<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1998
--------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________.
Commission file number: 000-23993
BROADCOM CORPORATION
(Exact name of registrant as specified in its charter)
CALIFORNIA 33-0480482
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.
16251 LAGUNA CANYON ROAD
IRVINE, CALIFORNIA 92618
(Address of principal executive offices and zip code)
(949) 450-8700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(D) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
The number of shares of the registrant's Common Stock, $0.0001 par value,
outstanding as of November 11, 1998: 10,375,996 shares of Class A Common Stock
and 34,245,739 shares of Class B Common Stock.
<PAGE> 2
BROADCOM CORPORATION
QUARTERLY REPORT ON
FORM 10-Q
THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 1998
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets at September 30, 1998 (unaudited)
and December 31, 1997 1
Unaudited Condensed Statements of Operations for the Three
and Nine Months Ended September 30, 1998 and 1997 2
Unaudited Condensed Statements of Cash Flows for the Nine
Months Ended September 30, 1998 and 1997 3
Notes to Unaudited Condensed Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 2. Change in Securities and Use of Proceeds 30
Item 3. Defaults Upon Senior Securities 31
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 5. Other Information 31
Item 6. Exhibits and Reports on Form 8-K 32
Signatures 33
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BROADCOM CORPORATION
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 42,706 $ 22,116
Short-term investments 14,944 --
Accounts receivable, net 22,356 9,913
Inventory 5,877 2,705
Other current assets 6,514 1,785
---------- ---------
Total current assets 92,397 36,519
Property and equipment, net 24,649 8,449
Long-term investments 43,152 --
Other assets 2,139 276
---------- ---------
Total assets $ 162,337 $ 45,244
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 13,465 $ 7,380
Wages and related benefits 2,735 846
Accrued liabilities 4,284 933
Current portion of long-term debt 110 1,098
--------- ---------
Total current liabilities 20,594 10,257
Long-term debt, less current portion -- 1,595
Shareholders' equity:
Convertible preferred stock -- 28,617
Common stock 124,655 7,129
Notes receivable from employees (3,016) (3,362)
Deferred compensation (5,550) (1,090)
Retained earnings 25,654 2,098
--------- ---------
Total shareholders' equity 141,743 33,392
--------- ---------
Total liabilities and shareholders' equity $ 162,337 $ 45,244
========= =========
</TABLE>
See accompanying notes.
1
<PAGE> 4
BROADCOM CORPORATION
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
Product revenue $ 51,075 $ 8,096 $ 129,568 $ 16,265
Development revenue 1,410 1,159 3,429 3,416
--------- --------- --------- ---------
Total revenue 52,485 9,255 132,997 19,681
Cost of revenue 23,658 4,047 57,870 8,857
--------- --------- --------- ---------
Gross profit 28,827 5,208 75,127 10,824
Operating expense:
Research and development 10,877 5,503 25,496 11,708
Selling, general and administrative 6,486 2,670 15,808 5,211
--------- --------- --------- ---------
Total operating expense 17,363 8,173 41,304 16,919
--------- --------- --------- ---------
Income (loss) from operations 11,464 (2,965) 33,823 (6,095)
Interest and other income (expense), net 1,116 (41) 2,417 22
--------- --------- --------- ---------
Income (loss) before income taxes 12,580 (3,006) 36,240 (6,073)
Provision (benefit) for income taxes 4,403 (1,202) 12,684 (2,428)
--------- --------- --------- ---------
Net income (loss) $ 8,177 $ (1,804) $ 23,556 $ (3,645)
========= ========= ========= =========
Basic earnings (loss) per share $ 0.20 $ (0.07) $ 0.64 $ (0.14)
========= ========= ========= =========
Diluted earnings (loss) per share $ 0.17 $ (0.07) $ 0.51 $ (0.14)
========= ========= ========= =========
Weighted average shares (basic) 41,205 27,024 36,591 26,295
========= ========= ========= =========
Weighted average shares (diluted) 48,425 27,024 45,866 26,295
========= ========= ========= =========
</TABLE>
See accompanying notes.
2
<PAGE> 5
BROADCOM CORPORATION
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 23,556 $ (3,645)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 5,213 2,159
Amortization of deferred compensation 909 --
Change in operating assets and liabilities:
Accounts receivable (12,443) (2,353)
Inventory (3,172) (20)
Other assets (6,754) (180)
Accounts payable 6,085 2,336
Income taxes payable 4,313 (4,278)
Other accrued liabilities 5,240 1,462
-------- --------
Net cash provided by (used in) operating activities 22,947 (4,519)
INVESTING ACTIVITIES
Purchases of property and equipment (21,413) (4,009)
Purchases of held-to-maturity investments (58,096) --
-------- --------
Net cash used in investing activities (79,509) (4,009)
FINANCING ACTIVITIES
Proceeds from bank term loan -- 3,000
Payments on bank term loan (2,500) (250)
Payments on capital lease obligations (83) (52)
Proceeds from issuance of Preferred Stock -- 22,689
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 565 682
-------- --------
Net cash provided by financing activities 77,152 26,069
-------- --------
Increase in cash and cash equivalents 20,590 17,541
Cash and cash equivalents at beginning of period 22,116 4,657
-------- --------
Cash and cash equivalents at end of period $ 42,706 $ 22,198
======== ========
Supplemental disclosure of non-cash activities:
Notes receivable from employees in connection
with exercise of stock options $ 191 $ 729
======== ========
</TABLE>
See accompanying notes.
3
<PAGE> 6
BROADCOM CORPORATION
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
1. BASIS OF PRESENTATION
The condensed financial statements included herein are unaudited;
however, they contain all normal recurring accruals and adjustments which, in
the opinion of management, are necessary to present fairly the financial
position of Broadcom Corporation (the "Company") at September 30, 1998 and the
results of its operations and cash flows for the nine months ended September 30,
1998 and 1997. It should be understood that accounting measurements at interim
dates inherently involve greater reliance on estimates than at year-end. The
results of operations for the three and nine months ended September 30, 1998 are
not necessarily indicative of the results to be expected for the full year.
The accompanying unaudited condensed financial statements do not include
footnotes and certain financial presentations normally required under generally
accepted accounting principles. Therefore, these financial statements should be
read in conjunction with the audited financial statements and notes thereto for
the year ended December 31, 1997, included in the Company's Final Prospectus
dated October 20, 1998 (the "Final Prospectus"), filed as part of a Registration
Statement on Form S-1, as amended (Reg. No. 333-65117).
2. EARNINGS PER SHARE
The following table sets forth the computation of earnings (loss) per
share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1998 1997 1998 1997
--------- -------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Numerator: Net income (loss) $ 8,177 $ (1,804) $ 23,556 $ (3,645)
========= ======== ======== ========
Denominator:
Weighted-average shares
outstanding 43,827 30,557 39,711 29,841
Less: nonvested common shares
outstanding (2,622) (3,533) (3,120) (3,546)
--------- -------- -------- --------
Denominator for basic earnings per
common share 41,205 27,024 36,591 26,295
Effect of dilutive securities:
Nonvested common shares 1,673 -- 1,917 --
Stock options 5,540 -- 4,538 --
Warrants 7 -- 2
Convertible preferred stock -- -- 2,818 --
--------- -------- -------- --------
Denominator for diluted earnings
per common share 48,425 27,024 45,866 26,295
========= ======== ======== ========
Basic earnings (loss) per share $ 0.20 $ (0.07) $ 0.64 $ (0.14)
========= ======== ======== ========
Diluted earnings (loss) per share $ 0.17 $ (0.07) $ 0.51 $ (0.14)
========= ======== ======== ========
</TABLE>
4
<PAGE> 7
3. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" ("SFAS
130"), which establishes standards for reporting and displaying comprehensive
income and its components in the financial statements. For the three and nine
month periods ended September 30, 1998 and 1997, the Company did not have any
components of comprehensive income as defined in SFAS 130.
4. INVESTMENTS
The Company accounts for its investments in debt securities pursuant to
SFAS 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. At September 30, 1998, all of the Company's investments
were in state, municipal, county and United States government agency 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 September 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 $23,153 $ -- $ (1) $23,152
Short-term investments 14,944 33 -- 14,977
Long-term investments 43,152 154 -- 43,306
------- ---- ---- -------
Securities classified as
held-to-maturity $81,249 $187 $ (1) $81,435
======= ==== ==== =======
</TABLE>
Scheduled maturities of held-to-maturity investments at September 30, 1998
were as follows:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
--------- -------
(In thousands)
<S> <C> <C>
Debt securities maturing within:
One year $38,097 $38,129
Two years 43,152 43,306
------- -------
$81,249 $81,435
======= =======
</TABLE>
5
<PAGE> 8
5. INVENTORY
Inventory is stated at the lower of cost (first-in, first-out) or market
and consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(In thousands)
<S> <C> <C>
Raw materials $ 1,282 $ 670
Work in process 3,132 1,645
Finished goods 5,286 2,076
------- -------
9,700 4,391
Less reserve for excess and
obsolete inventory (3,823) (1,686)
------- -------
$ 5,877 $ 2,705
======= =======
</TABLE>
6. LONG-TERM DEBT
The following is a summary of the Company's long-term debt:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- -----------
(In thousands)
<S> <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% 110 193
------ -------
110 2,693
Less current portion of long-term debt (110) (1,098)
------ -------
$ -- $ 1,595
====== =======
</TABLE>
7. SHAREHOLDERS' EQUITY
Stock Option Plan
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 Amended
and Restated 1994 Stock Option Plan (the "1994 Plan"). On April 8, 1998, the
1998 Plan effective date, outstanding options under the 1994 Plan and under the
1998 Special Stock Option Plan (the "Special Plan") (a plan adopted to permit
options to be granted with certain terms permitted by the 1998 Plan prior to the
1998 Plan becoming effective) were incorporated into the 1998 Plan, and no
further option grants will be made under the 1994 Plan or the Special Plan. A
total of 15,948,439 shares of Common Stock have been authorized for issuance
under the 1998 Plan (including shares reserved for issuance for options
outstanding under the 1994 Plan and Special Plan). As of September 30, 1998,
options to purchase an aggregate of 7,778,024 shares of Class B Common Stock
were outstanding at a weighted average exercise price per share of $5.25 and
options to purchase an aggregate of 920,050 shares of Class A Common Stock were
outstanding at a weighted average exercise price per share of $37.03.
1998 Employee Stock Purchase Plan
The 1998 Employee Stock Purchase Plan (the "Purchase Plan") was adopted on
February 3, 1998 and became effective on April 16, 1998. The Purchase Plan
allows eligible employees to designate up to 15% of their total compensation to
purchase shares of the Company's Class A Common Stock, at semi-annual intervals,
at 85% of fair market value (determined as provided in the Purchase Plan). The
Company has reserved 750,000 shares of Class A Common Stock for issuance under
the Purchase Plan.
6
<PAGE> 9
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 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.
Follow-on Public Offering
In October 1998, the Company completed a follow-on public offering of
3,450,000 shares of its Class A Common Stock. Of these shares, the Company sold
470,000 shares (including 77,500 shares in connection with the exercise of the
underwriters' over-allotment option), and selling shareholders sold 2,980,000
shares (including 372,500 shares in connection with the exercise of the
underwriters' over-allotment option), at a price of $69 per share. The Company
received net aggregate proceeds of approximately $30.6 million after deducting
underwriting discounts and commissions and estimated offering costs. The net
proceeds from the follow-on public offering have not been included in the
accompanying balance sheet at September 30, 1998.
Stock Split
On March 9, 1998, prior to the Offering, the Company effected a 3-for-2
stock split of the Company's Class B Common Stock. All share and per share
amounts in the accompanying financial statements have been retroactively
restated to reflect this change in the Company's capital structure.
8. LITIGATION
In December 1996, Stanford Telecommunications, Inc. ("STI") 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
7
<PAGE> 10
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, 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 discovery period has been closed,
subject to the completion by the parties of certain additional discovery no
later than November 27, 1998. The Company has filed new motions for summary
judgment based on recent admissions and other events. The Company's renewed
motions for summary judgment are expected to be heard in December 1998 or
January 1999, with trial expected to commence on or before February 16, 1999.
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.
8
<PAGE> 11
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 March 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 for a certain period of time.
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 Class B Common Stock into
which such shares of Series E Preferred Stock would have converted upon
consummation of the initial public offering). In the alternative, Mr. Davis may
be entitled to unspecified damages and punitive damages should he prevail. 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.
9
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAUTIONARY STATEMENT
The following discussion and other sections of this Form 10-Q may contain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, Section 21E of the Securities Exchange Act of
1934, as amended, and Section 27A of the Securities Act of 1933, as amended, and
is subject to the safe harbors created by those sections. These forward-looking
statements are subject to significant risks and uncertainties, including without
limitation those identified in the section of this Form 10-Q entitled "Risk
Factors" and in the Company's Final Prospectus as filed with the Securities and
Exchange Commission (the "SEC"). Such risks and uncertainties may cause actual
results to differ materially and adversely from those discussed in such
forward-looking statements. The forward-looking statements within this Form 10-Q
are identified by words such as "believes," "anticipates," "expects," "intends,"
"may" and other similar expressions. However, these words are not the exclusive
means of identifying such statements. In addition, any statements that refer to
expectations, projections or other characterizations of future events or
circumstances, including any underlying assumptions, are forward-looking
statements. The Company disclaims any obligation to publicly release the results
of any revisions to these forward-looking statements which may be made to
reflect events or circumstances occurring subsequent to the filing of this Form
10-Q with the SEC or otherwise to revise or update any oral or written
forward-looking statement that may be made from time to time by or on behalf of
the Company.
The information contained in this Form 10-Q is not a complete description
of the Company's business or the risks associated with an investment in the
Company. Readers are urged to carefully review and consider the various
disclosures made by the Company in this Report and in the Company's other
filings with the SEC, including its Final Prospectus, that discuss the Company's
business in greater detail and attempt to advise interested parties of certain
risks, uncertainties and other factors that may affect the Company's business in
the future.
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 integrated circuits ("ICs") for some of the most significant broadband
communications markets including cable set-top boxes, cable modems, high-speed
networking, DBS (direct broadcast satellite) and terrestrial digital broadcast,
and xDSL (digital subscriber line). 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 that 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
10
<PAGE> 13
predominately through sales of its semiconductor products. The Company intends
to continue to enter into development contracts with key customers, but expects
that development revenue will constitute a decreasing percentage of its total
revenue. In any given quarter, development revenue may vary significantly due to
the number of outstanding contracts and the timing of contract milestones. The
Company generates a small percentage of its product revenue from sales of its
system level reference designs.
For a further overview of the Company's accounting policies and significant
factors affecting the Company's business and operations, please refer to the
additional disclosures made in the Company's Final Prospectus.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998
COMPARED TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997
The following table sets forth certain statement of operations data
expressed as a percentage of total revenue:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
1998 1997 1998 1997
------ ------- ------ ------
<S> <C> <C> <C> <C>
Revenue:
Product revenue 97.3% 87.5% 97.4% 82.6%
Development revenue 2.7 12.5 2.6 17.4
----- ----- ----- -----
Total revenue 100.0 100.0 100.0 100.0
Cost of revenue 45.1 43.7 43.5 45.0
----- ----- ----- -----
Gross profit 54.9 56.3 56.5 55.0
Operating expense:
Research and development 20.7 59.5 19.2 59.5
Selling, general and administrative 12.3 28.8 11.9 26.4
----- ----- ----- -----
Total operating expense 33.0 88.3 31.1 85.9
----- ------ ----- -----
Income (loss) from operations 21.9 (32.0) 25.4 (30.9)
Interest and other income (expense), net 2.1 (0.5) 1.8 0.1
----- ------- ----- -----
Income (loss) before income taxes 24.0 (32.5) 27.2 (30.8)
Provision (benefit) for income taxes 8.4 (13.0) 9.5 (12.3)
----- ------ ----- -----
Net income (loss) 15.6% (19.5)% 17.7% (18.5)%
===== ====== ===== =====
</TABLE>
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 three months ended September 30, 1998 was $52.5 million,
an increase of $43.2 million or 467% from total revenue of $9.3 million in the
three months ended September 30, 1997. Total revenue for the nine months ended
September 30, 1998 was $133.0 million, an increase of $113.3 million or 576%
from total revenue of $19.7 million in the nine months ended September 30, 1997.
The increase in total revenue was derived mainly from an increase in volume
shipments of ICs for digital cable set-top boxes, high-speed networking and, to
a lesser extent, for the cable modem market.
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,
11
<PAGE> 14
as well as costs of personnel and equipment associated with manufacturing
support and contracted development work. Gross profit for the three months ended
September 30, 1998 was $28.8 million or 54.9% of total revenue, an increase of
$23.6 million as compared with gross profit of $5.2 million or 56.3% of total
revenue in the three months ended September 30, 1997. Gross profit for the nine
months ended September 30, 1998 was $75.1 million or 56.5% of total revenue, an
increase of $64.3 million as compared with gross profit of $10.8 million or
55.0% of total revenue in the nine months ended September 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 three and nine months ended September 30, 1998
was $10.9 million and $25.5 million or 20.7% and 19.2% of total revenue,
respectively, an increase of $5.4 million and $13.8 million as compared with
research and development expense of $5.5 million and $11.7 million or 59.5% of
total revenue for both the three and nine months ended September 30, 1997,
respectively. 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 three
and nine months ended September 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 three months ended September 30, 1998 was
$6.5 million or 12.3% of total revenue, an increase of $3.8 million as compared
with $2.7 million or 28.8% of total revenue for the three months ended September
30, 1997. Selling, general and administrative expense for the nine months ended
September 30, 1998 was $15.8 million or 11.9% of total revenue, an increase of
$10.6 million as compared with $5.2 million or 26.4% of total revenue for the
nine months ended September 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 three and nine months ended September 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 nine months ended September 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
12
<PAGE> 15
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 $406,000 and $909,000 of deferred compensation
in the three and nine months ended September 30, 1998, respectively. 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 (EXPENSE), NET. Interest and other income
(expense), 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 three and nine months
ended September 30, 1998 was $1.1 million and $2.4 million, respectively,
compared to interest and other expense, net of $41,000 in the three months ended
September 30, 1997 and interest and other income, net of $22,000 in the nine
months ended September 30, 1997. The increases were principally due to increased
cash balances available to invest resulting from consummation of the Company's
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 nine months ended
September 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.
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
September 30, 1998, the Company had $71.8 million in working capital and $57.7
million in cash, cash equivalents and short-term investments, compared to $26.3
million in working capital and $22.1 million in cash and cash equivalents at
December 31, 1997. In addition, at September 30, 1998, the Company had long-term
investments of $43.2 million; at December 31, 1997, the Company had no long-term
investments. At October 31, 1998, the Company had $89.9 million in cash, cash
equivalents and short-term investments and $43.0 million in long-term
investments. The net increase in cash, cash equivalents and investments from
September 1998 was primarily due to the net proceeds from the Company's
follow-on public offering in October 1998.
The Company's operating activities provided cash of $22.9 million in the
nine months ended September 30, 1998, primarily as a result of net income and a
growth in accounts payable, partially offset by increases in accounts
receivable, inventory and other assets. In the nine months ended September 30,
1997, cash used in operating activities was $4.5 million, primarily as a result
of a net loss.
13
<PAGE> 16
In the nine months ended September 30, 1998, the Company's investing
activities used cash in the amount of $58.1 million for the purchase of
held-to-maturity investments and $21.4 million for the purchase of capital
equipment to support its expanding operations. In the nine months ended
September 30, 1997, the Company's investing activities used $4.0 million for the
purchase of capital equipment. At September 30, 1998, the Company had
outstanding purchase commitments for capital equipment of approximately $4.2
million.
Cash provided by financing activities was $77.2 million for the nine months
ended September 30, 1998, primarily from aggregate net proceeds of $79.2 million
from the Company's Offering and sale of shares to Cisco Systems in April 1998,
partially offset by the repayment of $2.5 million outstanding under a bank term
loan. In the nine months ended September 30, 1997, cash provided by financing
activities was $26.1 million, primarily from $22.7 million in net proceeds from
the issuance of preferred stock and $3.0 million in proceeds from a bank term
loan.
In October 1998, the Company completed an underwritten follow-on public
offering. Of the 3,450,000 shares of Class A Common Stock offered, the Company
sold 470,000 shares and selling shareholders sold 2,980,000 shares, at a price
of $69 per share. The Company received net aggregate proceeds from the follow-on
offering of approximately $30.6 million after deducting underwriting discounts
and commissions and estimated offering costs.
The Company believes that the aggregate net proceeds from the follow-on
public offering, its initial public offering and sale of shares to Cisco Systems
in April 1998, 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
the follow-on offering, the Company's initial public offering and sale of shares
to Cisco Systems, 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.
14
<PAGE> 17
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."
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, master production scheduling, materials requirement
planning, 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,
Taiwan Semiconductor Manufacturing Corporation ("TSMC") and Chartered
Semiconductor Manufacturing ("Chartered"), that fabricate substantially all of
its semiconductor devices, and to the two subcontractors, ASAT Ltd. ("ASAT") and
ST Assembly Test Services ("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 or results of operations.
15
<PAGE> 18
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, financial condition 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.
RISK FACTORS
In future periods the Company's business, financial condition and results
of operations may be affected in a material and adverse manner by many factors,
including, but not limited to, the following:
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 and the risk of non-qualification
or non-certification; 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
16
<PAGE> 19
other employees in the numbers, with the capabilities and at the compensation
levels 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.
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 33.6% and
25.9%, respectively, of total revenue in the three months ended September 30,
1998 and 32.6% and 32.0%, respectively, of total revenue in the nine months
ended September 30, 1998. In 1997, sales to General Instrument and 3Com
accounted for 31.9% and 14.6%, respectively, of total revenue. Moreover, sales
to the Company's five largest customers (including sales to their respective
manufacturing subcontractors) represented approximately 73.4% and 76.1% of the
Company's total revenue in the three and nine months ended September 30, 1998,
respectively, and 61.7% of total revenue in fiscal 1997. 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 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
17
<PAGE> 20
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.
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.
18
<PAGE> 21
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 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.
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.
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
19
<PAGE> 22
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 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.
MANAGEMENT OF GROWTH. The Company has experienced a period of rapid growth,
expanding from 182 employees in September 1997 to 400 employees (including
temporary and contract employees) in September 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
20
<PAGE> 23
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.
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, TSMC in Taiwan and
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 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 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
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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.
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 in Hong Kong and 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.
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 Company to
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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.
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 and distribution activities abroad. Approximately 15.8% of the
Company's total revenue in the nine months ended September 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. The Company
intends to expand its international operations in the near future and may
establish foreign subsidiaries to conduct certain of the Company's international
activities. As a result, the Company's business may be impacted to a greater
degree in the future by the foregoing risks.
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.
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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 and negatively
impact sales of the products under development. 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.
TRANSITION TO SMALLER GEOMETRY PROCESS TECHNOLOGIES AND HIGHER LEVELS OF
DESIGN INTEGRATION. 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 Company to
remain competitive. The Company has in the past experienced difficulty in
migrating to smaller geometry process technologies or 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 greater levels
of functionality as well as customer and third-party intellectual property into
its products. No assurance can be given that higher levels of design integration
will not adversely affect the Company's ability to deliver new integrated
products on a timely basis, or at all.
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
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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 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,
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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.
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.
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 have a material adverse effect on the Company's
business, financial condition and results of operations and could result in the
Company holding excess inventory, which in turn 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.
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
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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.
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.
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.
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
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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
October 31, 1998, the Company's directors and executive officers beneficially
owned approximately 50.1% of the outstanding Common Stock and 62.8% of the total
voting control of the Company. In particular, as of October 31, 1998, the two
founders of the Company, Dr. Henry T. Nicholas, III and Dr. Henry Samueli,
beneficially owned an aggregate of approximately 46.3% of the outstanding Common
Stock and 58.3% 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.
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 $100.25 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.
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 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
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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. 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 or that any such plans will be successful.
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 "Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Year 2000."
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING. The Company
believes that the aggregate net proceeds from the follow-on public 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 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 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 financings or borrowings. 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
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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.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings, claims and litigation
arising in the ordinary course of business. The current status of the Company's
previously reported claims and litigation is discussed in Note 8 of the "Notes
to Unaudited Condensed Financial Statements" in Part I, Item 1, and under "Risks
Associated with Intellectual Property Protection" in Part I, Item 2, elsewhere
in this Form 10-Q, which sections are hereby incorporated by this reference.
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 financial statements included in Part I.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) SALES OF UNREGISTERED SECURITIES. During the three months ended
September 30, 1998, the Company issued 21,875 shares of Class B Common Stock to
a former employee for an aggregate purchase price of $24,792, upon the exercise
of options to purchase shares of Class B Common Stock. The sale of Class B
Common Stock made by the Company pursuant to the exercise of stock options was
made pursuant to the exemptions from registration by Section 4(2) of the
Securities Act of 1933.
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(d) USE OF PROCEEDS FROM SALES OF REGISTERED SECURITIES. On April 21, 1998,
the Company completed an initial public offering of its Class A Common Stock,
$0.0001 par value. The managing underwriters in the Offering were Morgan Stanley
& Co. Incorporated, BT Alex. Brown Incorporated, Deutsche Morgan Grenfell, Inc.
and Hambrecht & Quist LLC (the "Underwriters"). The shares of Class A Common
Stock sold in the Offering were registered under the Securities Act of 1993, as
amended, on a Registration Statement on Form S-1 (the "Registration Statement")
(Reg. No. 333-45619) that was declared effective by the SEC on April 16, 1998.
The Offering commenced on April 16, 1998 and terminated on April 21, 1998
after all 4,525,000 shares of Class A Common Stock registered under the
Registration Statement were sold. Of the total shares sold, 3,120,000 shares
were sold by the Company (including 355,000 shares sold pursuant to the exercise
of the Underwriters' over-allotment option), 905,000 shares were sold by selling
shareholders (including 170,000 shares sold pursuant to the exercise of the
Underwriters' over-allotment option) and 500,000 shares were sold by the Company
to Cisco Systems in a concurrent registered offering that was not underwritten.
The purchase price for the underwritten shares was $24.00 per share and the
purchase price of the shares sold to Cisco Systems was $22.32 per share. The
aggregate price of the Offering amount registered was $107,760,000.
In connection with the Offering, the Company paid an aggregate of
$5,241,600 in underwriting discounts and commissions to the Underwriters and
paid other expenses of approximately $1,628,000. After deducting the
underwriting discounts and commissions and other expenses, the Company received
net aggregate proceeds from the Offering and sale of shares to Cisco Systems of
approximately $79,170,400. In April 1998, the Company used $2,250,000 of the
proceeds to repay the balance outstanding under its term loan with Silicon
Valley Bank and through September 1998, used approximately $13.6 million for the
purchase of capital equipment. The balance of the proceeds will be used for
general corporate purposes, including working capital and capital purchases such
as test equipment and leasehold improvements associated with the Company's
planned facilities expansion. None of the Company's net proceeds of the Offering
were paid directly or indirectly to any director, officer, general partner of
the Company or their associates, persons owning 10 percent or more of any class
of equity securities of the Company, or an affiliate of the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
In October 1998, the Company completed an underwritten follow-on public
offering. Of the 3,450,000 shares of Class A Common Stock offered, the Company
sold 470,000 shares and selling shareholders sold 2,980,000 shares, at a price
of $69 per share. The Company received net aggregate proceeds from the follow-on
offering of approximately $30.6 million after deducting underwriting discounts
and commissions and estimated offering costs.
31
<PAGE> 34
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
1.1 Underwriting Agreement dated October 20, 1998
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No such reports were filed during the three months ended September 30,
1998.
32
<PAGE> 35
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BROADCOM CORPORATION
A CALIFORNIA CORPORATION
(Registrant)
November 12, 1998 /s/ WILLIAM J. RUEHLE
--------------------------------------
William J. Ruehle
Vice President and Chief Financial
Officer (principal financial and
accounting officer)
33
<PAGE> 36
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
1.1 Underwriting Agreement dated October 20, 1998
27.1 Financial Data Schedule
<PAGE> 1
Execution Copy
3,000,000 SHARES
BROADCOM CORPORATION
CLASS A COMMON STOCK, PAR VALUE $.0001 PER SHARE
UNDERWRITING AGREEMENT
October 20, 1998
<PAGE> 2
October 20, 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, III 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
$0.0001 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 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.
-2-
<PAGE> 3
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 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.
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<PAGE> 4
(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 after September 30, 1998 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
(except as disclosed in the Prospectus) 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
-5-
<PAGE> 6
not received any notice of infringement or conflict with (and the
Company does not know of any infringement or conflict with) asserted
rights of 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.
-6-
<PAGE> 7
(z) The Nasdaq Stock Market, Inc. has approved the Shares to be
issued by the Company for listing on the Nasdaq National Market.
(aa) The section of the Prospectus entitled "Shares Eligible for
Future Sale" properly describes all 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 the respective periods of time
designated in such Lock-Up Agreements, without the prior written consent
of the Company or Morgan Stanley & Co. Incorporated, and all of such
Lock-up Agreements are valid and binding.
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 that are outstanding as of the date hereof have been duly
authorized and are validly issued, fully paid and non-assessable, and
the Shares to be sold by such Selling Shareholder that are issuable upon
exercise of outstanding options, will be, upon receipt by the Company of
the exercise price thereof, validly issued, fully paid and
non-assessable.
-7-
<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 $66.24 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 (x)
in the case of the Company, during the period ending 90 days after the date of
the Prospectus, and (y) in the case of each other Seller, during the period
specified in the Lock-up Agreements between the Seller and Morgan Stanley & Co.
Incorporated (i) offer, pledge, sell,
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<PAGE> 9
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 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
$69.00 a share (the "PUBLIC OFFERING PRICE") and to certain dealers selected by
you at a price that represents a concession not in excess of $1.66 a share under
the Public Offering Price, and that any Underwriter may allow, and such dealers
may reallow, a concession, not in excess of $0.10 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 October 26, 1998, or at such other time on the same or such other date,
not later than November 2, 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 each Seller 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 December 3, 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.
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<PAGE> 10
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 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
Shareholders (or by their attorney-in-fact on their behalf), to the
effect that the representations and warranties of the Selling
Shareholders contained in this Agreement are true and correct as of the
Closing Date and that each Selling Shareholder 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
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<PAGE> 11
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 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 financial condition, business, properties or results of
operations of 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 as of the date
of the Prospectus 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;
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<PAGE> 12
(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 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 of 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, including
notes and the schedules thereto and the other financial and
statistical data included therein, 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;
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<PAGE> 13
(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
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 Founders;
(ii) the execution and delivery by each Founder of, and the
performance by such Founder of its obligations under, this Agreement
and the Custody Agreement and Power of Attorney of such Founder 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 Founders 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 Founder;
(iii) no consent, approval, authorization or order of, or
qualification with, any governmental body or agency is required for
the performance by such Founder of its obligations under this
Agreement or the Custody Agreement and Power of Attorney of such
Founder, 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;
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<PAGE> 14
(iv) each of the Founders is the sole registered owner of the
Shares to be sold by such Founder and has the right, power and
authority to enter into this Agreement and the Custody Agreement and
Power of Attorney of such Founder and to sell, transfer and deliver
the Shares to be sold by such Founder;
(v) the Custody Agreement and the Power of Attorney of each
Founder has been duly authorized, executed and delivered by such
Founder and are valid and binding agreements of such Founder;
(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 Founder, 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.
(vii) as to each Selling Shareholder who is not a Corporate
Selling Shareholder (as defined below) or a Founder (each, an
"Individual Selling Shareholder"), to such counsel's knowledge, this
Agreement has been duly authorized, executed and delivered by or on
behalf of each of the Individual Selling Shareholders;
(viii) to such counsel's knowledge, the execution and delivery by
each Individual Selling Shareholder of, and the performance by such
Individual Selling Shareholder of its obligations under, this
Agreement and the Custody Agreement and Power of Attorney of such
Individual Selling Shareholder will not (A) contravene any material
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 of
any governmental body, agency or court having jurisdiction over the
Individual Selling Shareholder or, (B) contravene any material
agreement or other instrument binding upon such Individual Selling
Shareholder;
(ix) to such counsel's knowledge, no consent, approval,
authorization or order of, or qualification with, any governmental
body or agency is required for the performance by such Individual
Selling Shareholder of its obligations under this Agreement or the
Custody Agreement and Power of Attorney of such Individual 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;
(x) to such counsel's knowledge, each of the Individual Selling
Shareholders is the sole registered owner of the Shares to be sold by
such Individual Selling Shareholder and has the right, power and
authority to enter into this Agreement and the Custody Agreement and
Power of Attorney of such Individual Selling Shareholder and to sell,
transfer and deliver the Shares to be sold by such Individual Selling
Shareholder;
(xi) to such counsel's knowledge, the Custody Agreement and the
Power of Attorney of each Individual Selling Shareholder has been
duly authorized, executed and delivered by such Individual Selling
Shareholder and are valid and binding agreements of such Individual
Selling Shareholder;
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<PAGE> 15
(xii) 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 Individual Selling Shareholder, 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> 16
(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 fifth 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.
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<PAGE> 17
(j) The Underwriters shall have received on the Closing Date opinions
of counsel for each of Intel Corporation and Scientific-Atlanta, Inc.
(the "Corporate Selling Shareholders"), dated the Closing Date, to the
effect that:
(i) this Agreement has been duly authorized by such Corporate
Selling Shareholder and, when executed on such Corporate Selling
Shareholder's behalf by one of the attorneys-in-fact named in the
Custody Agreement and Power of Attorney, will be duly executed and
delivered by or on behalf of such Corporate Selling Shareholder;
(ii) the execution and delivery by such Corporate Selling
Shareholder of, and the performance by such Corporate Selling
Shareholder of its obligations under, this Agreement and the Custody
Agreement and Power of Attorney of such Corporate 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 such Corporate Selling Shareholder and any of its
properties, (B) conflict with, or result in a breach or other
violation of any of the terms, conditions or provisions of such
Corporate Selling Shareholder's Certificate of Incorporation or
Bylaws, or (C) to such counsel's knowledge, constitute a breach or
default under any material agreement or other instrument binding upon
such Corporate 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 Corporate Selling Shareholder of its
obligations under this Agreement or the Custody Agreement and Power
of Attorney of such Corporate 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) such Corporate Selling Shareholder is the sole registered
owner of the Shares to be sold by such Corporate Selling Shareholder
and has the right, power and authority to enter into this Agreement
and the Custody Agreement and Power of Attorney of such Corporate
Selling Shareholder and to sell, transfer and deliver the Shares to
be sold by such Corporate Selling Shareholder;
(v) the Custody Agreement and Power of Attorney of such Corporate
Selling Shareholder has been duly authorized, executed and delivered
by such Corporate Selling Shareholder and is a valid and binding
agreement of such Corporate 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 Corporate Selling Shareholder, 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.
(k) The Lock-up Agreements between you and all officers and directors
of the Company and certain shareholders 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.
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<PAGE> 18
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 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.
(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.
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<PAGE> 19
(f) to (i) enforce the terms of each Lock-up Agreement and (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. 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.
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 Section 7 hereof,
including filing fees and the reasonable fees, in the amount not to exceed
$10,000, 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 $5,000, 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
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<PAGE> 20
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 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
-20-
<PAGE> 21
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
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
-21-
<PAGE> 22
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, 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
-22-
<PAGE> 23
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 misrepresentation (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 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
-23-
<PAGE> 24
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.
13 APPLICABLE LAW. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of New York.
-24-
<PAGE> 25
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.
Very truly yours,
BROADCOM CORPORATION
By: /s/ Henry T. Nicholas
--------------------------------------
Name: Henry T. Nicholas, III
Title: Co-Chairman and Chief
Executive Officer
FOUNDERS
/s/ Henry T. Nicholas
------------------------------------------
Henry T. Nicholas, III
/s/ Henry Samueli
------------------------------------------
Henry Samueli
The Selling Shareholders
named in Schedule I hereto,
acting severally
By: /s/ Henry Samueli
------------------------------------------
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: /s/ Paul E. Chamberlain
----------------------------------
Name: Paul E. Chamberlain
Title: Principal
-25
<PAGE> 26
SCHEDULE I
<TABLE>
<CAPTION>
NUMBER OF
FIRM SHARES
SELLING SHAREHOLDER TO BE SOLD
- ------------------- -----------
<S> <C>
Alpert, Herb 22,195
Bhatia, Prakash 150
Brandlin, Laura 2,250
Brooks, Donald 37,168
Cameron, Kelly 25,650
Carlcom Investments, Inc. 9,749
Carpenter, Richard 22,195
Chang, Emery 500
Costanzo, Timothy & Claudia, Trustees of the Costanzo
Family Trust dated March 15, 1989 9,878
Creigh, John 5,625
Dull, David 15,000
Dumouchel, Jean 6,750
Echtenkamp, Jeffrey 2,500
Eichen, Myron S. & Joan D., as Trustees under
Trust Agreement dated May 26, 1982 45,000
Fernandez, Aurelio 30,000
Firlein, Vivian Carol 250
Ford, Julianne 450
Garcia, Virgilio 300
Glelter, John 4,000
Haas, Kenneth 225
Halberg, Cheryl 375
Hanna, Ganalios 5,000
Hao, Yi-Hsien 2,000
Heiden, David 6,300
Henry Samueli and Susan Faye Samueli, Trustees of the
Samueli Family 1995 Trust 430,000
Henry Thompson Nicholas and Stacey Elizabeth Nicholas,
Trustees of the Nicholas Family Trust d/o/e 11-2-94 430,000
Hollywood Venture Capital, Inc. 5,488
Huang, Lipson 500
Intel Corporation 630,580
Irell & Manella 52,036
</TABLE>
<PAGE> 27
<TABLE>
<CAPTION>
NUMBER OF
FIRM SHARES
SELLING SHAREHOLDER TO BE SOLD
- ------------------- -----------
<S> <C>
Jantzi, Steve 2,500
Judicrest Holdings, Inc. 4,390
Khorramabadi, Haideh 5,000
Kwei, Johnny Y. 2,000
Law, Honmann Samuel 3,000
Lawrence, J. Carey & Lori M., Trustees of the
Lawrence Family Trust dated June 4, 1996 11,564
Lee, Jind-Yeh (Michael) 500
Lee, Owen 1,200
Li, Xiaojun (Johnson) 750
Lindenfelser, Tim 90,000
Linson, Neal 3,281
MacInnis, Alexander 10,000
Maine, Stephen 7,866
Mali, Jagan 10,000
Mandel, David 6,143
Mandel, Ruth 9,170
Manian, Vahid 33,000
Marcus-LaBonty, Laurent 630
Miskell, George 2,250
Monroe, Jason 3,375
Moshar, Hooman 9,000
Moskowitz, Jeffrey, Trustee 9,878
Moss, Jerome S. 22,195
Myers, Glenn 2,000
Norgren, William 3,567
O'Rourke, Aidan 6,750
Osborne, Larry 1,000
Palevsky, Max 8,115
Palevsky, Nick 6,586
Pham, Daniel 500
Pharn, Art 1,000
Preuss, Peter 6,145
Reddy, Venkatesh 5,000
</TABLE>
<PAGE> 28
<TABLE>
<CAPTION>
NUMBER OF
FIRM SHARES
SELLING SHAREHOLDER TO BE SOLD
- ------------------- -----------
<S> <C>
Ross, Alan E. 19,800
Rossfield Investments Ltd. 4,390
Roston Enterprises 23,718
Ruehle, William J. 40,000
Samueli, Leon M. and Barbara Jane 9,878
Scientific-Atlanta, Inc. 340,000
Tang, Chengfuh Jeffrey 2,500
Taylor, Deborah 562
Vandermeer, Roland 3,293
Velatini, Gregg 2,000
Venbrux, Jack 320
Vu, Hung 2,000
Walker, Carolyn 4,375
Wang, Mark M. 1,500
Wolfen, Lawrence 15,750
Wolfen, Werner F. 22,500
Xie, Xiaodong 2,000
Yeager, Catherine Cox 250
Yoshida, Hiromi 22,195
---------
Total 2,607,500
=========
</TABLE>
<PAGE> 29
SCHEDULE II
<TABLE>
<CAPTION>
NUMBER OF
FIRM SHARES
TO BE
UNDERWRITER PURCHASED
----------- -----------
<S> <C>
Morgan Stanley & Co. Incorporated............................... 600,000
BT Alex. Brown Incorporated..................................... 600,000
Credit Suisse First Boston Corporation.......................... 600,000
Hambrecht & Quist LLC........................................... 600,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated.............. 600,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated.............. 600,000
---------
Total............................................ 3,000,000
=========
</TABLE>
<PAGE> 30
SCHEDULE III
<TABLE>
<CAPTION>
MAXIMUM
NUMBER OF
ADDITIONAL
SHARES
SELLING SHAREHOLDER TO BE SOLD
- ------------------- ----------
<S> <C>
Alpert, Herb 5,104
Brooks, Donald 8,547
Carlcom Investments, Inc. 2,242
Carpenter, Richard 5,104
Costanzo, Timothy & Claudia, Trustees of the
Costanzo Family Trust dated March 15, 1989 2,272
Henry Samueli and Susan Faye Samueli, Trustees of
the Samueli Family 1995 Trust 60,000
Henry Thompson Nicholas and Stacey Elizabeth Nicholas,
Trustees of the Nicholas Family Trust d/o/e 11-2-94 60,000
Hollywood Venture Capital, Inc. 1,262
Intel Corporation 119,420
Irell & Manella 11,965
Judicrest Holdings, Inc. 1,010
Lawrence, J. Carey & Lori M., Trustees of the
Lawrence Family Trust dated June 4, 1996 2,658
Maine, Stephen 1,809
Mandel, David 1,412
Mandel, Ruth 2,109
Moskowitz, Jeffrey, Trustee 2,272
Moss, Jerome S. 5,104
Norgren, William 820
Palevsky, Max 1,866
Palevsky, Nick 1,514
Preuss, Peter 1,413
Rossfield Investments Ltd. 1,010
Roston Enterprises 5,454
Samueli, Leon M. and Barbara Jane 2,272
Scientific-Atlanta, Inc. 60,000
Vandermeer, Roland 757
Yoshida, Hiromi 5,104
-------
Total.................................................... 372,500
=======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 42,706
<SECURITIES> 14,944
<RECEIVABLES> 26,523
<ALLOWANCES> 4,167
<INVENTORY> 5,877
<CURRENT-ASSETS> 92,397
<PP&E> 34,545
<DEPRECIATION> 9,896
<TOTAL-ASSETS> 162,337
<CURRENT-LIABILITIES> 20,594
<BONDS> 0
0
0
<COMMON> 4
<OTHER-SE> 141,739
<TOTAL-LIABILITY-AND-EQUITY> 162,337
<SALES> 129,568
<TOTAL-REVENUES> 132,997
<CGS> 57,870
<TOTAL-COSTS> 57,870
<OTHER-EXPENSES> 40,652
<LOSS-PROVISION> 652
<INTEREST-EXPENSE> (2,417)
<INCOME-PRETAX> 36,240
<INCOME-TAX> 12,684
<INCOME-CONTINUING> 23,556
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,556
<EPS-PRIMARY> 0.64
<EPS-DILUTED> 0.51
</TABLE>
