<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 MARCH 31, 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 Identification No.)
incorporation or organization)
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 No X
----- -----
The number of shares of the registrant's Common Stock, $0.0001 par value,
outstanding as of May 14, 1998: 4,525,000 shares of Class A Common Stock and
39,195,949 shares of Class B Common Stock.
<PAGE> 2
BROADCOM CORPORATION
QUARTERLY REPORT ON
FORM 10-Q
THREE MONTHS ENDED
MARCH 31, 1998
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets at March 31, 1998 (unaudited)
and December 31, 1997 2
Unaudited Statements of Operations for the Three Months
Ended March 31, 1998 and 1997 3
Unaudited Statements of Cash Flows for the Three Months
Ended March 31, 1998 and 1997 4
Notes to Unaudited Condensed Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 27
PART II OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 2. Change in Securities and Use of Proceeds 28
Item 3. Defaults Upon Senior Securities 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 5. Other Information 30
Item 6. Exhibits and Reports on Form 8-K 30
Signatures 31
</TABLE>
1
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BROADCOM CORPORATION
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Pro Forma
March 31, March 31,
1998 1998 December 31,
(Unaudited) (Unaudited) 1997
----------- ----------- ------------
ASSETS (Note 6)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 29,765 $ 108,313 $ 22,116
Accounts receivable, net 16,128 16,128 9,913
Inventory 7,571 7,571 2,705
Other current assets 1,757 1,757 1,785
--------- --------- ---------
Total current assets 55,221 133,769 36,519
Property and equipment, net 12,920 12,920 8,449
Other assets 1,462 590 276
--------- --------- ---------
Total assets $ 69,603 $ 147,279 $ 45,244
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 18,430 $ 18,430 $ 7,380
Wages and related benefits 1,282 1,282 846
Income taxes payable 3,693 3,693 --
Accrued liabilities 2,437 2,865 933
Current portion of long-term debt 1,089 89 1,098
--------- --------- ---------
Total current liabilities 26,931 26,359 10,257
Long-term debt, less current portion 1,326 76 1,595
Shareholders' equity:
Convertible preferred stock 28,617 -- 28,617
Common stock 13,555 121,670 7,129
Notes receivable from employees (3,513) (3,513) (3,362)
Deferred compensation (7,074) (7,074) (1,090)
Retained earnings 9,761 9,761 2,098
--------- --------- ---------
Total shareholders' equity 41,346 120,844 33,392
--------- --------- ---------
Total liabilities and shareholders' equity $ 69,603 $ 147,279 $ 45,244
========= ========= =========
</TABLE>
See accompanying notes.
2
<PAGE> 4
BROADCOM CORPORATION
UNAUDITED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Revenue:
Product revenue $ 35,225 $ 3,959
Development revenue 119 1,072
----------- -----------
Total revenue 35,344 5,031
Cost of revenue 13,832 2,534
----------- -----------
Gross profit 21,512 2,497
Operating expense:
Research and development 5,952 2,686
Selling, general and administrative 3,989 1,142
----------- -----------
Total operating expense 9,941 3,828
----------- -----------
Income (loss) from operations 11,571 (1,331)
Interest and other income, net 218 60
----------- -----------
Income (loss) before income taxes 11,789 (1,271)
Provision (benefit) for income taxes 4,126 (508)
----------- -----------
Net income (loss) $ 7,663 $ (763)
=========== ===========
Basic earnings (loss) per share $ 0.27 $ (0.03)
=========== ===========
Diluted earnings (loss) per share $ 0.19 $ (0.03)
=========== ===========
Weighted average shares (basic) 27,989 25,742
=========== ===========
Weighted average shares (diluted) 41,279 25,742
=========== ===========
</TABLE>
See accompanying notes.
3
<PAGE> 5
BROADCOM CORPORATION
UNAUDITED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 7,663 $ (763)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities
Depreciation and amortization 1,222 681
Amortization of deferred compensation 90 --
Change in operating assets and liabilities:
Accounts receivable (6,215) 411
Inventory (4,866) (18)
Other assets (1,591) (90)
Accounts payable 11,050 (23)
Income taxes payable 4,134 (2,358)
Other accrued liabilities 1,932 1,818
----------- -----------
Net cash provided by (used in) operating activities 13,419 (342)
INVESTING ACTIVITIES
Purchase of property and equipment (5,693) (1,530)
----------- -----------
Net cash used in investing activities (5,693) (1,530)
FINANCING ACTIVITIES
Payments on bank term loan (250) --
Payments on capital lease obligations (28) (18)
Net proceeds from issuance (payments for
repurchase) of Class B Common Stock 201 (7)
----------- -----------
Net cash used in financing activities (77) (25)
----------- -----------
Increase (decrease) in cash and cash equivalents 7,649 (1,897)
Cash and cash equivalents at beginning of period 22,116 4,657
----------- -----------
Cash and cash equivalents at end of period $ 29,765 $ 2,760
=========== ===========
Supplemental disclosure of non-cash activities:
Notes receivable from employees in connection
with exercise of stock options $ 166 $ --
=========== ===========
</TABLE>
See accompanying notes.
4
<PAGE> 6
BROADCOM CORPORATION
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 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 March 31, 1998 and the
results of its operations and cash flows for the three months ended March 31,
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 months ended March 31, 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 April 16, 1998 (the "Final Prospectus"), filed as part of a
Registration Statement on Form S-1, as amended (Reg. No. 333-45619).
2. Earnings Per Share
------------------
The following table sets forth the computation of earnings (loss) per
share:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------- ----------
1998 1997
----------- ----------
(In thousands, except share data)
<S> <C> <C>
Numerator: Net income (loss) $ 7,663 $ (763)
=========== ==========
Denominator:
Weighted-average shares outstanding 31,584,657 29,478,768
Less: nonvested common shares outstanding (3,595,327) (3,736,666)
----------- ----------
Denominator for earnings per common share 27,989,330 25,742,102
Effect of dilutive securities:
Nonvested common shares 2,086,224 --
Stock options 2,750,400 --
Convertible preferred stock 8,453,517 --
----------- ----------
Denominator for diluted earnings per common share 41,279,471 25,742,102
=========== ==========
Basic earnings (loss) per share $ 0.27 $ (0.03)
=========== ==========
Diluted earnings (loss) per share $ 0.19 $ (0.03)
=========== ==========
</TABLE>
5
<PAGE> 7
3. Comprehensive Income
--------------------
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards 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 months ended March
31, 1998 and 1997, the Company did not have any components of comprehensive
income as defined in SFAS 130.
4. Inventory
---------
Inventory is stated at the lower of cost (first-in, first-out) or
market and consists of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- ------------
(In thousands)
<S> <C> <C>
Work in process $ 5,407 $ 2,315
Finished goods 4,079 2,076
----------- ------------
9,486 4,391
Less reserve for excess and obsolete inventory (1,915) (1,686)
----------- ------------
$ 7,571 $ 2,705
=========== ============
</TABLE>
5. Long-Term Debt
--------------
The following is a summary of the Company's long-term debt:
<TABLE>
<CAPTION>
March 31, 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
current rate of 9.0% $ 2,250 $ 2,500
Capitalized lease obligations payable in varying
monthly installments at rates from 10.4% to 22.3% 165 193
----------- ------------
2,415 2,693
Less current portion of long-term debt (1,089) (1,098)
----------- ------------
$ 1,326 $ 1,595
=========== ============
</TABLE>
6. Shareholders' Equity
--------------------
Stock Split
On March 9, 1998, 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.
6
<PAGE> 8
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"). A total of
16,115,343 shares of Common Stock have been authorized for issuance under the
1998 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. As of March 31, 1998, options to purchase an
aggregate of 8,239,315 shares of Class B Common Stock were outstanding at a
weighted average exercise price per share of $5.13.
During the three months ended March 31, 1998, the Company's Board of
Directors granted stock options to employees under the Company's 1994 Plan and
its Special Plan in an aggregate of 3,009,675 shares of the Company's Class B
Common Stock, of which options to purchase 2,929,675 shares are exercisable at
$10.00 per share and options to purchase 80,000 shares are exercisable at a
purchase price of $24.00 per share (the initial public offering price of the
Company's Class A Common Stock). In the three months ended March 31, 1998, the
Company recorded $6.1 million of deferred compensation related to 1,518,500
options granted in late March 1998 (in addition to approximately $1.1 million of
deferred compensation recorded in 1997). The deferred compensation represents
the difference between the deemed value of the Class B Common Stock for
accounting purposes and the option exercise price of such options at the date of
grant. The amount has been presented as a reduction of shareholders' equity and
will be amortized ratably over the vesting period of the applicable options. The
Company amortized approximately $90,000 (pre-tax) of deferred compensation in
the three months ended March 31, 1998, which included $73,000 amortization of
the $1.1 million deferred compensation recorded in 1997. The remaining balance
of the total deferred compensation will be amortized at the rate of
approximately $452,000 (pre-tax) per quarter through September 2001 and
approximately $380,000 (pre-tax) for the quarters ended December 2001 and March
31, 2002.
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 percent 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). 750,000 shares of Class A Common Stock have been reserved
for issuance under the Purchase Plan.
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
7
<PAGE> 9
170,000 shares in connection with the exercise of the underwriters'
over-allotment option) at a price of $24.00 per share. In addition, the Company
sold 500,000 shares of Class A Common Stock to Cisco Systems, Inc. ("Cisco
Systems"), in a concurrent registered offering that was not underwritten, at a
price of $22.32 per share. The Company received aggregate net proceeds from the
Offering and the sale of shares to Cisco Systems of approximately $79.5 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.
Pro Forma Balance Sheet
The unaudited pro forma balance sheet at March 31, 1998 gives effect to
the Company's Offering and the retirement of approximately $2.3 million of
outstanding debt with a portion of the Offering proceeds.
7. 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 BCM-3036 burst modulator
used in cable modems infringes 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 both invalidity and noninfringement grounds. The Company and STI
are currently conducting discovery in this case and a claims construction
hearing was held on April 8, 1998. 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 modem 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. These 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 it "illegally pirated" Sarnoff's
employees. The complaint seeks to preliminarily and permanently enjoin the
Company and the Former
8
<PAGE> 10
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 precluding them from working for six months in
any capacity relating to certain of the Company's programs. The Company has
filed an answer and is vigorously defending itself in this action. In May 1997,
the Court denied Sarnoff's request for a temporary restraining order.
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, Central District of California, and
was stayed pending resolution of the New Jersey action described in the
preceding paragraph. Notwithstanding that the California action is currently
stayed, the Company believes that it involves facts, circumstances and claims
unrelated to those at issue in the New Jersey action, and the Company intends to
vigorously prosecute the California action against Sarnoff.
In December 1997, Rockwell Semiconductor Systems, Inc. ("RSSI") filed a
complaint in California Superior Court against the Company asserting
misappropriation of trade secrets, breach of duty of loyalty, tortious
interference with prospective business advantage, unfair business practices and
unfair competition. These alleged claims related to the Company's hiring of
former employees of RSSI. The Company and RSSI entered into a settlement in this
action, pursuant to which the Company agreed not to hire or extend an offer to
any employees from RSSI for 30 days following the consummation of the Company's
initial public offering. While this action has been dismissed without prejudice,
neither the dismissal nor the settlement agreement releases any claims that RSSI
may assert in the future regarding the actual use or misappropriation by the
Company of trade secrets or other proprietary information of RSSI. The Company
has asserted and believes that no such use or misappropriation has occurred.
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 and breach of the implied covenant of good
faith and fair dealing. These claims relate to Mr. Davis' alleged ownership of
26,000 shares of Series D Preferred Stock originally purchased by Mr. Davis in
February 1996 (which shares would have converted into 78,000 shares of Class B
Common Stock upon consummation of the Offering). The purchase agreement between
the Company and Mr. Davis contained a provision permitting the Company to
repurchase all 26,000 shares of Series D Preferred Stock at the original price
paid per share in the event that Mr. Davis did not continue to be employed by
the Company until the later of February 22, 1998 or one year after the
consummation of the Company's initial public offering. After Mr. Davis resigned
from the Company in June 1997, the Company exercised its repurchase right. Mr.
Davis' complaint alleges that the repurchase right should not be enforceable
under several legal theories and seeks unspecified damages and declaratory
relief. If Mr. Davis is successful in
9
<PAGE> 11
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. 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. Any suit or proceeding involving the Company or its intellectual
property could be costly, could result in a diversion of management's efforts
and other Company resources, and could restrict the Company from marketing
certain of its products without a license, which license may not be available on
acceptable terms, if at all. Any of these factors could have a material adverse
effect on the Company's business, financial condition and results of operations.
10
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion 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 "Factors That May Affect Future Results" 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, are forward-looking statements. The Company assumes no 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
reports filed with the SEC, including its Final Prospectus, that attempt to
advise interested parties of certain risks and factors that may affect the
Company's business.
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 for some of the most significant broadband
communications markets including cable set-top boxes, cable modems, high-speed
networking, DBS (digital 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 this period, the Company
generated the majority of its total revenue from development work performed for
key customers. The Company began shipping its products in 1994, and subsequently
the Company's total revenue has grown predominately through sales of its
semiconductor products. The Company generates additional revenue from
development contracts and a small percentage of its product revenue from sales
of its system level reference designs.
11
<PAGE> 13
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THE
THREE MONTHS ENDED MARCH 31, 1997
The following table sets forth certain statement of operations data
expressed as a percentage of total revenue:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1998 1997
--------- --------
<S> <C> <C>
Revenue:
Product revenue 99.7% 78.7%
Development revenue 0.3 21.3
--------- --------
Total revenue 100.0 100.0
Cost of revenue 39.1 50.4
--------- --------
Gross profit 60.9 49.6
Operating expense:
Research and development 16.8 53.4
Selling, general and administrative 11.3 22.7
--------- --------
Total operating expense 28.1 76.1
--------- --------
Income (loss) from operations 32.8 (26.5)
Interest and other income, net 0.6 1.2
--------- --------
Income (loss) before income taxes 33.4 (25.3)
Provision (benefit) for income taxes 11.7 (10.1)
--------- --------
Net income (loss) 21.7% (15.2)%
========= ========
</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 March 31, 1998 was $35.3 million, an
increase of $30.3 million or 602.5% from total revenue of $5.0 million in the
three months ended March 31, 1997. The substantial increase in total revenue was
derived mainly from shipments of the Company's Fast Ethernet quad transceivers
for the high-speed networking market that were introduced in the second and
third quarters of 1997. In addition, increases in shipments of QAM receivers for
digital cable set-top boxes, offset by a decrease in revenue derived from
development contracts, also contributed to the increase in total revenue from
year to year. Revenue from development contracts decreased in the three months
ended March 31, 1998 as fewer contract milestones were attained during the
period. The Company expects 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.
Gross Profit. Gross profit represents total revenue less the cost of
revenue. Cost of revenue includes the cost of purchasing the finished silicon
wafers processed by independent foundries, and costs associated with assembly,
test and quality assurance for those products, as well as costs of personnel and
equipment associated with contracted development work. Gross profit for the
three months ended March 31, 1998 was $21.5 million or 60.9% of total revenue,
an increase of $19.0 million as compared with gross profit of $2.5 million or
49.6%
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<PAGE> 14
of total revenue in the three months ended March 31, 1997. The increase in gross
profit was primarily attributable to a more favorable product mix, including
higher margin, high-speed networking products, and a significant increase in the
volume of these product shipments in general. Pricing concessions given to a
major customer for cable set-top boxes negatively impacted gross profit in the
three months ended March 31, 1997. 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 take effect.
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 months ended March 31,
1998 was $6.0 million or 16.8% of total revenue, an increase of $3.3 million as
compared with research and development expense of $2.7 million or 53.4% of total
revenue for the three months ended March 31, 1997. The increase in absolute
dollars was primarily due to the addition of personnel for the development of
new products and the enhancement of existing products. The decline in research
and development expense as a percentage of total revenue reflected a significant
increase in total revenue during the three months ended March 31, 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 March 31, 1998 was $4.0
million or 11.3% of total revenue, an increase of $2.9 million as compared with
$1.1 million or 22.7% of total revenue for the three months ended March 31,
1997. The increase in absolute dollars reflected higher personnel related costs
resulting from an increase in sales and marketing personnel to address each of
the Company's markets, the hiring of senior management and administrative
personnel, and increased occupancy, legal and other professional fees. The
decline in selling, general and administrative expense as a percentage of total
revenue reflected a significant increase in total revenue during the three
months ended March 31, 1998. The Company expects that selling, general and
administrative expense in absolute dollars will continue to increase in the near
term as the Company expands its operations to support its growth.
Deferred Compensation. In the three months ended March 31, 1998, the
Company recorded approximately $6.1 million of deferred compensation related to
employee stock options to purchase 1,518,500 shares of Class B Common Stock
granted in late March 1998 (in addition to approximately $1.1 million of
deferred compensation recorded in 1997). The deferred compensation represents
the difference between the deemed value of the Class B Common Stock for
accounting purposes and the option exercise price of such options at the date of
grant. Such amount has been presented as a reduction of shareholders' equity and
will be amortized ratably over the vesting period of the applicable options. The
Company amortized an aggregate of $90,000 of deferred compensation in the three
months ended March 31, 1998, which also included amortization of approximately
$73,000 of the $1.1 million deferred compensation recorded in 1997. The
remaining balance of the total deferred compensation will be amortized at the
rate of approximately $452,000 (pre-tax) per quarter
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through September 2001 and approximately $380,000 (pre-tax) for the quarters
ending December 2001 and March 2002.
Interest and Other Income, Net. Interest and other income, net reflects
interest earned on average cash and cash equivalents balances, less interest on
the Company's long-term debt. Interest and other income, net for the three
months ended March 31, 1998 was $218,000, an increase of $158,000 or 263.3% from
$60,000 in the three months ended March 31, 1997. The increase was primarily due
to interest earned on higher average cash and cash equivalents balances in the
three months ended March 31, 1998 partially offset by higher interest expense
incurred on higher average debt balances.
Provision (Benefit) for Income Taxes. The Company accrues a provision
for federal and state income tax at applicable statutory rates. The Company's
effective tax rates were approximately 35% and 40% for the three months ended
March 31, 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
March 31, 1998, the Company had $28.3 million in working capital and $29.8
million in cash and cash equivalents, compared to $26.3 million in working
capital and $22.1 million in cash and cash equivalents at December 31, 1997.
The Company's operating activities provided cash in the amount of $13.4
million in the three months ended March 31, 1998 and used cash of $342,000 in
the three months ended March 31, 1997. Cash provided by operating activities in
the three months ended March 31, 1998 was primarily attributed to net income and
growth in accounts payable and income taxes payable, partially offset by
increases in accounts receivable and inventory. Cash used in operating
activities in the three months ended March 31, 1997 was primarily due to a net
loss and a decrease in income taxes payable, offset in part by the non-cash
impact of depreciation and amortization, an increase in accounts receivable and
a decrease in other accrued liabilities.
In the three months ended March 31, 1998 and 1997, the Company's
investing activities used $5.7 million and $1.5 million in cash, respectively,
for the purchase of capital equipment to support its expanding operations.
The Company's financing activities used $77,000 and $25,000 in the
three months ended March 31, 1998 and 1997, respectively. Payments on long-term
debt in the three months ended March 31, 1998 were partially offset by proceeds
from issuance of Class B Common Stock to employees through stock option
exercises.
At March 31, 1998, the Company had approximately $2.3 million
outstanding under a term loan with Silicon Valley Bank ("SVB") and had available
a $3.0 million revolving credit facility.
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In April 1998, the Company completed its initial public offering. Of
the 4,025,000 shares of Class A Common Stock offered, the Company sold 3,120,000
shares and selling shareholders sold 905,000 shares at a price of $24.00 per
share. In addition, the Company sold 500,000 shares to Cisco Systems, in a
concurrent registered offering that was not underwritten, at a price of $22.32
per share. The Company received net aggregate proceeds from this Offering and
the sale of shares to Cisco Systems of approximately $79.5 million in cash (net
of underwriting discounts and commissions and estimated offering costs). A
portion of the Company's net proceeds of the Offering were used to retire
approximately $2.3 million outstanding under the SVB term loan in April 1998.
The Company believes that the net proceeds from the Offering, together
with cash generated from its operations and funds available under its credit
facilities, will be sufficient to meet its capital requirements for at least the
next twelve months. 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, 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,
technological advances, the response of competitors to the Company's products,
relationships with suppliers and customers, the level of working capital
required to sustain planned growth, operating results, and hiring,
infrastructure and facility needs. To the extent that the funds generated by the
Offering, together with existing resources and cash generated from operations,
are insufficient to fund the Company's future activities, the Company may need
to raise additional funds through public or private financing. No assurance can
be given that additional financing will be available or that, if available, can
be obtained on terms favorable to the Company and its shareholders.
FACTORS THAT MAY AFFECT FUTURE RESULTS
In future periods the Company's business, financial condition and
results of operations may be affected 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, including, but not limited to, competitive pressures on
selling prices; the volume of product sales; the timing and cancellation of
significant customer orders; lengthy sales cycles; pricing concessions on volume
sales; fluctuations in manufacturing yields; changes in product and customer
mix; intellectual property disputes; the Company's ability to develop, introduce
and market new products and technologies on a timely basis; introduction of
products and technologies by the Company's competitors; market acceptance of the
Company's and its customers' products; 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; currency fluctuations; and general
economic conditions. The Company intends to continue to increase its operating
expenses significantly in 1998. Because a large portion of the Company's
operating expense, including rent, salaries and
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capital lease expenses, is fixed and difficult to reduce or modify, if total
revenue does not meet the Company's expectations, the material adverse 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.
Rapid Technological Change; Dependence on Emerging Markets. 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
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 as expected by the Company. The
failure of new markets to develop or the failure of the 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 anticipate future standards will be a significant factor in
maintaining or improving its 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.
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
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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, 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. In particular, the Company's current MPEG chip is presently produced
on an interim basis by another manufacturer. The Company is currently
redesigning this chip to be manufactured at its outside foundries. The Company
has licensed the MPEG technology from General Instrument and expects to
introduce the next generation of this chip during 1998. If the Company is not
able to launch or market this product successfully, the Company could lose
significant sales to one of its key customers, and the Company's business,
financial condition and results of operations could be materially and adversely
affected. 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 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.
Customer Concentration. A relatively small number of customers has
accounted for a significant portion of the Company's total revenue to date, and
the Company expects that this trend will continue for the foreseeable future. In
particular, sales to General Instrument and 3Com (including sales to their
respective manufacturing subcontractors) accounted for approximately 31.9% and
14.6%, respectively, of the Company's total revenue in 1997 and approximately
19.4% and 54.6%, respectively, of the Company's total revenue in the three
months ended March 31, 1998. Moreover, sales to the Company's five largest
customers (including sales to their respective manufacturing subcontractors)
represented approximately 61.7% and 85.6% of the Company's total revenue in 1997
and in the three months ended March 31, 1998, respectively. Accordingly, the
Company's future results of operations will continue to be substantially
dependent on the success of its largest customers. 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 recruit 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.
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Most of the Company's customers can cease incorporating the Company's
products in their own products with limited notice to the Company and with
little or no penalty. The Company's agreements with its customers typically do
not require minimum purchases. In addition, certain of the Company's customers
offer or may offer products (designed by themselves or third parties) that
compete with those offered by the Company. Many of the Company's customers have
pre-existing relationships with current or potential competitors of the Company,
which may affect such customers' purchasing decisions. In addition, the
Company's longstanding relationship with certain of its larger customers may
affect the purchasing decisions of other potential customers who compete with
these customers. The Company's customers face intense competition from other
manufacturers that do not use the Company's products. Further, some of the
Company's customers have "most favored nation" pricing arrangements, which could
materially adversely affect the Company's average selling prices and gross
margins in the event of product pricing decisions that trigger such
arrangements.
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. 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 Nicholas, the Co-Chairman,
President and Chief Executive Officer, or Dr. Henry Samueli, the Co-Chairman,
Vice President of Engineering and Chief Technical Officer, could materially and
adversely affect the Company. The Company has obtained $2.5 million key man life
insurance policies covering each of Dr. Nicholas and Dr. Samueli, the proceeds
of which would be payable to the Company in the event of death of either of such
officers. There are no employment contracts with any of the Company's employees.
Dependence on Independent Foundries. The Company does not own or
operate a fabrication facility, and substantially all of its semiconductor
device requirements are currently supplied by two outside foundries, Taiwan
Semiconductor Manufacturing Corporation ("TSMC") in Taiwan and Chartered
Semiconductor Manufacturing ("Chartered") in Singapore. There are significant
risks associated with the Company's reliance on outside foundries, including the
lack of ensured wafer supply, limited control over delivery schedules, quality
assurance, manufacturing yields and production costs, and the unavailability of
or delays in obtaining access to key process technologies. In addition, the
manufacture of integrated circuits ("ICs") is a highly complex and
technologically demanding process. Although the Company works closely with its
foundries to minimize the likelihood of reduced manufacturing yields, the
Company's foundries have from time to time experienced lower than anticipated
manufacturing yields, particularly in connection with the introduction of new
products and the installation and start-up of new process technologies.
The Company provides its foundries with rolling forecasts of its
production requirements; however, the ability of each foundry to provide
semiconductor devices to the Company is limited by the foundry's available
capacity. Although the Company has entered into contractual commitments to
supply specified levels of products to certain of its customers, the Company
does not have a long-term volume purchase agreement or a
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guaranteed level of production capacity with any of its existing foundries
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 the new foundry's
products. 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 of a disruption, the Company may not be able to qualify alternative
manufacturing sources for existing or new products in a timely manner. Even the
Company's current outside foundries would need to have certain manufacturing
processes qualified in the event of disruption at another foundry, which the
Company may not be able to accomplish in a timely enough manner to prevent an
interruption in supply of the affected products. There can be no assurance that
any such sources 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 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 Ltd. ("ASAT") in Hong Kong and ST Assembly
Test Services ("STATS") in Singapore. The Company does not have long-term
agreements with either of these suppliers and typically procures services from
such suppliers on a per order basis. 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 could lead to 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.
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
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from or delay the completion of other important development projects. Delays in
development could impair the relationship between the Company and its strategic
partners. Moreover, there can be no assurance that customers of the Company will
not develop their own solutions for products currently supplied by the Company,
which could have a materially adverse effect on the Company's business,
financial condition and results of operations.
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 two United States patents and has filed nine United States patent
applications. There can be no assurance that any patent will issue as a result
of these applications or future applications or, if issued, that any claims
allowed will be sufficiently broad to protect the Company's technology. In
addition, there can be no assurance that any existing or future patents will not
be challenged, invalidated or circumvented, or that any right granted thereunder
would provide meaningful protection to the Company. The failure of any patents
to provide protection to the Company's technology would make it easier for the
Company's competitors to offer similar products. 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 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
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is currently involved in litigation with STI concerning the alleged infringement
of one of STI's patents by one of the Company's modem products. There can be no
assurance that the Company will prevail in this action, or that other actions
alleging infringement by the Company of third-party patents or invalidity of the
patents held by the Company will not be asserted or prosecuted against the
Company, or that any assertions of infringement 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
issue 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 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 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 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.
Competition. The broadband communications markets and semiconductor
industries are intensely competitive and are characterized by rapid
technological change, evolving standards, short product life cycles and price
erosion. The Company competes with a number of major domestic and international
suppliers of equipment in the markets for cable set-top boxes, cable modems,
high-speed networking, DBS and terrestrial digital broadcast, and xDSL, which
competition has resulted and may continue to result in declining average selling
prices for the Company's products. The Company currently competes in the cable
television set-top box market with Rockwell, Philips, LSI Logic and VLSI
Technologies for communication devices and with SGS-THOMSON, LSI Logic and
C-Cube in the MPEG 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 LSI Logic, Rockwell and Toshiba, have announced that they are
developing and plan to introduce MCNS/DOCSIS compliant
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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 Lucent Technologies, Level One,
National Semiconductor and Advanced Micro Devices. The Company's principal
competitors in the DBS market include LSI Logic, Philips, SGS-THOMSON and VLSI
Technologies, and the Company's principal competitors in the xDSL market include
Analog Devices, Alcatel, Motorola and Globespan. 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, the Company's
competitors may in the future develop technologies that more effectively address
the transmission of digital information through existing analog infrastructures
at a lower cost. There can be no assurance that the Company will be able to
compete successfully against current or potential competitors, or that
competition will not have a material adverse effect on the Company's business,
financial condition and results of operations
Transition to Smaller Geometry Process Technologies. The Company
continuously evaluates the benefits, on a product-by-product basis, of migrating
to smaller geometry process technologies in order to reduce costs and has
commenced migration of certain products to smaller geometry processes. The
Company believes that the transition of its products to increasingly smaller
geometries will be important for the Company to remain competitive. Other
companies in the industry have experienced difficulty in migrating to new
manufacturing processes and, consequently, have suffered 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. 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.
Order and Shipment Uncertainties. The Company's sales are generally
made pursuant to individual purchase orders that may be canceled or deferred by
customers on short notice without significant penalty. Cancellation or deferral
of product orders could result in the Company holding excess inventory, which
could have a material adverse effect on the Company's profit margins and
restrict its ability to fund its operations. The Company recognizes revenue upon
shipment of products to the customer. Refusal of customers to accept shipped
products or delays or difficulties in collecting accounts receivable could
result in significant charges against income, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
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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 over-capacity. 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 Expansion of International Business Activities.
Approximately 15.4% of the Company's total revenue in 1997 and approximately
10.5% of the Company's total revenue in the first quarter of 1998 was derived
from sales to independent customers based outside the United States. In
addition, the Company often ships products to its domestic customers'
international manufacturing divisions. Further, the Company currently procures a
substantial portion of its manufacturing, assembly and test services from
suppliers located outside the United States. Accordingly, the Company is subject
to risks inherent in international operations, which include, but are not
limited to, 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, export license requirements, future
import and export restrictions, unexpected changes in regulatory requirements,
foreign technical standards, political, social and economic instability, trade
restrictions, changes in tariffs, difficulties in staffing and managing
operations, difficulties in collecting receivables and potentially adverse tax
consequences. In particular, certain of the Company's cable modem products
contain encryption features that are subject to various government regulations,
pursuant to which the Company has applied for export licenses. If such licenses
are not granted, the Company would be unable to either manufacture such products
at its foreign foundries or ship such products 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
23
<PAGE> 25
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.
Product Complexity. Products as complex as those offered by the Company
frequently contain errors, defects and bugs when first introduced or as new
versions are released. The Company has in the past experienced such errors,
defects and bugs. Delivery of products with production defects or reliability,
quality or compatibility problems could significantly delay or hinder market
acceptance of such products, which could damage the Company's reputation and
adversely affect the Company's ability to retain its existing customers and to
attract new customers. Moreover, such errors, defects or bugs could cause
problems, interruptions, delays or a cessation of sales to the Company's
customers. Alleviating such problems may require significant expenditures of
capital and resources by the Company. There can be no assurance that, despite
testing by the Company, its suppliers or its customers, errors, defects or bugs
will not be found in new products after commencement of commercial production,
resulting in additional development costs, loss of, or delays in, market
acceptance, diversion of technical and other resources from the Company's other
development efforts, 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.
Management of Expanded Operations. The Company has experienced a period
of rapid growth and expansion which has placed, and continues to place,
significant strain on its 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. In addition, this growth, as well as the Company's
product development and selling, general and administrative activities, has
necessitated an increase in the number of the Company's employees, resulting in
increased responsibilities for the Company's management. 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 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.
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
24
<PAGE> 26
results of operations. FCC regulatory policies affecting the ability of cable
operators or telephone companies to offer certain services and other terms on
which these companies conduct their businesses may impede sales of the Company's
products. For example, the Company has in the past experienced delays when
products incorporating its chips failed to comply with FCC emissions
specifications. In addition, the Company's business, financial condition and
results of operations may also be adversely affected by the imposition of
certain tariffs, duties and other import restrictions on components that the
Company obtains from non-domestic suppliers or by the imposition of export
restrictions on products that the Company sells internationally. The Company may
also be subject to regulation by countries other than the United States. Changes
in current laws or regulations or the imposition of new laws and regulations in
the United States or elsewhere, could materially adversely affect 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
agreements or negotiations underway 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. 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 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 and business markets in which the Company has no or
limited prior experience and potential loss of key employees of acquired
organizations. 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 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.
Control by Directors, Executive Officers and Their Affiliates. As of
April 30, 1998, the Company's directors and executive officers beneficially
owned approximately 55.0% of the outstanding Common Stock and 60.4% of the total
voting control of the Company. In particular, as of April 30, 1998, the two
founders of the Company, Dr. Henry Nicholas and Dr. Henry Samueli, beneficially
owned an aggregate of approximately 49.9% of the outstanding Common Stock and
55.0% 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
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.
25
<PAGE> 27
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. As
a result, such systems and applications could fail or create erroneous results
unless corrected so that they can process data related to the year 2000. 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. The Company is in the process of upgrading its
software to address the year 2000 issue. The Company also relies, directly and
indirectly, on external systems 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. 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.
Future Capital Needs; Uncertainty of Additional Funding. The Company
anticipates that the net proceeds of the Company's initial public offering,
together with cash generated from its operations and funds available under its
credit facilities, will be adequate to satisfy its capital requirements for at
least the next twelve months. The Company's future capital requirements will
depend on many factors, including, but not limited to, the levels at which the
Company maintains inventory, the market acceptance of the Company's products,
the levels of promotion and advertising required to launch such products and
attain a competitive position in the marketplace, the extent to which the
Company invests in new technology and improvements to its existing technology,
potential acquisitions and the response of competitors to the products based on
the Company's technology. To the extent the Company's existing resources and any
future earnings are insufficient to fund the Company's activities, the Company
may need to raise additional funds through public or private financing. No
assurance can be given that additional financing will be available or that if
available, any such financing can be obtained on terms favorable to the Company
and its shareholders. If adequate funds are not available, the Company may be
required to curtail its operations significantly or to obtain funds through
arrangements with strategic partners or others that may require the Company to
relinquish rights to certain of its technologies or potential markets. If
additional funds are raised through the issuance of equity securities, the
percentage ownership of the then existing shareholders of the Company would be
reduced. Such equity securities may have rights, preferences or privileges
senior to those of the holders of the Company's Common Stock.
Stock Price Volatility. The trading price of the Company's Class A
Common Stock could 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 or its competitors, general
conditions in the semiconductor, telecommunications and data communications
equipment markets, changes in earnings estimates or buy/sell recommendations by
analysts, or other events or factors. 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
26
<PAGE> 28
of the specific companies. These broad market fluctuations may adversely affect
the market price of the Company's Class A 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 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.
27
<PAGE> 29
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. There have been no
material new developments in any of the Company's previously reported claims and
litigation as discussed further in Note 7 of the "Notes to Unaudited Condensed
Financial Statements" and under "Risks Associated with Intellectual Property
Protection," elsewhere herein.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Sales of Unregistered Securities. During the three months ended
March 31, 1998, following the exercise of options to purchase shares of Class B
Common Stock that had been granted under the Company's Amended and Restated 1994
Stock Option Plan by 15 employees, the Company issued an aggregate of 134,780
shares of Class B Common Stock for aggregate purchase price of $353,367. All
sales of Class B Common Stock made by the Company pursuant to the exercise of
stock options were made pursuant to the exemption from the registration
requirements of the Securities Act afforded by Rule 701 promulgated under the
Securities Act.
(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, 1997.
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. In
addition, the following table sets forth an estimate of all expenses incurred in
connection with the Offering, other than underwriting discounts and commissions.
All amounts shown are estimated except for the registration fees of the SEC and
the National Association of Securities Dealers, Inc. ("NASD").
28
<PAGE> 30
SEC registration fee $ 31,789
NASD filing fee 5,888
Nasdaq National Market listing fee 60,000
Blue sky fees and expenses 10,000
Printing and engraving expenses 200,000
Legal fees and expenses 725,000
Accounting fees and expenses 200,000
Transfer Agent and Registrar fees 10,000
Miscellaneous 57,323
-------------
Total $ 1,300,000
=============
After deducting the underwriting discounts and commissions and the
estimated Offering expenses described above, the Company received net proceeds
from the Offering of approximately $79,498,400. 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. 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
On January 26, 1998, the shareholders of the Company approved a
resolution by written consent approving (i) an amendment to the Company's 1994
Stock Option Plan increasing the number of shares for which options may be
granted under such plan to 13,000,000 shares, and (ii) an amendment to the
Company's Restated Articles of Incorporation to increase the authorized number
of shares of Common Stock to 200,000,000 shares.
On March 9, 1998, the shareholders of the Company approved a resolution
by written consent approving (i) the amendment and restatement of the Company's
Articles of Incorporation increasing the authorized capital stock of the Company
and establishing the rights, preferences, privileges and restrictions of the
Company's capital stock, (ii) the ratification of the number of shares of Class
B Common Stock reserved under the Company's 1994 Stock Option Plan, (iii) the
adoption of the 1998 Special Stock Option Plan and the reservation of 2,000,000
shares of Class B Common Stock thereunder, (iv) the adoption of the 1998 Stock
Incentive Plan, the reservation of 16,115,343 shares of Common Stock thereunder
and an increase in such share reserve by 3% annually beginning in 1999, (v) the
issuance of 60,000 shares of Class B Common Stock to the Regents of the
University of New Mexico, (vi) the issuance of 225,000 shares of Class B Common
Stock to Irell & Manella, (vii) the issuance of 500,000 shares of Class A Common
Stock to Cisco Systems, concurrently with the Company's initial public offering
and (viii) the waiver of any rights to purchase any
29
<PAGE> 31
additional equity securities of the Company related to the issuances in items
(v) through (vii) above.
On March 30, 1998, the shareholders of the Company approved a
resolution by written consent approving an amendment to the Company's 1998 Stock
Incentive Plan increasing the number of options to be granted to non-employee
Board members under the Company's Automatic Option Grant Program.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No such reports were filed during the three months ended March 31,
1998.
30
<PAGE> 32
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)
May 14, 1998 /s/ WILLIAM J. RUEHLE
-------------------------------------------
William J. Ruehle
Vice President and Chief Financial Officer
(principal financial and accounting officer)
31
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