any rights to the Company's patents, copyrights, trademarks,
service marks, trade names, or technology which, if exercised, could have
a material adverse effect on the ability of the Company to conduct its
business in the manner described in the Prospectus.
(u) No material labor dispute with the employees of the Company
exists, except as described in the Prospectus, or, to the knowledge of the
Company, is imminent; and the Company is not aware of any existing,
threatened or imminent labor disturbance by the employees of any of its
principal suppliers, manufacturers or contractors that could have a
material adverse effect on the Company.
(v) The Company is insured by insurers of recognized financial
responsibility against such losses and risks and in such amounts as are
prudent and customary in the businesses in which they are engaged; the
Company has not been refused any insurance coverage sought or applied for
during the previous four years; and the Company does not have any reason
to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage
from similar insurers as may be necessary to continue its business at a
cost that would not have a material adverse effect on the Company, except
as described in the Prospectus.
(w) The Company possesses all certificates, authorizations and
permits issued by the appropriate federal, state or foreign regulatory
authorities necessary to conduct its business, except where the failure to
possess such certificates, authorizations or permits would not have a
material adverse effect on the Company, and the Company has not received
any notice of proceedings relating to the revocation or modification of
any such certificate, authorization or permit which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding,
would have a material adverse effect on the Company, except as described
the Prospectus
(x) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (1) transactions are
executed in accordance with management's general or specific
authorizations; (2) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability; (3) access to
material assets is permitted only in accordance with management's general
or specific authorization; and (4) the recorded accountability for assets
is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(y) Ernst & Young LLP are, and during the periods covered by their
report included in the Registration Statement were, independent certified
public accountants with respect to the Company within the meaning of the
Securities Act.
(z) The Nasdaq Stock Market, Inc. has approved the Shares to be
issued by the Company for listing on the Nasdaq National Market.
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<PAGE> 7
(aa) Except as described in the Prospectus, all outstanding shares
of Common Stock are subject to valid and binding agreements (collectively,
the "LOCK-UP AGREEMENTS") that restrict the holders thereof from selling,
making any short sale of, granting any option for the purchase of, or
otherwise transferring or disposing of, any of such shares of Common
Stock, or any such securities convertible into or exercisable or
exchangeable for Common Stock, for a period of 90 days after the date of
the Prospectus without the prior written consent of the Company or Morgan
Stanley & Co. Incorporated.
(bb) The Company (i) has notified each holder of a currently
outstanding option issued under the 1994 Stock Option Plan (the "OPTION
PLAN") and each person who has acquired shares of Common Stock pursuant to
the exercise of any option granted under the Option Plan that pursuant to
the terms of the Option Plan, none of such options or shares may be sold
or otherwise transferred or disposed of for a period of 90 days after the
date of the initial public offering of the Shares and (ii) has imposed a
stop-transfer instruction with the Company's transfer agent in order to
enforce the foregoing lock-up provision imposed pursuant to the Option
Plan.
2. REPRESENTATIONS AND WARRANTIES OF THE SELLING SHAREHOLDERS. Each
of the Selling Shareholders, including the Founders, represents and warrants to
and agrees with each of the Underwriters that:
(a) This Agreement has been duly authorized, executed and delivered
by or on behalf of such Selling Shareholder.
(b) The execution and delivery by such Selling Shareholder of, and
the performance by such Selling Shareholder of its obligations under, this
Agreement, the Custody Agreement and Power of Attorney signed by such
Selling Shareholder and U.S. Stock Transfer Corporation, as Custodian,
relating to the deposit of the Shares to be sold by such Selling
Shareholder and appointing certain individuals as such Selling
Shareholder's attorneys-in-fact to the extent set forth therein, relating
to the transactions contemplated hereby and by the Registration Statement
(the "CUSTODY AGREEMENT AND POWER OF ATTORNEY") will not contravene any
provision of applicable law, or the articles of incorporation or by-laws
of such Selling Shareholder (if such Selling Shareholder is a
corporation), or any agreement or other instrument binding upon such
Selling Shareholder or any judgment, order or decree of any governmental
body, agency or court having jurisdiction over such Selling Shareholder,
and no consent, approval, authorization or order of, or qualification
with, any governmental body or agency is required for the performance by
such Selling Shareholder of its obligations under this Agreement or the
Custody Agreement and Power of Attorney of such Selling Shareholder,
except such as may be required by the securities or Blue Sky laws of the
various states in connection with the offer and sale of the Shares.
(c) Such Selling Shareholder has, and on the Closing Date will have,
valid title to the Shares to be sold by such Selling Shareholder and the
legal right and power, and all authorization and approval required by law,
to enter into this Agreement and the Custody Agreement and Power of
Attorney and to sell, transfer and deliver the Shares to be sold by such
Selling Shareholder.
(d) The Shares to be sold by such Selling Shareholder pursuant to
this Agreement have been duly authorized and are validly issued, fully
paid and non-assessable.
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<PAGE> 8
(e) The Custody Agreement and Power of Attorney has been duly
authorized, executed and delivered by such Selling Shareholder and is a
valid and binding agreement of such Selling Shareholder.
(f) Delivery of the Shares to be sold by such Selling Shareholder
pursuant to this Agreement will pass title to such Shares free and clear
of any security interests, claims, liens, equities and other encumbrances.
(g) All information furnished in writing by or on behalf of such
Selling Shareholder for use in the Registration Statement is, and on the
Closing Date will be, true, correct, and complete, and does not, and on
the Closing Date will not, contain any untrue statement of a material fact
or omit to state any material fact necessary to make such information not
misleading, and all information furnished in writing by or on behalf of
such Selling Shareholder for use in the Prospectus is, and on the Closing
Date will be, true, correct, and complete, and does not, and on the
Closing Date will not, contain any untrue statement of a material fact or
omit to state any material fact necessary to make such information not
misleading in the light of the circumstances under which they were made.
3. AGREEMENTS TO SELL AND PURCHASE. Each Seller, severally and not
jointly, hereby agrees to sell to the several Underwriters, and each
Underwriter, upon the basis of the representations and warranties herein
contained, but subject to the conditions hereinafter stated, agrees, severally
and not jointly, to purchase from such Seller at $_____ a share (the "PURCHASE
PRICE") the number of Firm Shares (subject to such adjustments to eliminate
fractional shares as you may determine) that bears the same proportion to the
number of Firm Shares to be sold by such Seller as the number of Firm Shares set
forth in Schedule II hereto opposite the name of such Underwriter bears to the
total number of Firm Shares.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to issue
and sell and certain Selling Shareholders named in Schedule III hereto severally
agree to sell to the Underwriters the Additional Shares, of which 77,500 shares
are to be issued and sold by the Company and 372,500 shares are to be sold by
such Selling Shareholders, each such Selling Shareholder selling the amount set
forth opposite such Selling Shareholder's name in Schedule III hereto, and the
Underwriters shall have a one-time right to purchase, severally and not jointly,
up to 450,000 Additional Shares at the Purchase Price. If you, on behalf of the
Underwriters, elect to exercise such option, you shall so notify the Company in
writing not later than 30 days after the date of this Agreement, which notice
shall specify the number of Additional Shares to be purchased by the
Underwriters and the date on which such shares are to be purchased. Such date
may be the same as the Closing Date (as defined below) but not earlier than the
Closing Date nor later than ten business days after the date of such notice.
Additional Shares may be purchased as provided in Section 5 hereof solely for
the purpose of covering over-allotments made in connection with the offering of
the Firm Shares. If any Additional Shares are to be purchased, each Underwriter
agrees, severally and not jointly, to purchase the number of Additional Shares
(subject to such adjustments to eliminate fractional shares as you may
determine) that bears the same proportion to the total number of Additional
Shares to be purchased as the number of Firm Shares set forth in Schedule II
hereto opposite the name of such Underwriter bears to the total number of Firm
Shares.
Each Seller hereby agrees that, without the prior written consent of
Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not,
during the period ending 90 days after the date of the Prospectus, (i) 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, lend, or otherwise transfer or dispose of,
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<PAGE> 9
directly or indirectly, any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock or (ii) enter into any swap
or other arrangement that transfers to another, in whole or in part, any of the
economic consequences of ownership of the Common Stock, whether any such
transaction described in clause (i) or (ii) above is to be settled by delivery
of Common Stock or such other securities, in cash or otherwise. The foregoing
sentence shall not apply to (A) the sale of any Shares to the Underwriters to be
sold hereunder, (B) the issuance by the Company of shares of Common Stock upon
the exercise of an option or warrant or the conversion of a security outstanding
on the date hereof of which the Underwriters have been advised in writing or (C)
transactions by any person other than the Company relating to shares of Common
Stock or other securities acquired in open market transactions after the
completion of the offering of the Shares. In addition, each Selling Shareholder,
agrees that, without the prior written consent of Morgan Stanley & Co.
Incorporated on behalf of the Underwriters, it will not, during the period
ending 90 days after the date of the Prospectus, make any demand for, or
exercise any right with respect to, the registration of any shares of Common
Stock or any security convertible into or exercisable or exchangeable for Common
Stock.
4. TERMS OF PUBLIC OFFERING. The Sellers are advised by you that the
Underwriters propose to make a public offering of their respective portions of
the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable. The Sellers are further
advised by you that the Shares are to be offered to the public initially at
$_____ a share (the "PUBLIC OFFERING PRICE") and to certain dealers selected by
you at a price that represents a concession not in excess of $____ a share under
the Public Offering Price, and that any Underwriter may allow, and such dealers
may reallow, a concession, not in excess of $____ a share, to any Underwriter or
to certain other dealers.
5. PAYMENT AND DELIVERY. Payment for the Firm Shares to be sold by
each Seller shall be made to such Seller in federal or other funds immediately
available in New York City against delivery of such Firm Shares for the
respective accounts of the several Underwriters at 10:00 a.m., New York City
time, on ____________, 1998, or at such other time on the same or such other
date, not later than _____________, 1998, as shall be designated in writing by
you. The time and date of such payment are hereinafter referred to as the
"CLOSING DATE."
Payment for any Additional Shares shall be made to the Company in
federal or other funds immediately available in New York City against delivery
of such Additional Shares for the respective accounts of the several
Underwriters at 10:00 a.m., New York City time, on the date specified in the
notice described in Section 3 or at such other time on the same or on such other
date, in any event not later than ______________, 1998, as shall be designated
in writing by you. The time and date of such payment are hereinafter referred to
as the "OPTION CLOSING DATE."
Certificates for the Firm Shares and Additional Shares shall be in
definitive form and registered in such names and in such denominations as you
shall request in writing not later than one full business day prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes payable
in connection with the transfer of the Shares to the Underwriters duly paid,
against payment of the Purchase Price therefor.
6. CONDITIONS TO THE UNDERWRITERS' OBLIGATIONS. The obligations of
the Sellers to sell the Shares to the Underwriters and the several obligations
of the Underwriters to purchase and pay for the
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<PAGE> 10
Shares on the Closing Date are subject to the condition that the
Registration Statement shall have become effective not later than 3:00 p.m. (New
York City time) on the date hereof.
The several obligations of the Underwriters hereunder are subject to
the following further conditions:
(a) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date:
(i) there shall not have occurred any downgrading, nor shall
any notice have been given of any intended or potential downgrading
or of any review for a possible change that does not indicate the
direction of the possible change, in the rating accorded any of the
Company's securities by any "nationally recognized statistical
rating organization," as such term is defined for purposes of Rule
436(g)(2) under the Securities Act; and
(ii) there shall not have occurred any change, or any
development involving a prospective change, in the condition,
financial or otherwise, or in the earnings, business or operations
of the Company from that set forth in the Prospectus (exclusive of
any amendments or supplements thereto subsequent to the date of this
Agreement) that, in your judgment, is material and adverse and that
makes it, in your judgment, impracticable to market the Shares on
the terms and in the manner contemplated in the Prospectus.
(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by the chief executive
officer and the chief financial officer of the Company, to the effect set
forth in Section 6(a)(i) above and to the effect that the representations
and warranties of the Company contained in this Agreement are true and
correct as of the Closing Date and that the Company has complied with all
of the agreements and satisfied all of the conditions on its part to be
performed or satisfied hereunder on or before the Closing Date.
The officers signing and delivering such certificate may rely upon
the best of their knowledge as to proceedings threatened.
(c) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by the Selling Stockholders
(or by their attorney-in-fact on their behalf), to the effect that the
representations and warranties of the Selling Stockholders contained in
this Agreement are true and correct as of the Closing Date and that each
Selling Stockholder has complied with all of the agreements and satisfied
all of the conditions on its part to be performed or satisfied hereunder
on or before the Closing Date.
(d) The Underwriters shall have received on the Closing Date an
opinion of Brobeck, Phleger & Harrison LLP, outside counsel for the
Company, dated the Closing Date, to the effect that:
(i) the Company has been duly incorporated, is validly
existing as a corporation in good standing under the laws of the
state of California, has the corporate power and authority to own
its property and to conduct its business as described in the
Registration Statement and Prospectus (and any amendment or
supplement thereto) and is duly qualified to transact business and
is in good standing in each jurisdiction in which the conduct of its
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<PAGE> 11
business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to so qualify
or be in good standing would not have a material adverse effect on
the Company;
(ii) to such counsel's knowledge, the Company does not own or
control, directly or indirectly, any corporation, association or
other entity;
(iii) the authorized capital stock of the Company is as set
forth in the description thereof set forth under the caption
"Description of Capital Stock" in the Prospectus;
(iv) the shares of Common Stock (including the Shares to be
sold by the Selling Shareholders) outstanding prior to the issuance
of the Shares to be sold by the Company have been duly authorized
and are validly issued and non-assessable and, to such counsel's
knowledge, fully paid; and, to such counsel's knowledge, except as
set forth in the Prospectus, the Company does not have outstanding
any options to purchase, or any preemptive rights arising under the
Company's Restated and Amended Articles of Incorporation (the
"Articles") or other rights to subscribe for or to purchase, any
securities or obligations convertible into, or any contracts or
commitments to issue or sell, shares of the Company's capital stock
or any such options, rights, convertible securities or obligations;
and all outstanding shares of capital stock were not issued in
violation of any preemptive rights or, to such counsel's knowledge,
rights of first refusal of the Company or other similar rights.
(v) the Shares to be sold by the Company have been duly
authorized and, when issued and delivered in accordance with the
terms of this Agreement, will be validly issued, fully paid and
non-assessable, and the issuance of such Shares will not be subject
to (A) any preemptive rights arising under the Articles or the
California General Corporation Law or (B) to such counsel's
knowledge, any similar rights that entitle or will entitle any
person to acquire any shares of capital stock of the Company upon
the issuance and sale of the Shares by the Company;
(vi) this Agreement has been duly authorized, executed and
delivered by the Company;
(vii) the execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement
will not (A) contravene the Articles or bylaws of the Company or (B)
to such counsel's knowledge, constitute a breach or default under
any agreement or other instrument binding upon the Company that is
an exhibit to the Registration Statement, or (C) result in any
violation of an existing provision of California or federal law or
regulation (other than applicable state securities and Blue Sky
laws, as to which such counsel need express no opinion) or any
ruling, judgment, order or decree known to such counsel and
applicable to the Company or any of its properties;
(viii) no consent, approval, authorization or order of, or
qualification with, any governmental body or agency is required for
the performance by the Company of its obligations under this
Agreement, except (A) as have been obtained under the Securities Act
or the Exchange Act, or (B) such as may be required by the
securities or Blue Sky laws
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<PAGE> 12
governing the purchase and distribution of the Shares, as to which
such counsel need express no opinion;
(ix) the statements (A) in the Prospectus under the captions
"Risk Factors--Shares Eligible for Future Sale,"
"Business--Customers and Strategic Relationships (except that such
counsel need express an opinion only as to the second paragraph in
such section)," "Management--Employee Benefit Plans (to the extent
of the description of the terms of the employee benefit plans),"
"Management--Limitation of Liability and Indemnification Matters,"
"Certain Transactions" (except that such counsel need express an
opinion only as to the paragraph entitled "Development Agreement
with Cisco Systems"), "Description of Capital Stock" and "Shares
Eligible for Future Sale" and (B) in the Registration Statement in
Items 14 and 15, in each case insofar as such statements constitute
summaries of the legal matters, documents or proceedings referred to
therein, fairly present the information called for with respect to
such legal matters, documents and proceedings and fairly summarize
the matters referred to therein;
(x) to such counsel's knowledge, (A) there are no legal,
regulatory or governmental proceedings pending or threatened to
which the Company is a party or to which any of the properties of
the Company is subject that are required to be described in the
Registration Statement or the Prospectus and are not so described or
of any California or federal statutes or regulations, and (B) there
are no agreements, contracts or other documents that are required to
be described in the Registration Statement or the Prospectus or to
be filed as exhibits to the Registration Statement that are not
described or filed as required, as the case may be;
(xi) the Company is not an "investment company" as such term
is defined in the Investment Company Act of 1940, as amended;
(xii) to such counsel's knowledge, except as described in the
Prospectus, no holder of any securities of the Company or any other
person has the right, contractual or otherwise, to cause the Company
to sell or otherwise issue them, or to permit them to underwrite the
sale of, any or the Shares or the right to have any Common Stock or
other securities of the Company included in the Registration
Statement or the right, as a result of the filing of the
Registration Statement, to require the Company to register under the
Securities Act any shares of Common Stock or other securities of the
Company, any registration rights in connection with the offering
contemplated hereby have been waived;
(xiii) such counsel is of the opinion that the Registration
Statement and Prospectus (except for financial statements and
schedules and other financial and statistical data derived
therefrom, as to which such counsel need not express any opinion)
comply as to form in all material respects with the Securities Act
and the applicable rules and regulations of the Commission
thereunder;
(xiv) such counsel (A) has no reason to believe that (other
than the financial statements, including the notes and schedules
thereto and the other financial and statistical data included
therein, as to which such counsel need not express any belief) at
the time the
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<PAGE> 13
Registration Statement became effective, the Registration Statement
contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to
make the statements therein not misleading and (B) has no reason to
believe that (other than the financial statements, including the
notes and schedules thereto and other financial and statistical data
derived therefrom, as to which such counsel need not express any
belief) the Prospectus, on the date hereof, contains any untrue
statement of a material fact or omits to state a material fact
necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading;
(xv) to such counsel's knowledge: (A) the Registration
Statement has become effective under the Securities Act, no stop
order proceedings with respect thereto have been instituted or are
pending, threatened or contemplated under the Securities Act; and
(B) any required filing of the Prospectus and any supplement thereto
pursuant to Rule 424(b) under the Securities Act has been made in
the manner and within the time period required by such Rule 424(b);
and
(xvi) the Shares to be sold under this Agreement to the
Underwriters have been approved for quotation on the Nasdaq National
Market, upon issuance as contemplated by this Agreement.
(e) The Underwriters shall have received on the Closing Date an
opinion of Brobeck, Phleger & Harrison LLP, counsel for the Selling
Shareholders, dated the Closing Date, to the effect that:
(i) this Agreement has been duly authorized, executed and
delivered by or on behalf of each of the Selling Shareholders;
(ii) the execution and delivery by each Selling Shareholder
of, and the performance by such Selling Shareholder of its
obligations under, this Agreement and the Custody Agreement and
Power of Attorney of such Selling Shareholder will not (A) result in
a violation of any existing provision of applicable California or
federal law (other than applicable state securities and Blue Sky
laws, as to which such counsel need express no opinion) or any
judgment, order or decree known to such counsel and applicable to
the Selling Shareholders and any of its properties, or, (B) to such
counsel's knowledge, constitute a breach or default under any
material agreement or other instrument binding upon such Selling
Shareholder;
(iii) no consent, approval, authorization or order of, or
qualification with, any governmental body or agency is required for
the performance by such Selling Shareholder of its obligations under
this Agreement or the Custody Agreement and Power of Attorney of
such Selling Shareholder, except such as may be required by the
securities or Blue Sky laws of the various states in connection with
offer and sale of the Shares;
(iv) each of the Selling Shareholders is the sole registered
owner of the Shares to be sold by such Selling Shareholder and has
the right, power and authority to enter into this Agreement and the
Custody Agreement and Power of Attorney of such Selling Shareholder
and to sell, transfer and deliver the Shares to be sold by such
Selling Shareholder;
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<PAGE> 14
(v) the Custody Agreement and the Power of Attorney of each
Selling Shareholder has been duly authorized, executed and delivered
by such Selling Shareholder and are valid and binding agreements of
such Selling Shareholder;
(vi) upon the delivery of and payment for the Shares as
contemplated in the Underwriting Agreement, each of the Underwriters
will receive valid marketable title to the Shares purchased by it
from such Selling Stockholder, free of any adverse claim, assuming
the Underwriters purchase such Shares for value, in good faith and
without notice of any adverse claim, as such terms are defined in
the Uniform Commercial Code in effect in the State of California.
(f) The Underwriters shall have received on the Closing Date an
opinion of Fulwider, Patton, Lee & Utecht, special patent counsel to the
Company, dated the Closing Date, to the effect that:
(i) the Company is listed in the records of the United States
Patent and Trademark Office ("PTO") as the holder of record of the
patent applications listed in Exhibit A to such counsel's opinion
(the "PATENT APPLICATIONS"). Three of such Patent Applications,
listed on Exhibit B to such counsel's opinion, have been allowed or
indicated as containing allowable subject matter. To such counsel's
knowledge, written assignments to the Company of all ownership
interests in the Patent Applications have been duly authorized,
executed and delivered by all of the inventors in accordance with
their terms. To such counsel's knowledge, there is no claim of any
party other than the Company to any ownership interest or lien with
respect to any of the Patent Applications;
(ii) the statements in the Prospectus under the captions "Risk
Factors -- Risks Associated With Intellectual Property Protection"
and "Business -- Intellectual Property," to such counsel knowledge,
insofar as such statements relate to the Patent Applications or any
legal matters, documents and proceedings relating thereto fairly
present the information called for with respect to such legal
matters, documents and proceedings and fairly summarize the matters
referred to therein;
(iii) to such counsel's knowledge, other than in connection
with assertions or inquiries made by patent office examiners in the
ordinary course of the prosecution of the Company's Patent
Applications, there is not pending or threatened in writing any
action, suit, proceeding or claim by others (A) challenging the
validity or scope of the Patent Applications or any other material
patent or patent applications held by or licensed to the Company, or
(B) other than as disclosed to the Underwriters in writing,
asserting that any patent is infringed by the activities of the
Company described in the Prospectus or by the manufacture, use or
sale of any of the Company's products or other items made and used
according to the Patent Applications held by or licensed to the
Company; and
(iv) to such counsel's knowledge, there is not pending or
threatened in writing any action, suit, proceeding or claim by the
Company asserting infringement on the part of any third party of the
Patent Applications or any other patents or patent applications held
by or licensed to the Company.
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<PAGE> 15
(g) The Underwriters shall have received on the Closing Date an
opinion of Irell & Manella LLP, special litigation counsel to the Company,
dated the Closing Date, to the effect that:
(i) the statements in the Prospectus under the caption
"Business -- Legal Proceedings," to such counsel's knowledge,
insofar as such statements relate to any legal matters, documents
and proceedings relating thereto fairly present the information
called for with respect to such legal matters, documents and
proceedings and fairly summarize the matters referred to therein;
and such counsel concurs with the Company's belief as stated in the
fourth sentence of the first paragraph of "Business--Legal
Proceedings."
(h) The Underwriters shall have received on the Closing Date an
opinion of Wilson Sonsini Goodrich & Rosati, counsel for the Underwriters,
dated the Closing Date, covering the matters referred to in Sections
6(d)(v), 6(d)(vi), 6(d)(ix) (but only as to the statements in the
Prospectus under "Description of Capital Stock" and "Underwriters"),
6(d)(xiii) and 6(d)(xiv) above.
With respect to Section 6(d)(xiii) above, Brobeck, Phleger &
Harrison LLP and Wilson Sonsini Goodrich & Rosati may state that their
belief is based upon their participation in the preparation of the
Registration Statement and Prospectus and any amendments or supplements
thereto and review and discussion of the contents thereof, but are without
independent check or verification, except as specified. With respect to
Section 6(e) above, Brobeck, Phleger & Harrison LLP may rely upon an
opinion or opinions of counsel for any Selling Shareholders and, with
respect to factual matters and to the extent such counsel deems
appropriate, upon the representations of each Selling Shareholder
contained herein and in the Custody Agreement and Power of Attorney of
such Selling Shareholder and in other documents and instruments; provided
that (A) each such counsel for the Selling Shareholders is satisfactory to
your counsel, (B) a copy of each opinion so relied upon is delivered to
you and is in form and substance satisfactory to your counsel, (C) copies
of such Custody Agreements and Powers of Attorney and of any such other
documents and instruments shall be delivered to you and shall be in form
and substance satisfactory to your counsel and Brobeck, Phleger & Harrison
LLP shall state in their opinion that they are justified in relying on
each such other opinion.
The opinions of Brobeck, Phleger & Harrison LLP described in
Sections 6(d) and 6(e) above (and any opinions of counsel for any Selling
Shareholder referred to in the immediately preceding paragraph) and the
opinions of Fulwider, Patton, Lee & Utecht and Irell & Manella LLP
described in Sections 6(f) and 6(g) above shall be rendered to the
Underwriters at the request of the Company or one or more of the Selling
Shareholders, as the case may be, and shall so state therein.
(i) The Underwriters shall have received, on each of the date hereof
and the Closing Date, a letter dated the date hereof or the Closing Date,
as the case may be, in form and substance satisfactory to the
Underwriters, from Ernst & Young LLP, independent public accountants,
containing statements and information of the type ordinarily included in
accountants' "comfort letters" to underwriters with respect to the
financial statements and certain financial information contained in the
Registration Statement and the Prospectus; provided, however, that the
letter delivered on the Closing Date shall use a "cut-off date" not
earlier than the date hereof.
(j) The "lock-up" agreements, each substantially in the form
attached hereto as Exhibit A hereto, between you and all officers and
directors of the Company and the stockholders listed on
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<PAGE> 16
Exhibit B hereto relating to sales and certain other dispositions of
shares of Common Stock or certain other securities, delivered to you on or
before the date hereof, shall be in full force and effect on the Closing
Date.
All of the agreements, opinions, certificates and letters mentioned
above or elsewhere in this Agreement shall be deemed in compliance with the
provisions hereof only if Wilson Sonsini Goodrich & Rosati, counsel for the
Underwriters, shall be reasonably satisfied that they comply in form and scope.
The several obligations of the Underwriters to purchase Additional
Shares hereunder are subject to the delivery to you on the Option Closing Date
of such documents as you may reasonably request with respect to the good
standing of the Company, the due authorization and issuance of the Additional
Shares, other matters related to the issuance of the Additional Shares and an
opinion or opinions of Brobeck Phleger and Harrison LLP in form and substance
satisfactory to Wilson Sonsini Goodrich & Rosati, counsel for the Underwriters.
7. COVENANTS OF THE COMPANY. In further consideration of the
agreements of the Underwriters herein contained, the Company covenants with each
Underwriter as follows:
(a) To furnish to you, without charge, six signed copies of the
Registration Statement (including exhibits thereto) and for delivery to
each other Underwriter a conformed copy of the Registration Statement
(without exhibits thereto) and to furnish to you in New York City, without
charge, prior to 10:00 a.m. New York City time on the business day
following the date of this Agreement and during the period mentioned in
Section 7(c) below, as many copies of the Prospectus and any supplements
and amendments thereto or to the Registration Statement as you may
reasonably request.
(b) Before amending or supplementing the Registration Statement or
the Prospectus, to furnish to you a copy of each such proposed amendment
or supplement and not to file any such proposed amendment or supplement to
which you reasonably object, and to file with the Commission within the
applicable period specified in Rule 424(b) under the Securities Act any
prospectus required to be filed pursuant to such Rule.
(c) If, during such period after the first date of the public
offering of the Shares as in the reasonable opinion of counsel for the
Underwriters the Prospectus is required by law to be delivered in
connection with sales by an Underwriter or dealer, any event shall occur
or condition exist as a result of which it is necessary to amend or
supplement the Prospectus in order to make the statements therein, in the
light of the circumstances when the Prospectus is delivered to a
purchaser, not misleading, or if, in the reasonable opinion of counsel for
the Underwriters, it is necessary to amend or supplement the Prospectus to
comply with applicable law, forthwith to prepare, file with the Commission
and furnish, at its own expense, to the Underwriters and to the dealers
(whose names and addresses you will furnish to the Company) to which
Shares may have been sold by you on behalf of the Underwriters and to any
other dealers upon request, either amendments or supplements to the
Prospectus so that the statements in the Prospectus as so amended or
supplemented will not, in the light of the circumstances when the
Prospectus is delivered to a purchaser, be misleading or so that the
Prospectus, as amended or supplemented, will comply with law.
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<PAGE> 17
(d) To endeavor to qualify the Shares for offer and sale under the
securities or Blue Sky laws of such jurisdictions as you shall reasonably
request.
(e) To make generally available to the Company's security holders
and to you as soon as practicable an earnings statement covering the
twelve-month period ending June 30, 1999 that satisfies the provisions of
Section 11(a) of the Securities Act and the rules and regulations of the
Commission thereunder.
(f) to (i) enforce the terms of each Lock-up Agreement, (ii) issue
stop-transfer instructions to the transfer agent for the Common Stock with
respect to any transaction or contemplated transaction that would
constitute a breach of or default under the applicable Lock-up Agreement
and (iii) upon written request of Morgan Stanley & Co. Incorporated, to
release from the Lock-up Agreements those shares of Common Stock held by
those holders set forth in such request. In addition, except with the
prior written consent of Morgan Stanley & Co. Incorporated, the Company
agrees until the expiration of the Lock-up Agreements (i) not to amend or
terminate, or waive any right under, any Lock-up Agreement, or take any
other action that would directly or indirectly have the same effect as an
amendment or termination, or waiver of any right under, any Lock-up
Agreement, that would permit any holder of shares of Common Stock, or
securities convertible into or exercisable or exchangeable for Common
Stock, to sell, make any short sale of, grant any option for the purchase
of, or otherwise transfer or dispose of, any of such shares of Common
Stock or other securities prior to the expiration of 90 days after the
date of the Prospectus, and (ii) not to consent to any sale, short sale,
grant of an option for the purchase of, or other disposition or transfer
of shares of Common Stock, or securities convertible into or exercisable
or exchangeable for Common Stock, subject to a Lock-up Agreement.
(g) to issue stop-transfer instructions to the transfer agent for
the Common Stock with respect to any shares of Common Stock acquired
pursuant to the exercise, after the date hereof and prior to the
expiration of the 90-day period after the date of the initial public
offering of the Shares, of any option granted under the Option Plan, which
stop-transfer instructions shall restrict the transfer of such shares
prior to the expiration of such 180-day period. In addition, the Company
agrees that, without the prior written consent of Morgan Stanley & Co.
Incorporated, it will not release any shareholder or option holder from
the market standoff provision imposed by the Company pursuant to the terms
of the Option Plan earlier than 90 days after the date of the initial
public offering of the Shares.
8. EXPENSES. Whether or not the transactions contemplated in this
Agreement are consummated or this Agreement is terminated, the Company agrees to
pay or cause to be paid all expenses incident to the performance of the Sellers'
obligations under this Agreement, including: (i) the fees, disbursements and
expenses of the Company's counsel, the Company's accountants and counsel for the
Selling Shareholders in connection with the registration and delivery of the
Shares under the Securities Act and all other fees or expenses in connection
with the preparation and filing of the Registration Statement, any preliminary
prospectus, the Prospectus and amendments and supplements to any of the
foregoing, including all printing costs associated therewith, and the mailing
and delivering of copies thereof to the Underwriters and dealers, in the
quantities hereinabove specified, (ii) all costs and expenses related to the
transfer and delivery of the Shares to the Underwriters, including any transfer
or other taxes payable thereon, (iii) the cost of printing or producing any Blue
Sky or Legal Investment memorandum in connection with the offer and sale of the
Shares under securities laws of various states and other jurisdictions and all
expenses in connection with the qualification of the Shares for offer and sale
under state securities laws as provided in paragraph (d) of
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<PAGE> 18
Section 7 hereof, including filing fees and the reasonable fees, in the amount
not to exceed $15,000, and disbursements of counsel for the Underwriters in
connection with such qualification and in connection with the Blue Sky or Legal
Investment memorandum, (iv) all filing fees and the reasonable fees, in the
amount not to exceed $15,000, and disbursements of counsel to the Underwriters
incurred in connection with the review and qualification of the offering of the
Shares by the NASD, (v) all costs and expenses incident to listing the Shares on
the Nasdaq National Market, (vi) the cost of printing certificates representing
the Shares, (vii) the costs and charges of any transfer agent, registrar or
depositary, (viii) the costs and expenses of the Company relating to investor
presentations on any "road show" undertaken in connection with the marketing of
the offering of the Shares, including, without limitation, expenses associated
with the production of road show slides and graphics, fees and expenses of any
consultants engaged in connection with the road show presentations with the
prior approval of the Company, and one-half of the total cost of all travel and
lodging expenses of the representatives and officers of the Company and the
representatives and officers of the Underwriters and any consultants to such
parties, and one-half the cost of any aircraft chartered in connection with the
road show, (ix) all expenses in connection with any offer and sale of the Shares
outside of the United States, including filing fees and the reasonable fees and
disbursements of counsel for the Underwriters in connection with offers and
sales outside of the United States, and (x) all other costs and expenses
incident to the performance of the obligations of the Company hereunder for
which provision is not otherwise made in this Section. It is understood,
however, that except as provided in this Section, Section 9 entitled "Indemnity
and Contribution", and the last paragraph of Section 11 below, the Underwriters
will pay all of their costs and expenses, including fees and disbursements of
their counsel, stock transfer taxes payable on resale of any of the Shares by
them and any advertising expenses connected with any offers they may make.
The provisions of this Section shall not supersede or otherwise
affect any agreement that the Sellers may otherwise have for the allocation of
such expenses among themselves.
9. INDEMNITY AND CONTRIBUTION.
(a) The Company and Founders, jointly and severally, agree to
indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of either Section 15 of the
Securities Act or Section 20 of the Securities Exchange Act of 1934, as
amended (the "EXCHANGE ACT"), from and against any and all losses, claims,
damages and liabilities (including, without limitation, any legal or other
expenses reasonably incurred in connection with defending or investigating
any such action or claim) caused by any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement or
any amendment thereof, any preliminary prospectus or the Prospectus (as
amended or supplemented if the Company shall have furnished any amendments
or supplements thereto), or caused by any omission or alleged omission to
state therein a material fact required to be stated therein or necessary
to make the statements therein not misleading, except insofar as such
losses, claims, damages or liabilities are caused by any such untrue
statement or omission or alleged untrue statement or omission based upon
information relating to any Underwriter furnished to the Company in
writing by such Underwriter through you expressly for use therein.
Notwithstanding the foregoing provisions of this paragraph (a), the
Company and each of the Underwriters agrees with each of the Founders that
any claim of such Underwriter against such Founder for indemnification,
reimbursement or advancement of expenses pursuant to this Section 9(a) or
for breach of any representation or warranty in Section 1 hereof shall
first be sought by such Underwriter to be satisfied in full by the Company
and, subject to the limitation on the aggregate liability of the Founders
set forth below, shall be satisfied by the Founders only to the extent
that such claim has not been satisfied in full by the Company within the
60-day period following the date
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<PAGE> 19
requested for payment in accordance with the terms of this Agreement. The
liability of each Founder under this Agreement shall be limited to an
amount equal to the net proceeds received by such Founder from the
offering of the Shares sold by such Founder, except with respect to (i)
any breaches of the representations and warranties set forth in paragraphs
(a), (c), (e) or (f) of Section 2 hereof, (ii) intentional
misrepresentation or (iii) fraud.
(b) Each Selling Shareholder (other than the Founders) agrees,
severally and not jointly, to indemnify and hold harmless each Underwriter
and each person, if any, who controls any Underwriter within the meaning
of either Section 15 of the Securities Act or Section 20 of the Exchange
Act, or is under common control with, or is controlled by, any
Underwriter, and the Company, its directors, its officers who sign the
Registration Statement and each person, if any, who controls the Company
within the meaning of either Section 15 of the Securities Act or Section
20 of the Exchange Act, from and against any and all losses, claims,
damages and liabilities (including, without limitation, any legal or other
expenses reasonably incurred in connection with defending or investigating
any such action or claim) caused by any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement or
any amendment thereof, any preliminary prospectus or the Prospectus (as
amended or supplemented if the Company shall have furnished any amendments
or supplements thereto), or caused by any omission or alleged omission to
state therein a material fact required to be stated therein or necessary
to make the statements therein not misleading, but only with reference to
information relating to such Selling Shareholder furnished in writing by
or on behalf of such Selling Shareholder expressly for use in the
Registration Statement, any preliminary prospectus, the Prospectus or any
amendments or supplements thereto, and except insofar as such losses,
claims, damages or liabilities are caused by any such untrue statement or
omission or alleged untrue statement or omission based upon information
relating to any Underwriter furnished to the Company in writing by such
Underwriter through you expressly for use therein. The liability of each
Selling Shareholder under the indemnity agreement contained in this
paragraph shall be limited to an amount equal to the net proceeds received
by such Selling Shareholder from the offering of the Shares sold by such
Selling Shareholder.
(c) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, the Selling Shareholders, the directors of
the Company, the officers of the Company who sign the Registration
Statement and each person, if any, who controls the Company or any Selling
Shareholder within the meaning of either Section 15 of the Securities Act
or Section 20 of the Exchange Act from and against any and all losses,
claims, damages and liabilities (including, without limitation, any legal
or other expenses reasonably incurred in connection with defending or
investigating any such action or claim) caused by any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement or any amendment thereof, any preliminary prospectus or the
Prospectus (as amended or supplemented if the Company shall have furnished
any amendments or supplements thereto), or caused by any omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, but
only with reference to information relating to such Underwriter furnished
to the Company in writing by such Underwriter through you expressly for
use in the Registration Statement, any preliminary prospectus, the
Prospectus or any amendments or supplements thereto.
(d) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of
which indemnity may be sought pursuant to Section 9(a), 9(b) or 9(c), such
person (the "INDEMNIFIED PARTY") shall promptly notify the person against
whom such
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<PAGE> 20
indemnity may be sought (the "INDEMNIFYING PARTY") in writing and the
Indemnifying Party, upon request of the Indemnified Party, shall retain
counsel reasonably satisfactory to the Indemnified Party to represent the
Indemnified Party and any others the Indemnifying Party may designate in
such proceeding and shall pay the fees and disbursements of such counsel
related to such proceeding. In any such proceeding, any Indemnified Party
shall have the right to retain its own counsel, but the fees and expenses
of such counsel shall be at the expense of such Indemnified Party unless
(i) the Indemnifying Party and the Indemnified Party shall have mutually
agreed to the retention of such counsel or (ii) the named parties to any
such proceeding (including any impleaded parties) include both the
Indemnifying Party and the Indemnified Party and representation of both
parties by the same counsel would be inappropriate due to actual or
potential differing interests between them. It is understood that the
Indemnifying Party shall not, in respect of the legal expenses of any
Indemnified Party in connection with any proceeding or related proceedings
in the same jurisdiction, be liable for (i) the fees and expenses of more
than one separate firm (in addition to any local counsel) for all
Underwriters and all persons, if any, who control any Underwriter within
the meaning of either Section 15 of the Securities Act or Section 20 of
the Exchange Act, (ii) the fees and expenses of more than one separate
firm (in addition to any local counsel) for the Company, its directors,
its officers who sign the Registration Statement and each person, if any,
who controls the Company within the meaning of either such Section and
(iii) the fees and expenses of more than one separate firm (in addition to
any local counsel) for all Selling Shareholders and all persons, if any,
who control any Selling Shareholder within the meaning of either such
Section, and that all such fees and expenses shall be reimbursed as they
are incurred. In the case of any such separate firm for the Underwriters
and such control persons of any Underwriters, such firm shall be
designated in writing by Morgan Stanley & Co. Incorporated. In the case of
any such separate firm for the Company, and such directors, officers and
control persons of the Company, such firm shall be designated in writing
by the Company. In the case of any such separate firm for the Selling
Shareholders and such control persons of any Selling Shareholders, such
firm shall be designated in writing by the persons named as
attorneys-in-fact for the Selling Shareholders under the Powers of
Attorney. The Indemnifying Party shall not be liable for any settlement of
any proceeding effected without its written consent, but if settled with
such consent or if there be a final judgment for the plaintiff, the
Indemnifying Party agrees to indemnify the Indemnified Party from and
against any loss or liability by reason of such settlement or judgment. No
Indemnifying Party shall, without the prior written consent of the
Indemnified Party, effect any settlement of any pending or threatened
proceeding in respect of which any Indemnified Party is or could have been
a party and indemnity could have been sought hereunder by such Indemnified
Party, unless such settlement includes an unconditional release of such
Indemnified Party from all liability on claims that are the subject matter
of such proceeding.
(e) To the extent the indemnification provided for in Section 9(a),
9(b) or 9(c) is unavailable to an Indemnified Party or insufficient in
respect of any losses, claims, damages or liabilities referred to therein,
then each Indemnifying Party under such paragraph, in lieu of indemnifying
such Indemnified Party thereunder, shall contribute to the amount paid or
payable by such Indemnified Party as a result of such losses, claims,
damages or liabilities (i) in such proportion as is appropriate to reflect
the relative benefits received by the Indemnifying Party or parties on the
one hand and the Indemnified Party or parties on the other hand from the
offering of the Shares or (ii) if the allocation provided by clause
9(e)(i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in
clause 9(e)(i) above but also the relative fault of the Indemnifying Party
or parties on the one hand and of the Indemnified Party or parties on the
other hand in connection with the statements or omissions that resulted in
such losses,
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<PAGE> 21
claims, damages or liabilities, as well as any other relevant equitable
considerations. The relative benefits received by the Sellers on the one
hand and the Underwriters on the other hand in connection with the
offering of the Shares shall be deemed to be in the same respective
proportions as the net proceeds from the offering of the Shares (before
deducting expenses) received by each Seller and the total underwriting
discounts and commissions received by the Underwriters, in each case as
set forth in the table on the cover of the Prospectus, bear to the
aggregate Public Offering Price of the Shares. The relative fault of the
Sellers on the one hand and the Underwriters on the other hand shall be
determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Sellers or by the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent
such statement or omission. The Underwriters' respective obligations to
contribute pursuant to this Section 9 are several in proportion to the
respective number of Shares they have purchased hereunder, and not joint.
(f) The Sellers and the Underwriters agree that it would not be just
or equitable if contribution pursuant to this Section 9 were determined by
pro rata allocation (even if the Underwriters were treated as one entity
for such purpose) or by any other method of allocation that does not take
account of the equitable considerations referred to in Section 9(e). The
amount paid or payable by an Indemnified Party as a result of the losses,
claims, damages and liabilities referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such Indemnified
Party in connection with investigating or defending any such action or
claim. Notwithstanding the provisions of this Section 9, no Underwriter
shall be required to contribute any amount in excess of the amount by
which the total price at which the Shares underwritten by it and
distributed to the public were offered to the public exceeds the amount of
any damages that such Underwriter has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepre sentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The remedies provided for in this Section 9 are not
exclusive and shall not limit any rights or remedies which may otherwise
be available to any Indemnified Party at law or in equity.
(g) The indemnity and contribution provisions contained in this
Section 9 and the representations, warranties and other statements of the
Company and the Selling Shareholders contained in this Agreement shall
remain operative and in full force and effect regardless of (i) any
termination of this Agreement, (ii) any investigation made by or on behalf
of any Underwriter or any person controlling any Underwriter, any Selling
Shareholder or any person controlling any Selling Shareholder, or the
Company, its officers or directors or any person controlling the Company
and (iii) acceptance of and payment for any of the Shares.
10. TERMINATION. This Agreement shall be subject to termination by
notice given by you to the Company, if (a) after the execution and delivery of
this Agreement and prior to the Closing Date (i) trading generally shall have
been suspended or materially limited on or by, as the case may be, any of the
New York Stock Exchange, the American Stock Exchange, the NASD, the Chicago
Board of Options Exchange, the Chicago Mercantile Exchange or the Chicago Board
of Trade, (ii) trading of any securities of the Company shall have been
suspended on any exchange or in any over-the-counter market, (iii) a general
moratorium on commercial banking activities in New York shall have been declared
by either federal or New York State authorities or (iv) there shall have
occurred any outbreak or escalation of hostilities or any change in financial
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<PAGE> 22
markets or any calamity or crisis that, in your judgment, is material and
adverse and (b) in the case of any of the events specified in clauses 10(a)(i)
through 10(a)(iv), such event, singly or together with any other such event,
makes it, in your judgment, impracticable to market the Shares on the terms and
in the manner contemplated in the Prospectus.
11. EFFECTIVENESS; DEFAULTING UNDERWRITERS. This Agreement shall
become effective upon the execution and delivery hereof by the parties hereto.
If, on the Closing Date or the Option Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase Shares
that it has or they have agreed to purchase hereunder on such date, and the
aggregate number of Shares which such defaulting Underwriter or Underwriters
agreed but failed or refused to purchase is not more than one-tenth of the
aggregate number of the Shares to be purchased on such date, the other
Underwriters shall be obligated severally in the proportions that the number of
Firm Shares set forth opposite their respective names in Schedule II bears to
the aggregate number of Firm Shares set forth opposite the names of all such
non-defaulting Underwriters, or in such other proportions as you may specify, to
purchase the Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase on such date; provided, however, that in no event
shall the number of Shares that any Underwriter has agreed to purchase pursuant
to this Agreement be increased pursuant to this Section 11 by an amount in
excess of one-ninth of such number of Shares without the written consent of such
Underwriter. If, on the Closing Date, any Underwriter or Underwriters shall fail
or refuse to purchase Firm Shares and the aggregate number of Firm Shares with
respect to which such default occurs is more than one-tenth of the aggregate
number of Firm Shares to be purchased, and arrangements satisfactory to you, the
Company and the Selling Shareholders for the purchase of such Firm Shares are
not made within 36 hours after such default, this Agreement shall terminate
without liability on the part of any non-defaulting Underwriter, the Company or
the Selling Shareholders. In any such case either you or the relevant Sellers
shall have the right to postpone the Closing Date, but in no event for longer
than seven days, in order that the required changes, if any, in the Registration
Statement and in the Prospectus or in any other documents or arrangements may be
effected. If, on the Option Closing Date, any Underwriter or Underwriters shall
fail or refuse to purchase Additional Shares and the aggregate number of
Additional Shares with respect to which such default occurs is more than
one-tenth of the aggregate number of Additional Shares to be purchased, the
non-defaulting Underwriters shall have the option to (i) terminate their
obligation hereunder to purchase Additional Shares or (ii) purchase not less
than the number of Additional Shares that such non-defaulting Underwriters would
have been obligated to purchase in the absence of such default. Any action taken
under this paragraph shall not relieve any defaulting Underwriter from liability
in respect of any default of such Underwriter under this Agreement.
If this Agreement shall be terminated by the Underwriters, or any of
them, because of any failure or refusal on the part of any Seller to comply with
the terms or to fulfill any of the conditions of this Agreement, or if for any
reason any Seller shall be unable to perform its obligations under this
Agreement, the Sellers will reimburse the Underwriters or such Underwriters as
have so terminated this Agreement with respect to themselves, severally, for all
out-of-pocket expenses (including the fees and disbursements of their counsel)
reasonably incurred by such Underwriters in connection with this Agreement or
the offering contemplated hereunder.
12. COUNTERPARTS. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
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<PAGE> 23
13. APPLICABLE LAW. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York.
14. HEADINGS. The headings of the sections of this Agreement have
been inserted for convenience of reference only and shall not be deemed a part
of this Agreement.
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<PAGE> 24
Very truly yours,
BROADCOM CORPORATION
By:
-------------------------------------
Name: Henry T. Nicholas
Title: Co-Chairman and
Chief Executive Officer
FOUNDERS
------------------------------------------
Henry T. Nicholas
------------------------------------------
Henry Samueli
The Selling Shareholders named in
Schedule I hereto, acting severally
By:
-------------------------------------
Attorney-in-Fact
Accepted as of the date hereof
Morgan Stanley & Co. Incorporated
BT Alex. Brown Incorporated
Credit Suisse First Boston Corporation
Hambrecht & Quist LLC
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Acting severally on behalf
of themselves and the
several Underwriters named in
Schedule II hereto.
By: Morgan Stanley & Co. Incorporated
By:
----------------------------------
Name:
Title:
-24-
<PAGE> 25
SCHEDULE I
<TABLE>
<CAPTION>
NUMBER OF
FIRM SHARES
SELLING SHAREHOLDER TO BE SOLD
- ---------------------- -----------
<S> <C>
Henry T. Nicholas III
Henry Samueli
[others]
---------
Total ................................................. 2,607,500
=========
</TABLE>
<PAGE> 26
SCHEDULE II
<TABLE>
<CAPTION>
NUMBER OF
FIRM SHARES
UNDERWRITER TO BE PURCHASED
- ----------- ---------------
<S> <C>
Morgan Stanley & Co. Incorporated...............................
BT Alex. Brown Incorporated.....................................
Credit Suisse First Boston Corporation..........................
Hambrecht & Quest LLC...........................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated..............
[others]........................................................
---------
Total.................................................. 3,000,000
=========
</TABLE>
<PAGE> 27
SCHEDULE III
<TABLE>
<CAPTION>
MAXIMUM
NUMBER OF
ADDITIONAL
SHARES
SELLING SHAREHOLDER TO BE SOLD
- ------------------- ----------
<S> <C>
Henry T. Nicholas, III
Henry Samueli
[others]
-------
Total................................................... 372,500
=======
</TABLE>
<PAGE> 28
EXHIBIT A
[FORM OF LOCK-UP LETTER]
________________, 1998
Morgan Stanley & Co. Incorporated
BT Alex. Brown Incorporated
Credit Suisse First Boston Corporation
Hambrecht & Quist LLC
Merrill Lynch, Pierce, Fenner & Smith Incorporated
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, NY 10036
Dear Sirs and Mesdames:
The undersigned understands that Morgan Stanley & Co. Incorporated
("MORGAN STANLEY") proposes to enter into an Underwriting Agreement (the
"UNDERWRITING AGREEMENT") with Broadcom Corporation, a California corporation
(together with any successor Delaware corporation, the "COMPANY") providing for
the public offering (the "PUBLIC OFFERING") by the several Underwriters,
including Morgan Stanley (the "UNDERWRITERS"), of ______________ shares (the
"SHARES") of the Common Stock (including par value) of the Company (the "COMMON
STOCK").
To induce the Underwriters that may participate in the Public Offering to
continue their efforts in connection with the Public Offering, the undersigned
hereby agrees that, without the prior written consent of Morgan Stanley on
behalf of the Underwriters, it will not, during the period commencing on the
date hereof and ending 90 days after the date of the final prospectus relating
to the Public Offering (the "PROSPECTUS"), (1) 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, lend, 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 (2) enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of Common Stock,
whether any such transaction described in clause (1) or (2) above is to be
settled by delivery of Common Stock or such other securities, in cash or
otherwise. The foregoing sentence shall not apply to (a) the sale of any
<PAGE> 29
Shares to the Underwriters pursuant to the Underwriting Agreement or (b)
transactions relating to shares of Common Stock or other securities acquired in
open market transactions after the completion of the Public Offering. In
addition, the undersigned agrees that, without the prior written consent of
Morgan Stanley on behalf of the Underwriters, it will not, during the period
commencing on the date hereof and ending 180 days after the date of the
Prospectus, make any demand for or exercise any right with respect to, the
registration of any shares of Common Stock or any security convertible into or
exercisable or exchangeable for Common Stock.
The undersigned hereby acknowledges that this agreement is valid and
binding notwithstanding any prior agreements relating to this matter and further
agrees and consents to the entry of stop-transfer instructions with the
Company's transfer agent against the transfer of shares of Common Stock held by
the undersigned except in compliance with the terms and conditions of this
agreement. The undersigned also understands that the Company and the
Underwriters will proceed with the Public Offering in reliance on this Lock-Up
Agreement. Whether or not the Public Offering actually occurs depends on a
number of factors, including market conditions. Any Public Offering will only be
made pursuant to an Underwriting Agreement, the terms of which are subject to
negotiation between the Company and the Underwriters.
Very truly yours,
--------------------------------------
Name of Shareholder
--------------------------------------
Signature of Authorized Signatory
--------------------------------------
Print Name and Title, if applicable
<PAGE> 30
EXHIBIT B
LIST OF PERSONS WHO HAVE SIGNED LOCK-UP AGREEMENTS
-3-
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated January 16, 1998, except for Note 9, as to which the
date is March 31, 1998 and Note 7, as to which the date is September 25, 1998 in
Amendment No. 1 to the Registration Statement (Form S-1 No. 333-65117) and
related Prospectus of Broadcom Corporation to be filed on October 14, 1998.
/s/ Ernst & Young LLP
Orange County, California
October 12, 1998
